One can increase their income by avoiding advisors, Vanguard has retirement strategies and advisory links on the website.Why pay an advisor 1-2 %?Example.Vanguard Managed Payout Fund (VPGDX)offers a reasonable fee of.43%...Advisors recommend Annuities ....With an Annuity you immediately loose 100% of your initial investment, the for the next 15 years it pays you out of your own principal..
6
I live in Europe and no one has these conversations. We sit in cafes with our $5 cups of coffee and discuss politics. Sure, we wish we had more retirement money, but we are not worried about running out of money, being kicked out of our flats or how to pay for an expensive, unexpected illness. The 40% in taxes we paid into for over 30 years assures that. You get what you pay for. These comments are a great argument for people paying their fair share, higher tax rates to insure a decent (but not ostentatious) lifestyle which, for the most part is free from worry. At least for my generation. The young in Europe are slowly facing the American problem.
20
I'm an American, and I'm going to Europe this month and will sit near you in that café drinking the same (or better) $5 cup of coffee. I'm under 40, and already have over $1 million, because I worked my butt off for it. And because we have a system that allows me to CAPITALIZE on the opportunities presented to me. Smashing. Yeah capitalism.
I knew a friend, did the same thing you did. Retired at 45 over $2 million in assets. Then 2008 hit. Now he is living with his mom. Yeah capitalism.
20
You do understand that you are in the minority, correct? Millions of Americans have worked their butts off but did not make the kind of money that allows capitalization.
11
A million bucks, ha ha ha.
I was on track to have about half that, with my house paid off by age 62, but then my job got outsourced. I was extremely lucky to get another job, but I had to move hundreds of miles away and buy a house in 2006 at the top of the market. I finally sold my other house with only a slight loss as the real estate market collapsed, but then the 2008 crash decimated my retirement funds. A wage freeze was instituted at my new place of employment, and now I'll be lucky to have $300,000 when I retire in a few years. Plus I'll have a mortgage that won't be paid off until I'm in my 80s - even though the house isn't worth anything close to what I paid for it.
But the Republicans tell me it's all my fault for not planning better and saving more. Jerks.
I was on track to have about half that, with my house paid off by age 62, but then my job got outsourced. I was extremely lucky to get another job, but I had to move hundreds of miles away and buy a house in 2006 at the top of the market. I finally sold my other house with only a slight loss as the real estate market collapsed, but then the 2008 crash decimated my retirement funds. A wage freeze was instituted at my new place of employment, and now I'll be lucky to have $300,000 when I retire in a few years. Plus I'll have a mortgage that won't be paid off until I'm in my 80s - even though the house isn't worth anything close to what I paid for it.
But the Republicans tell me it's all my fault for not planning better and saving more. Jerks.
22
I have a song for you especially this part:
"But the Republicans tell me it's all my fault for not planning better and saving more."
https://www.youtube.com/watch?v=6lc0PqKPjws
"But the Republicans tell me it's all my fault for not planning better and saving more."
https://www.youtube.com/watch?v=6lc0PqKPjws
bunny, you are obviously not living in Greece. The difference between Europe and America has to do with who gets the responsibility for the bills? For example, you seem comfortable with the government taxing an managing your retirement money. In the case of Greece, that didn't turn out well. For Glassyeyed, his personal management didn't turn out well, which is sad. However, I'd point out that the situation is much worse for those in Greece, as everybody is in trouble at the same time, so where does one turn for help? Who gets to sacrifice their retirement income to make up for an entire country in trouble? Of course, we can all retire to the State of Denial, and think that can't happen anywhere else, right?
4
The whole problem stems from a single issue: we don't know how long we will live. My solution is to look closely at my parents' life and health and decide how long I want to live. I've made the choice to end my life on my own terms at the time of my choosing and not continue my life past it's usefulness and joy. I won't waste away in a rest home, with someone changing my diapers and feeding me pills in applesauce. The day I retire I'll know exactly how much I have to spend each year, and how much I'll leave to my child and favorite charities. It's not for everyone, and I respect that, but it's an option that deserves to be discussed. Unfortunately we have a belief in this country that suicide is wrong, while warehousing people in rest homes is somehow noble. Everyone envisions they'll die peacefully in their sleep, when in reality they'll most likely die in a vegetative state in a rest home or while someone tries to aggressively keep them alive in a hospital. No thanks. I'll take care of it myself and leave while still wanting a bit more...
16
Yep, that was my point. NYT just got around to posting my comment on that very issue. I totally agree, I think it is something we (people over 65) should be discussing and letting our politicians know what our thoughts are. This is a cohort issue and people in their 30's shouldn't really get a vote on it. There was recently an article in NYT about a woman who knew she had Alzheimers, effectively used the Oregon law to end her life before she was unable to drink her 'last glass of wine' with additives. Being a drooling, diapered, vegatable (unaware of self or loved ones or where or who I even am) is not my idea of a dignified life.
9
There are many unknown factors which are not mentioned in the article or by commenters, such as climate change and terrorism. What happens when California runs out of water, and most of the US's fresh vegetables come from there? Terrorism is already producing mass shifts in populations. If you have a house in Florida or anywhere near the ocean and it gets flooded during high tide, what happens then?
My financial philosophy means that I live a frugal life, unencumbered by wife, children, or debt. But my health is the great unknowable factor. I've been retired 13 years now, and have already survived cancer. Better to save my money, withdraw only when I need funds, in case the unknowable happens.
My financial philosophy means that I live a frugal life, unencumbered by wife, children, or debt. But my health is the great unknowable factor. I've been retired 13 years now, and have already survived cancer. Better to save my money, withdraw only when I need funds, in case the unknowable happens.
2
Annually I withdraw a percentage of my portfolio that is not adjusted for inflation so that in good markets and bad, I am tailoring withdrawals to growth or decline in portfolio value. I won't run out of money if markets are bad and I am not limiting my spending unnecessarily if markets are good.
The downside is that my annual budget can fluctuate quite a bit. I can get away with this because only 2/3 of my budget is needed for essentials (food, shelter, taxes). 1/3 of the budget is for non-essentials (luxury vs economy travel, large vs small charitable donations, large v small purchases) that can be eliminated in a bad year.
Another refinement is that as you age your life expectancy becomes smaller which means you can withdraw a larger percentage from the portfolio and still not risk running out of money. You can get a feel for this by looking at the IRS table of Required Minimum Withdrawal percentages from Traditional IRA accounts which rises annually. The formula I use for calculating the withdrawal percentage takes this life expectancy factor into account:
Withdrawal %-age = Age / (20 - x) where x = (Age - 60)/5
At age 80, for example:
Withdrawal %-age = 80 / (20 - (80 - 60)/5) = 80/(20 - 4) = 80/16 = 5%
People lucky enough to have a budget significantly larger than their essential expenses might find this works for them.
The downside is that my annual budget can fluctuate quite a bit. I can get away with this because only 2/3 of my budget is needed for essentials (food, shelter, taxes). 1/3 of the budget is for non-essentials (luxury vs economy travel, large vs small charitable donations, large v small purchases) that can be eliminated in a bad year.
Another refinement is that as you age your life expectancy becomes smaller which means you can withdraw a larger percentage from the portfolio and still not risk running out of money. You can get a feel for this by looking at the IRS table of Required Minimum Withdrawal percentages from Traditional IRA accounts which rises annually. The formula I use for calculating the withdrawal percentage takes this life expectancy factor into account:
Withdrawal %-age = Age / (20 - x) where x = (Age - 60)/5
At age 80, for example:
Withdrawal %-age = 80 / (20 - (80 - 60)/5) = 80/(20 - 4) = 80/16 = 5%
People lucky enough to have a budget significantly larger than their essential expenses might find this works for them.
7
Since I am entering my golden years, I have discovered a few things. Most investment advisors are clueless. Most plans don't allow for enough upside. Never follow the crowds, or as I call them, the sheep. While I definitely enjoyed several good years in the market, following the bloodbath where I followed the advise of a CFP from Morgan Stanley, I make sure that I am generating enough in my plan in dividends each year to at least cover my minimum distributions (like about 5%), and still invest in a couple of more risky stocks. I avoid all foreign stocks since my American stocks have enough foreign exposure. And I am always looking to buy a stock following a meaningless drop brought to us courtesy of the high-frequency stock market manipulators. Though not rich (thanks to poor choices in spouses), I am comfortable.
4
The best comment especially with regards to clueless advisors and spouse choices
6
This article does not take in consideration the "doomsday" scenario. The U.S. and the world are in uncharted territory with Central Banks printing money they don't have; governments with runaway debt; and let's not forget the currency wars. It is not a question of if, but rather when the U.S.D. is no longer the world's reserve currency. When this happens the dollar valuation will collapse along with ALL of our assets (house, 401k valuations, etc). Or maybe you believe that its going to be different this time. Certainly the British did. A little more than a century ago they controlled 3/5 of the land mass, then they lost it all. For those of us who are facing retirement in the next few years, one must seriously consider geography, including relocating to another country.
Great Britain is still there. Yes, world powers rise and fall. The biggest financial issue GB has is a result of its prior colonization. Now all those 'foreign' brits are showing up for the cradle to grave stuff. The British Pound is still a valid currency and British seniors are still living their lives. Me thinks losing global superiority is not so doomsday.
2
John Waggoner of USA Today wrote not too long ago, to paraphrase: In 1999-2014(approx), 1 million dollars was invested in 10 of the most popular mutual funds in 1999; 5% withdrawn each year. Two of the ten ran out of money altogether, only one in ten had $1 million remaining; 5 or so others had lost substantial portions of their principal. What happened was two approximate 50% market declines(2000 and 2008-2009) if I recall. The so called financial experts have painted an illusion no one questions...so much is luck and timing. There is no such thing as financial security if one has $1 million; it takes much more than that.
3
Karen A: Try this for some sensible advice, and helpful calculators. http://bit.ly/1cYWUaM
As a teacher with an engineer husband, we feel financially precarious facing our middle-ages. My salary has gone down every year for the last six here in CA. We have a retirement nest egg but also have a gifted child that may be able to attend an excellent college due to his years of hard work. The message we have received loud and clear is to not have any more children - one may even have been too much. Do we really want to live in a society where young people have to decide: Do I want to have children enough so that I am willing to face poverty in my old age? We did the math and decided even with our mid-six-figure combined incomes, unfortunately we could only raise one with a semblance of certainty that we could put him through college. Why are we constantly living in a state of fear of going broke in old age in this country ? We could solve this problem with the stroke of a few pens. Set up a guaranteed retirement account that would provide a steady stream of income to augment Social Security and pensions. Stop asking ordinary citizens to outsmart the casino called Wall Street.
As a side note, it is with a heavy heart that I am recommending he look to emigrate to a country that provides universal health care and support for families once he receives his degree. My husband is devastated but I feel this will be his best chance for a more fulfilling life and one that will provide support for him in terms of his health and welfare.
As a side note, it is with a heavy heart that I am recommending he look to emigrate to a country that provides universal health care and support for families once he receives his degree. My husband is devastated but I feel this will be his best chance for a more fulfilling life and one that will provide support for him in terms of his health and welfare.
7
You say you have a "mid-six-figure combined incomes." If I take you literally, this income would be in the range of $500,000 per year. I know California is a very expensive place to live, but surely you must have meant something else. If in fact you have $500K annual income, saving 15-20% per year in a diversified portfolio of index funds (stocks and bonds) with annual rebalancing, you will be fine.
3
Even with a "mid 6 figure household income, one has to choose what they spend it on. Certainly with that income you could save enough to educate your children and have a secure retirement. If, however, you spend it like the proverbial "drunken sailor" you won't have enough for either. It is all a question of one's priorities.
2
Although I understand many people commenting didn't / couldn't save enough money to retire using 401(k) my wife and I did. We did that by saving about 20% every year since graduating nearly 40 years ago. We grew up poor in Mississippi and happened to be talented / lucky enough to be good software engineers. We moved to California for good jobs. Even then housing was expensive. The first year we had a bed and a couple of beanbag chairs but we saved enough for a downpayment on our first house. The $99K, 13.75% mortgage cost nearly a 1/3 of our income a year so we had fewer new cars, vacations, furniture than our friends and family. But after a lot of frugal years we have a couple of million in stock and bonds and our Silicon Valley house is worth $1.5M. The mortgage is nearly paid and we are easing into retirement. Such articles are interesting and relevant to us. If you don't find them so, flip to the next article or ask for articles relating to your situation. Complaining does none of us any good. Thanks!
7
Why does this article ONLY deal with the withdrawal percentage and ignore withdrawal strategies like the 3-bucket portfolio that's been developed to address problems with the 4% rule.
1
This is why stuff like Social Security and defined benefit pensions were invented. It's a simple fact that people can be very diligent, thrifty, and hardworking their entire lives, save up a nest egg, and still be faced with tremendous amounts of uncertainty and chaos due to circumstances outside their control. 401ks are nice for their flexibility but put you are the mercy of a system you have no influence over and cannot account for.
6
How does this advice square with required minimum distribution requirements for all tax-deferred retirement accounts, which begin at 3.6% when you're 70? By 75, the RMD is 4.36% and it continues to increase each year. Shouldn't this be part of the discussion, since most people's retirement savings are tax-deferred?
2
Don't confuse RMD with the 4% (or whatever) rule. All or part of a RMD (after you've paid the IRS) can be reinvested in a taxable account.
1
I use a lower starting point around 3.6% and I seek to keep a balance in real dollars
My savings needs to cover only 35-40% of my needs because I am lucky enough to
have a pension in addition to my SSI. I am assuming that inflation is less than 3.2%
and that my investments can make around 7% minimum. If I have a surplus at the
start of my retirement, I will buy a deferred annuity instead of spending more.
I am worried more about inflation being like the late 70s so it is hard to plan ahead
I inverted the formula so the takeouts are determined by both earning & inflation
I could end up anywhere from 75-125% of my current income but I am hoping
for at least 95% of my current level in real dollars.
My savings needs to cover only 35-40% of my needs because I am lucky enough to
have a pension in addition to my SSI. I am assuming that inflation is less than 3.2%
and that my investments can make around 7% minimum. If I have a surplus at the
start of my retirement, I will buy a deferred annuity instead of spending more.
I am worried more about inflation being like the late 70s so it is hard to plan ahead
I inverted the formula so the takeouts are determined by both earning & inflation
I could end up anywhere from 75-125% of my current income but I am hoping
for at least 95% of my current level in real dollars.
I was very lucky to have belonged to a union.Yes,I paid dues and other fees but I have a defined benefit pension and other union plans that have allowed me to retire with as much as I was making before I retired.
The 401k plan was originally designed to supplement the defined benefit plan-not replace it.But because of a lack of bargaining power by individuals who were not unionized it has become the new norm as far as retirement planning goes.
Workers of the world unite and unionize(no it's not a public or government occupation).In the very small town I live in unions are thought of as"the big bad wolf",Wake up people! Also my pension plan is funded.
The 401k plan was originally designed to supplement the defined benefit plan-not replace it.But because of a lack of bargaining power by individuals who were not unionized it has become the new norm as far as retirement planning goes.
Workers of the world unite and unionize(no it's not a public or government occupation).In the very small town I live in unions are thought of as"the big bad wolf",Wake up people! Also my pension plan is funded.
14
After showing how nobody really knows how to handle retirement, the piece advises people to "Go to a qualified adviser and sit down and pay for that". The intended effect is apparently to make the retirement of financial advisers more secure.
16
Anyone with $1 million or more in assets can utilize the benefits of globalization to their advantage....such as relocating to another country where the cost of living is a fraction of N. America.
10
What about those of us who, in spite of working our butts off, won't be retiring with million dollar retirement accounts. At 60, I have an extremely modest $200k account, have been contributing my entire working life, lost a lot in the recession (as we all did) and continue to contribute. All the "what do you need to retire" calculators tell me I need $1M or more... I would sure appreciating some advice about what to do if I won't have that. But, it's really hard to find ANY good news about retirement for boomers in my situation.
18
I have a problem with two of the assumptions made in this article. First and foremost, I agree with you that not only does everyone have $1 million to begin with at retirement but, in fact, very few of us, percentage wise, have that kind of money in our retirement funds. So all of these models are erroneous from the get go. The second assumption I disagree with (and this is a challenge to what is almost gospel) is that one should hold a very large percentage of assets in bond funds. It's one thing to own a bond with a set rate of return to rely on; it's something completely different to own a bond fund, which fluctuates in value just like a stock fund - and money can be lost just as easily. Long term (and if we are talking about 30 years, this is long term) bond funds do not perform as well as stock funds.
So, what's the solution? I like to keep it simple - live within your means! If one doesn't spend more than one earns, one won't run out of cash. I always told my kids, if you can't pay off your credit card in full each month, it means you are living beyond your means. But how many Americans have credit card debt?
My financial plan (now without advisors to whom I had to pay money) is to always live with what comes in. If the markets are down, I'll have to live on as little as I can with Social Security as a base. When the markets are good, I can probably spend more BUT if the markets are very good, I will probably save some of those gains, as I always have.
So, what's the solution? I like to keep it simple - live within your means! If one doesn't spend more than one earns, one won't run out of cash. I always told my kids, if you can't pay off your credit card in full each month, it means you are living beyond your means. But how many Americans have credit card debt?
My financial plan (now without advisors to whom I had to pay money) is to always live with what comes in. If the markets are down, I'll have to live on as little as I can with Social Security as a base. When the markets are good, I can probably spend more BUT if the markets are very good, I will probably save some of those gains, as I always have.
1
Save as much as you can, at least 10 to 15% of income, and keep your money in dividend-paying stocks.
2
Hi Karen,
Unfortunately, you are in a large group with similar problems. Wall Street wants to eliminate Social Security and privatize all retirements. The problem with 401(k) plans is who they were created for: High Income Earners. They gave us 401(k) plans, but they didn't give us the "high incomes" to be able to save the $1 million. You will really need $1.5 million or more.
My suggestion is to have company subsidies of 401(k) plans and zero fees for accounts under $100,000. That way, the people at the low end of the ladder will have some of the same opportunities as those at the top.
If we forced companies to contribute to low-income workers' 401(k)s, there would be fewer people in desperate poverty in old age.
Meanwhile, CEOs who make $48 million per year get fully paid pensions and can't fund their own retirements... but, those same CEOs expect someone making $35k per year to fully fund his own retirement. If you want fairness, you have to fight for it. The rich won't "trickle down". They only want you out of their sight.
Unfortunately, you are in a large group with similar problems. Wall Street wants to eliminate Social Security and privatize all retirements. The problem with 401(k) plans is who they were created for: High Income Earners. They gave us 401(k) plans, but they didn't give us the "high incomes" to be able to save the $1 million. You will really need $1.5 million or more.
My suggestion is to have company subsidies of 401(k) plans and zero fees for accounts under $100,000. That way, the people at the low end of the ladder will have some of the same opportunities as those at the top.
If we forced companies to contribute to low-income workers' 401(k)s, there would be fewer people in desperate poverty in old age.
Meanwhile, CEOs who make $48 million per year get fully paid pensions and can't fund their own retirements... but, those same CEOs expect someone making $35k per year to fully fund his own retirement. If you want fairness, you have to fight for it. The rich won't "trickle down". They only want you out of their sight.
3
This article seems to assume the only income available for people who have retired is from their savings.
I don't have a million in the bank and I bet not many people do.
I consider myself lucky as I have a pension that is enough for me to live on for the present and I have some money saved if I need more in the future.
I have friends who made more than I did but spent more than I and therefore have less money in the bank and they don't have a pension.
This article isn't relevant for me or my friends.
I don't need the money I saved and my friend needs it but doesn't have it.
I therefore have a question.
Who is this article being written for.
People are living long enough so the average person will live long enough to retire.
They spent most of their income so have very little put away and will live on the money they get in Social Security.
You can't live on Social Security as your only income.
You need more.
This will be a problem that very few people are talking about.
The government will be forced to help these people.
The problem is that the government is already spending more than they
take in and therefore doesn't have the money needed to help these people
without reducing the funding for other programs like education that are underfunded..
Instead of stupid articles like this which is only relevant for a very few
we need articles that are relevant to everyone.and can explore how people will manage in the future.
.
I don't have a million in the bank and I bet not many people do.
I consider myself lucky as I have a pension that is enough for me to live on for the present and I have some money saved if I need more in the future.
I have friends who made more than I did but spent more than I and therefore have less money in the bank and they don't have a pension.
This article isn't relevant for me or my friends.
I don't need the money I saved and my friend needs it but doesn't have it.
I therefore have a question.
Who is this article being written for.
People are living long enough so the average person will live long enough to retire.
They spent most of their income so have very little put away and will live on the money they get in Social Security.
You can't live on Social Security as your only income.
You need more.
This will be a problem that very few people are talking about.
The government will be forced to help these people.
The problem is that the government is already spending more than they
take in and therefore doesn't have the money needed to help these people
without reducing the funding for other programs like education that are underfunded..
Instead of stupid articles like this which is only relevant for a very few
we need articles that are relevant to everyone.and can explore how people will manage in the future.
.
13
I agree, but not for the same reasons you are talking about. I am a person who helps coach people with their retirement planning and I must say that too many think they can wait until later. They are wrong, later comes far too quickly. If you don't start saving when you are younger, then you may not be able to retire, it is that simple. Retirement is not mandatory, as it once was, it is a luxury. If you don't have enough to stop working, then you will need to work longer, maybe forever.
As for the 4% rule, it never made sense to me. $1,000,000=$40,000 per year so if you need 80k then you either have to continue working or reduce your need. It is not the responsibility of the Government to provide, because the Government does not earn money, we do!
So what is the answer? Your have choices. You can go it alone, play the lottery, or see someone who will help guide you. The choice is ours. Skeptonomist infers that advisors retirement is contingent on those who need help, because they are going to charge for their services. Well the same can be said for dentists or doctors; but I have never seen someone drill his own teeth or operate on his own abdomen. I think most financial advisors are worth it if they help but if they don't do the job, then they need to traded for one who can. We have to be involved with our retirement needs, the advisor/coach is they to offer guidance and help; ...and that is my 2 cents on this matter.
As for the 4% rule, it never made sense to me. $1,000,000=$40,000 per year so if you need 80k then you either have to continue working or reduce your need. It is not the responsibility of the Government to provide, because the Government does not earn money, we do!
So what is the answer? Your have choices. You can go it alone, play the lottery, or see someone who will help guide you. The choice is ours. Skeptonomist infers that advisors retirement is contingent on those who need help, because they are going to charge for their services. Well the same can be said for dentists or doctors; but I have never seen someone drill his own teeth or operate on his own abdomen. I think most financial advisors are worth it if they help but if they don't do the job, then they need to traded for one who can. We have to be involved with our retirement needs, the advisor/coach is they to offer guidance and help; ...and that is my 2 cents on this matter.
1
You ask who this article is being written for. Clearly it's for successful white-collar workers who have either enjoyed a fat salary or have been able to scrimp and save over their entire career and have a seven-figure nest-egg to fall back on. This is the demographic that the article (and by extension NYT advertisers) is aiming at: the comfortably well-off middle class ABC1s rather than the super-rich who don't need to read this anyway. Let's hope that Ms. Bernard is now researching an article advising people in their 50s with difficult family situations and much less than $100,000 salted away how to organize their affairs so they don't have to line up at the soup kitchen when they get to their late 70s.
2
Well said!
This gets even more complicated when you have a disabled child and need to leave funds for their continued care after you die. It's hard to stay on top of all the government regulations regarding trusts and special needs trusts and Social Security Disability plus planning for your own retirement.
6
Why would a retiree want to have over a million dollars left after 30 years? Even if they retired early, say at 60 years old, they would be 90 years old after 30 years. The could still spend $100k per year until their hundredth birthday!
3
Because nobody knows how long they will live or what their expenses will be. So plan for the worst and hope for the best. DELAYED GRATIFICATION.
3
I think your math is off. $100k per year at a 4% growth rate would last you all of 12 years. If you lived 30 years, you'd be eating cat food and living on the streets after 12 years.
The problem with savings is exacerbated by 0% interest rates promoted to keep the hollowed out economy moving. Free Trade has destroyed us.
50 years ago, the #1 employer was GM and paid an average of $50/hr in today's dollars. Today, the #1 employer is WalMart and the average wage is $8/hr. If you wonder what is wrong, this is the heart of it.
The problem with savings is exacerbated by 0% interest rates promoted to keep the hollowed out economy moving. Free Trade has destroyed us.
50 years ago, the #1 employer was GM and paid an average of $50/hr in today's dollars. Today, the #1 employer is WalMart and the average wage is $8/hr. If you wonder what is wrong, this is the heart of it.
4
Robert- I helped care for a relative from the time she was 90 until her death at 98 so I know firsthand how even 100K a year can get heavily hit by (soaring) healthcare costs, especially if family lives far away and payment is needed for either a nursing home or in-home help ( which isn't covered by traditional insurance) Nursing homes cost a minimum of $9000 a month here and costs in my state are,relatively low . Maybe retirees can live on 80% of their income UNTIL they reach 90 and health care costs soar. Let's hope they've saved enough by then to cover those extra costs of their final years. Or they have the good fortune to have relatives living nearby who will help for free - as I did. After healthcare is factored in, there is often far less left than expected for food, shelter, and other needs.
4
I prefer my income for life formula: calculate a percentage of remaining portfolio each January (4% for example) and spend that amount that year, subject to a cap on previous year income (105% for example). This will mathematically guarantee you an income for life, let you spend more in good years and bank some of your excess profits if any for the future.
Joseph Gal
TekniGal.com
Joseph Gal
TekniGal.com
4
Like most of us will be lucky enough to be able to retire. Why isn't the NY Times doing more articles on what's about to happen with those of us born in and after 1955? We're the generation that watched as pension plans disappeared and 401Ks became the easy replacements. We've seen the cost of living skyrocket in the entire country while our salaries did not. We've watched our children graduate from college with a load of debt before they started their adult lives. We've lived through bouts of long and short term unemployment and gone through our savings. If we or our family members needed any medical care we may have had to file for bankruptcy. What about what's going to happen to us?
Yes, part of it is our fault for voting people into office who have turned out to favor big business over people but, in spite of that, I do think that this paper ought to be covering the upcoming crisis. We are going to be unable to retire, keep our homes or apartments, pay for our medication and any assistance we may need. We will be back to what old age was before Social Security and Medicare: poverty.
Yes, part of it is our fault for voting people into office who have turned out to favor big business over people but, in spite of that, I do think that this paper ought to be covering the upcoming crisis. We are going to be unable to retire, keep our homes or apartments, pay for our medication and any assistance we may need. We will be back to what old age was before Social Security and Medicare: poverty.
60
Party your fault? Folks get the government they deserve.
2
Is it just me or does the 4% rule seem to contradict all other financial advice given by financial advisors pre-retirement? Advisors always insist that you should be able to earn safe returns of at least 5% in the long run over time. If this is true, then why would you only be allowed to withdraw 4% of your savings per year once you reach retirement? At 4% per year you should not even be touching principal assuming your entire retirement savings is invested in investment-grade bonds with a small stake in a total-stock market fund.
The 4% rule seems to benefit only the advisor/broker, who gets to keep the principal locked away (and subject to fees based on the principal under management). Fiduciary duty is dead.
The 4% rule seems to benefit only the advisor/broker, who gets to keep the principal locked away (and subject to fees based on the principal under management). Fiduciary duty is dead.
4
Many are confused with the 4% rule. If you have $1 million, withdraw $40K the first year - that is your base amount. If inflation after year one is 3%, withdraw $40,120 in year two ($40K + $120). And so on. You withdraw the $40K plus inflation increases each year regardless of whether or not your portfolio principal has increased or decreased. You are NOT withdrawing 4% of your portfolio balance after the initial calculation. IOW, if your porfolio loses 10% to $900K in year two, you would still withdraw $40,120, which is obviously more than 4%. If inflation runs 3% per year, that initial $40K will grow to $80K in about 24 years (the rule of 72). Hopefully, there will be enough positive yearly gains that you should have at least $80K to withdraw at year thirty. Good luck.
6
Equity returns are not linear. While the equity market will average x% per year over whatever period of time it will rarely go up by that average in a given year. The potential impact of a withdrawal when the market is down a lot is of course bigger.
1
One of the most important elements of the 4% withdrawal is the application of that program to legislatively approved "interests". In Pennsylvania and other states the power to convert to a 4% Unitrust is usually provided for in trusts for wives, children and others. And, the withdrawal is not limited to 4% but may be approved for a greater or lesser amount of withdrawal. Furthermore the conversion to a 4% Unitrust while guaranteeing a steady cash flow to the beneficiary, especially in a down market, also does not impair the right of the trust administrator from distribution of discretionary funds even from principal when allowed by the trust documents. Therefore the 4% withdrawal is not just limited to retirees but it also affects an entirely different class of people as well. Additionally, the conversion to Unitrust allows the trust administrator to then "totally invest" the trust for a better return and therefore more investment in equities is allowed. The so-called "New Math for Retirees" is not just for retirees and mostly it does work. Also, if interest rates rise and the market returns fall, then the Trustee may also convert back to a regular trust that pays interest and dividends. And there is a provision as well for "smoothing" the value of the trust to determine market value to smooth out the return in a falling market. That can protect the trust as well as the cash flow stream. Lots of "New Math".
1
But what about long-term care, hospice care, nursing home needs, etc.? Does the 4% rule and its variations account for the dramatic uptick in end-of-life costs? It doesn't seem so.
Please address more holistically.
Please address more holistically.
16
I retired three years ago as a financial advisor after 39 years in the business. To me, the four percent thing was merely a seat-of-the-pants concept. Many of those old concepts--bonds should be around the same percentage of one's portfolio as your age, get conservative as you approach retirement, etc. should not be considered as Gospel for each and every one of ys.
The deepest and strongest drop in value that I had ever witnessed was not stocks, between 4Q07 and 1Q09, it was in the bond market, in 1981, when Fed Chairman Paul Volcker had no alternative but to raise the Fed Funds rate by two full percent in one day. (The previous Fed chief let inflation get grossly out-of-hand.)
Everyone should stay ever-vigilant on their asset base, factor-in whether you have loans/mortgages to repay, consider the longevity of your parents and grandparents, etc.
http://thetruthoncommonsense.com
The deepest and strongest drop in value that I had ever witnessed was not stocks, between 4Q07 and 1Q09, it was in the bond market, in 1981, when Fed Chairman Paul Volcker had no alternative but to raise the Fed Funds rate by two full percent in one day. (The previous Fed chief let inflation get grossly out-of-hand.)
Everyone should stay ever-vigilant on their asset base, factor-in whether you have loans/mortgages to repay, consider the longevity of your parents and grandparents, etc.
http://thetruthoncommonsense.com
7
The primary source of inflation then was the skyrocketing cost of fuel due to our import dependence and how it drives living costs(inflation). The accelerated rise in interest rates were in response to this inflation. Many suffered. Wouldn't it be wiser to manage our resources in a way that minimized such calamities? Perhaps Congress could fund mass transit more, safer, faster? The invisible hand can slap mighty hard.
1
I realize not everyone has this option, but as a professional I can continue to work (in my case 60% time), thereby earning enough in one year to (a) pay for most of that year's expenses, and (b) postpone by one year when I must start significantly depleting my retirement funds. Plus my work and the people I deal with there are fun and I love what I do at work even though I am also loving what I do outside of work.
8
The lack of sophisticated understanding of these matters by a large proportion of those posting here, despite their typical confidence, is frightening. The ignorance displayed even of the most basic concepts is appalling. Take a course people, and talk to good professionals (yes they exist, but they won't manage a portfolio of $60K).
10
And that's part of the problem. No professional management advise for people with portfolios under 1/2 mil minimum.
3
I'm wondering if all these fancy calculations, suppositions and hypotheses take into account IRS withholding tax. I have chosen to retire in Europe, and I know that for every $1,000 I withdraw from my 401(k) when I'm 65 Uncle Sam is going to take $300 to ensure that he gets his money back from a tax-deferred pension scheme. Should I be reworking these figures to take this into account?
The writer doesn't explicitly state this (though she probably should have), but Bengen, Pfau, and others offering advice along these lines intend taxes to be paid out of the 4% (or whatever) distribution, i.e. they consider taxes part of your "spending." And, in general, the wealthier you are, the larger the fraction of that 4% that will be "spent" on taxes.
4
In the US, taxable withdrawals from a 401(k) are subject to 20% withholding, so it doesn't seem that 30% is excessively onerous for a withdrawal taken in a foreign country. The 4% is gross. To the extent there is tax due reduces the amount of cash that will be available for spending.
1
You can put enough into a Roth to help pay the taxes down the road.
If you need 10K, then you have to take out around 14K to net 10K
With a proportional Roth, you can remove only 10K from the 401k
& take 3K from the Roth keeping a larger principal & saving on taxes
because you paid some tax up front when you were working
If you need 10K, then you have to take out around 14K to net 10K
With a proportional Roth, you can remove only 10K from the 401k
& take 3K from the Roth keeping a larger principal & saving on taxes
because you paid some tax up front when you were working
Given my genes...and if it were only me...I would have had to save only for about 10 years after 65.
Of course it's not only me, so I will join the ranks of despairing Americans.
Of course it's not only me, so I will join the ranks of despairing Americans.
3
IN the work that I have done with those who might be considered elderly, one of the things that caused me to change my thinking somewhat was finding out that absent severe medical/care costs, most once they get to about 80 start spending considerably less than they did in the initial stages of retirement. Thus, the money tends to start piling up. Less trips, less theater, less find dining out, etc. reduce the income need.
Of course, as I note above, if one of the dementias kick in or a need for long term care necessitates, then these numbers change and they can change drastically. Thus, the need for planning not only spending, but for the potential contingencies that can quickly erode existing savings and portfolios.
Of course, as I note above, if one of the dementias kick in or a need for long term care necessitates, then these numbers change and they can change drastically. Thus, the need for planning not only spending, but for the potential contingencies that can quickly erode existing savings and portfolios.
7
All retirees with IRAs know about MRDs, the minimum required distributions. These are set in stone and increase each year as the retiree gets closer to his/her expected demise. At my age of 82, I must take 6.54% from my IRAs in 2015 and more each year as I age. 4% would not satisfy the IRS. This distribution is not elective; it is mandatory.
4
As many others have pointed out, you have to take 6.54% (at your age) from your IRA's, but you don't have to spend it, you can reinvest it. Furthermore, the 4% figure applies only to year 1 of retirement; after that, you remove the same dollar amount (adjusted for inflation) each year. As your portfolio value likely decreases with advancing age, that will actually be (usually) higher than 4% of your CURRENT wealth as the years go by.
2
But you don;t have to spend it. You just have to pay taxes on it. You can bank the whole amount in a taxable account for later needs.
4
sure, but you don't have to spend it (MRD). put it to work.
9
A part of the retirement problem is the death of the defined pension plan in this country. When large numbers of people could count on this type of retirement plan, they could realistically count on a probably modest pension, plus social security, and supplement this income with other retirement savings (such as an IRA). However, business has managed to transfer people to the 401K type of scheme, which really has not worked. People whose incomes have been stagnant for 40 years (when adjusted for inflation), cannot in most cases save a million dollars.
43
Their income has not been stagnent, it has plunged by the present value of a defined benefit pension to the retiree and most often the spouse for life. That is an absolute colossal collapse in economic well-being. My mother still collects my father's union blue collar pension, although he passed away 30 years ago. She also went back to work after raising 5 kids and has a small pension of her own. Those were the good old days.
1
I noted that the article states a "typical" American family has $60,000 in retirement investments. What, pray tell, is a "typical American Family"? I don't know, but am quite sure that if you changed that to the average American couple at, say 60, has .....$ in retirement investments the amount would be much less than $60,000. Having been retired for more than 10 years now, I have almost nothing left in retirement savings. And the retired folks I know who have plenty of money at 80 either recently sold their GI loan tract house for more than half a million and/or have military or civil service pensions. The average American has never been able to actually save enough to retire comfortably on, and most would be on the streets if it were not for Social Security. Financial Gurus have blinders on...and of course, write only for the most fortunate among us.
BTW, I live quite comfortably on little more than my Social Security because I own a small home, and don't eat out too often.
BTW, I live quite comfortably on little more than my Social Security because I own a small home, and don't eat out too often.
30
You are absolutely correct. We have been destroyed by the outsourcing, offshoring, and free trade agreements. The tax policies that only benefit the rich (Capital gains tax rates are 15% while tax rates for working class go up to 38%).
I recommend we force companies to subsidize 401(k)s for workers on a sliding scale. The less you pay a worker, the more you have to fund the 401(k). Then, you should have 0 fees for any account less than $100k. That way, those of us at the bottom have the same opportunities as those at the top.
I recommend we force companies to subsidize 401(k)s for workers on a sliding scale. The less you pay a worker, the more you have to fund the 401(k). Then, you should have 0 fees for any account less than $100k. That way, those of us at the bottom have the same opportunities as those at the top.
2
"Capital gains tax rates are 15% while tax rates for working class go up to 38%". The 38% (actually worse, it's 39.5%) bracket applies to marginal income well over $400,000 in 2015. In what universe is that "working class"?
1
This is a bass-ackward review. After working for more than 40 years each, my wife and I have 5 retirement portfolios with greater than $4 million. If we use the 4% rule to determine our draw, we'd have annual income of $160,000. We were 64 when we retired 3 years ago. The portfolio has grown by roughly 16%. In addition we each a work related retirement and Social Security. Total income is greater than $200,000. And there's even more income from a trust. So, we don't run out of money. But, let's use a more conservative fund. Let's say we only had $1.5 million and only withdraw $60,000 annually plus our work retirement funds and SS. We still have income greater than $100,000 plus appreciation of the smaller portfolio. We don't need to pay a qualified financial advisor to tell us how to manage our money. Its really very simple. The DOW 30 averages about 7-9% annually. We know what our monthly expenses are. We spend, including taxes, less than we take in and we re-invest a surplus throughout the year. Its not rocket science. All of these financial machinations are for naught. We don't take cruises that are too expensive and we don't buy gold and jewels. We don't sit home either. The 4% rule is fine but let's not get carried away. And don't forget the minimum required distribution from IRA accounts does not follow the 4% rule. If you've save about $1million and have a work related retirement fund (state government etc.) and Social Security you're fine.
11
More important than any of the retirement formulas out there is doing exactly what you've done here: Think it out for yourself. Kudos on a nice logical analysis of your own situation.
5
Well, you are correct given that you have a $4 mill. nest egg to start, company funded pension plans for you AND your spouse, plus Social Security checks for two. And you are the beneficiary of a trust. This may be a shock to you but most people don't have a retirement nest egg that includes "only" $1.5 mill. I'd guess that your retirement assets are probably well within the top 1 percentile.
6
If you have more than $4 million, you are pretty much set and also very rare.
5
Now that I know the 4% rule came from an engineer from MIT (some of my best friends are aeronautical engineers) I feel much better about it. Coming from my financial planners (both of them) is much less reassuring.
7
The underlying flaw of the 4% rule is based on a nest egg lasting 30 years. A 65 year old male has a life expectancy of only 17.57 years -- until 82 -- and a 65 year old female an average life expectancy of 20.20 years -- until 85. Planning for 30 years is nice, but largely unnecessary. Further, the Bengen analysis, as others have mentioned, is based on 50% in equities and 50% in bonds which may have been an appropriate proportion 20 years ago, but today most portfolios of 65 year olds should be much more weighted towards equities.
11
I don't have a problem with life expectancy expectations. But I don't see anyone talking about the effect of long-term health care costs that can literally annihilate a well thought-out retirement plan. I'm talking about how we will handle the cost of nursing (home)care when some of us become incapacitated.
4
I do not fear a thing if I live to be 82 and die, but I do worry if I outlive that average. It is the uncertainty that makes retirement planning difficult. Planning for 30 years may be too long for some and too short for others. For my mother, it would have been off by almost 20 years--short.
7
I'm going on family history over averages. With most of my relatives living to 100 or just a few years shy of 100, I believe it would be unwise not to include that factor in my calculations of assets needed. Family history trumps financial planning based on the law of averages, doesn't it?
3
One word: annuities.
7
Exactly right, If you are well off to retire @ 62, you may end up losing
A portion of SSI but you can buy a 20 yr deferred annuity at a discount to
help out with inflation & higher medical expenses later on
A portion of SSI but you can buy a 20 yr deferred annuity at a discount to
help out with inflation & higher medical expenses later on
3 Words:
Anything but annuities
Anything but annuities
4
For those of us who HAVE managed to save a million by retirement age (and no, my wife and I don't work on Wall Street -- we just saved like maniacs and didn't have any kids), this article comes as reassuring news, especially since the models shown are for retirement at 65 with a 30-year withdrawal period, and very few people make it to 95.
11
The number of people who make it to 100 has increased dramatically in the last 10 years. What if this trend Continues?
2
And my state pension fund is still assuming a 7.5% annual rate of return.....now that is walking along the edge of cliff. Which is OK if you have the taxpayers to bail you out.
8
Actually, there's a reasonable basis for it, which those who want to raid pensions are loathe to admit. They're waging a campaign to use artificially low discount rates to inflate liabilities.
2
If the priority is to avoid running out of money, why not just take the $1M and buy a single premium annuity that would draw substantially more than the three withdrawal strategies suggested? With a little shopping around you could even find an inflation-protected policy that would do better than the best years under the Guyton approach. A do-it-yourself approach can be complicated and forces you to hold on to longevity risk, resulting in overly conservative strategies that would require much lower standards of living. It seems a little disheartening and unrealistic to think that a couple with a $1M nest egg has to live on as little as $15,800/year.
7
Because annuities are so often a rip-off (high fees, etc.), and are an especially bad deal in a low interest rate environment.
7
Annuity payments are largely determined by interest rates. Annuities are in essence interest only fixed income instruments with long durations. Interest rates are of course near all time lows. If someone doesn't like the yield on long term bonds they shouldn't be buying an annuity. As with bonds, a fixed income annuity would be disastrous in an inflationary environment.
4
Several thoughts:
1. the assumption is made that retirees want to spend it all and die at $0. I don't think that's the case. Most want to leave as much as possible to their families while maintaining a comfortable retirement income;
2. in low inflation times, retirees need not increase withdrawals every year with inflation as inflation has very little impact;
3. using a portfolio of tax-exempt bonds held to maturity instead of bond funds works better and reduces risk and taxes;
4. the best of all worlds is to have enough to live solely on dividends and interest, in the old New England style. That way you have no risk of outliving your money.
1. the assumption is made that retirees want to spend it all and die at $0. I don't think that's the case. Most want to leave as much as possible to their families while maintaining a comfortable retirement income;
2. in low inflation times, retirees need not increase withdrawals every year with inflation as inflation has very little impact;
3. using a portfolio of tax-exempt bonds held to maturity instead of bond funds works better and reduces risk and taxes;
4. the best of all worlds is to have enough to live solely on dividends and interest, in the old New England style. That way you have no risk of outliving your money.
9
The IRS required minimum distribution from an IRA doesn't have to be spent. Some or all of it can be re-invested in a taxable account, and spent in future years. The "inflated 4%" rule, covered in this article, concerns how much to spend (not the taxable withdrawal). A really easy rule that's in many ways better than "inflated 4%" is to find your life expectancy from the Social Security website. Add six. Divide that number into your total retirement account assets. That's what you can afford to spend, without risking that you may deplete your savings. There more on these ideas at www.able2pay.com
1
As of January, 2015, the typical American household had retirement savings that amount to about $60,000. Yet this article starts with the assumption that one has $1 million in assets with which to work. I daresay most people could probably manage to live quite comfortably on that amount of money for 30 years without having to develop some kind of arcane formula for withdrawal. Perhaps the best part of the article, however, is buried near the end. The retired financial planner profiled in the article hired two OTHER financial planners to handle his money. If a wealthy professional financial planner who is accomplished enough to have developed an industry-standard rule for investment management feels incapable of properly managing his investments, how is the average American with far fewer assets and far less financial experience expected to do so competently?
33
Well, the problem with that is you are wrong. One would be surprised just how fast they can blow through $1MM. In order for one to accumulate $1MM over their working career they probably need to avg about a $60,000/yr income. This is doable for many, so long as they are disciplined. The mistake people make is assuming their lifestyle won't change after retirement. It kind of does. Prior to retirement are the accumulation years, after that the distribution years. In order to maintain the $1MM or $500K or $250K or $90K you really need to not spend any more than it earns in interest. But seeing that large chunk of cash sitting there is awfully tempting, like an adult passing a Ben and Jerry's. A kid can be told, "no, we aren't stopping", an adult...not so much.
10
Which is why, when you look at the stats, only about .5%-1% of savers will crack a million. Those are long odds for most.
1
The "average household" includes 25 year olds as well as 64 year olds. It would be more meaningful to report the average and median savings for people nearing retirement age, rather than using an average covering all age groups.
3
Does any of this analysis take into account the IRS required MRS from IRA's? And the withdrawal amount increases each year - a withdrawal one must take whether or not the money is needed in a particular year. The RMS is the destroyer of savings above all.
5
Sure. You can suspend your SS for 6 months to offset the MRD or take the MRD and immediately place the excess into a Roth IRA.
5
RMS ?
2
You do not have to take minimum required distributions until age 70 1/2. There would be no point in suspending Social Security after age 70, so that suggestion doesn't make sense.
Also, you cannot take a minimum required distribution and use it to invest in a Roth IRA. You can transfer funds from a regular IRA to a Roth IRA after paying taxes on the transfer, but you cannot count that as your required minimum distribution.
Also, you cannot take a minimum required distribution and use it to invest in a Roth IRA. You can transfer funds from a regular IRA to a Roth IRA after paying taxes on the transfer, but you cannot count that as your required minimum distribution.
Assumption: A 65 year old couple begins with a portfolio of one million dollars,
Further assumption - The vast majority of us are screwed and when they reduce our Social Security we might as well roll over and die;
Why don't you write a plan that addresses the realities most of us will face?
Further assumption - The vast majority of us are screwed and when they reduce our Social Security we might as well roll over and die;
Why don't you write a plan that addresses the realities most of us will face?
17
when are they reducing SS????
You control that..there are more voters not wanting ANY negative changes to SS than there are those that do. It's like with midterm elections, the only ones that show up are those with an agenda. As a retiree, you have an agenda. Call you Rep and Senator and explain they job hinges on nothing bad happening to your SS. Join AARP, they are the lobby group for retirees. Think of AARP as the NRA for the rest of us.
You control that..there are more voters not wanting ANY negative changes to SS than there are those that do. It's like with midterm elections, the only ones that show up are those with an agenda. As a retiree, you have an agenda. Call you Rep and Senator and explain they job hinges on nothing bad happening to your SS. Join AARP, they are the lobby group for retirees. Think of AARP as the NRA for the rest of us.
10
The 4% "rule," is a place to start for anyone, a plan applicable to the "realities" of anyone, but the results for people with small nest eggs aren't pretty. 4% of $500K is $20K. 4% of $250K is $10K. And for the person who posted that they have just $60K, well 4% of that is $2400. Be thankful for social security, and, no, it probably won't go away at least for you. There is of course no plan that will give you a return on money you have not saved. A person earning $60K will need a retirement portfolio on the order of $1.5M to replace that. That's just the math.
1
Social Security can get reduced in real dollars when the increase does not match reality
1
Saving for retirement should be a priority for many people, yet it's obvious that many don't really do much planning. Should be taught every year in high school until the students really understand it (regular saving, retirement accounts, compounding, etc).
A factor not often mentioned is the cost of children. A common figure is $250,000 just to get a kid out of high school. Not that the choice between a child and one's own retirement would be easy, but saving the money of not having one child would get one easily past one million dollars in retirement.
A factor not often mentioned is the cost of children. A common figure is $250,000 just to get a kid out of high school. Not that the choice between a child and one's own retirement would be easy, but saving the money of not having one child would get one easily past one million dollars in retirement.
5
It's difficult to save for retirement on low wage jobs, student debt, medical bills. People could forego having children - -but that seems like a drastic solution. People want to have a family and all the joys that come with it.
8
Starting with a million dollars (or slightly more)...that's a dream in itself. I've been saving for years and will never come close to having that amount set aside for retirement. Guess it's the refrigerator box over a subway grate for me.
9
If you avg $60,000/year and save 10% ($6,000) and you sock away $500/month with easily anticipated ROI after 30 years there would be slightly over $1MM.
All it takes is discipline. If you never see that money you'll get used to not having it until you need it.
All it takes is discipline. If you never see that money you'll get used to not having it until you need it.
5
Well, W., unfortunately for me (and I'm presuming many others), I didn't have a starting salary of $60,00 a year when I began working all those years ago---thus saving 10% of what I did make couldn't bring me up to those standards. Drat my poor discipline.
16
Right - no income disruptions and steady returns. In what universe is that?
Our solution was to retire to the Philippines where the cost of living is less. If we were using the 4% rule and living in the U.S. our existence would be pitiful. Although we have to pay for our own medical care (Medicare only works in the U.S.) the cost of routine care is cheap. A recent visit to my cardiologist was less than $8. A hospital room is about $55 per day. We built a house here. Our property taxes are about $100. Car insurance is about $56. If we need live-in full-time help, it's affordable at about $60 per month. The climate is warm and it's a pleasure to live among the Filipino people. This may not be for everyone, but for us it's a way to live well on the resources we have.
21
I have some relatives from the Philippines, they are a hospitable people, with a fast growing, modern economy. I also bet the weather is fantastic. Congrats.
1
I'm confused. I guess that I'll just keep on working and paying taxes. But I know that if my taxes were as low as those that corporations and the 1% pay, I'd have retired long ago.
19
Is it really that bad a thing for retirees to "underspend"? I doubt it. But it would indeed be a catastrophe if the money runs out. Bottomline is, it's better safe than sorry.
That said, it would have made sense when withdrawals are higher during early retirement years for indulgence like traveling. As one gets older, we tend to slow down, our health might not keep up, and healthcare bills might pile up, including long term care facilities and such. Hence, whatever is "underspent" in earlier retirement years could be swallowed up by healthcare bills later on in life. This is not to mention the potential desire to leave any inheritance to the children and grand-children.
That said, it would have made sense when withdrawals are higher during early retirement years for indulgence like traveling. As one gets older, we tend to slow down, our health might not keep up, and healthcare bills might pile up, including long term care facilities and such. Hence, whatever is "underspent" in earlier retirement years could be swallowed up by healthcare bills later on in life. This is not to mention the potential desire to leave any inheritance to the children and grand-children.
3
So you mean I have to save to become a freaking millionaire, just to retire on 30k per year? While, these greedy law breaking banks are using my hard earned money for god knows what while I can't access it without ridiculous penalties and then after risking my life savings for decades I only get an xtra 4% that barely covers the inflation that these fat cats have pushed up in the first place! Maybe the real answer for the middle class is to stop the run a way inflation rates. These hotshot MIT educated financial planners aren't offering any real services when you consider that (w/o inflation) 1,000,000/30=$33,333 anyway!
26
Even in the current grossly inflated stock market, you can get 4% in dividends on a diversified portfolio. It is practically certain that the nominal value of the portfolio will go down somewhat whenever interest rates go up, but the stocks will continue to pay.
So if you have $30K in Social Security, and $40K in dividends with some prospect of increases, that's not too bad.
So if you have $30K in Social Security, and $40K in dividends with some prospect of increases, that's not too bad.
11
Not sure if this information will help you or not, but if you have CDs returning 4% you are indeed fortunate. And if these CDs are in an IRA and you reach the age of 70.5 at which point RMDs (Required Minimum Distributions) kick in, then most savings institutions will not charge you an early withdrawal penalty on the amount you must take as a distribution to meet the RMD percentage.
2
Misdirected blame - the banks would love for interest rates to increase. It's the Fed - see Janet Yellen - which is keeping rates low.
2
The biggest fear of retired and those considering retirement is the fear of outliving their resources. A 3.5 to 5% drawdown is currently considered to be appropriate for a 20 to 30 year period adjusted for inflation. A financial plan is critical in evaluating when and how much income is necessary to alleviate the fear. Additionally the plan should provide the necessary steps needed to achieve goals. The vast majority of people are not prepared to retire because of failure to save and invest prudently. A good plan should utilize Monte Carlo analysis as opposed to linear analysis in calculating retirement results.Consult a qualified financial planner, develop a strategy and make adjustments as necessary. Failure to adequately plan assures failing to achieve realistic retirement goals.
6
We had a Monte Carlo analysis done, which gave an odds ratio for various possible outcomes. It told us that in 30 years, depending upon how the financial world did and upon how much we spend per year, we'd have as much as 15 times what we do now, or we might be bankrupt. It was nothing but speculation, masquerading as statistics. There is no certainty in it, but certainty is what most retirees need.
6
Depending on unpooled funds for creating a pension is a silly thing to do. If the market is way up, it is likely inflation is also rising. So the 4% rule only makes sense in a static or very slowly changing 5 to 6% return AFTER tax or better market. (And remember by market for most retirees I mean min 70% bonds and 30% stocks so not the S&P as benchmark) If you buy a cash value life insurance or a GIC or annuity or anything that can pay a guaranteed income stream, you can solve this problem ESPECIALLY in down markets. That is when you draw from cash value life insurance or your GIC or annuity. Otherwise, if you income average out in down markets (most retires do this pulling the same amount out each month) you will do the opposite of income averaging in -- instead of moderating downside risk and enhancing upside you will double down and cut off the top of performance. The fastest way to trash a portfolio is to pull funds out when the market is down. Pensions, GICs, cash value life insurance, and annuities can help reverse this, BUT you have to buy them (join the risk pool) well before you're 80 and the money runs out!
5
I am a public school teacher and I have a pension. Thank God for unions. I wish everyone had the same protections. And I pay too-- 7.5% of my salary since 1986. I also contribute the legal maximum to my 403b. Growing older is tough enough without adding financial strain to it. Don't vote for politicians who want to make your golden years harder.
70
I'm in the generation that has followed the Me generation. When I read facts like, "Roughly 11,000 people, on average, are expected to turn 65 every day for the next 15 years", it hits me where my tax dollars are going to be headed for the next few decades. And also, of course, that I'll never see a dime of *my* SS contribution.
And right after I'm done paying for their comfort, the millennials will come caller (er, whining) to my doorstep.
And right after I'm done paying for their comfort, the millennials will come caller (er, whining) to my doorstep.
7
You will only have to worry about SS not being there if you vote for Republicans who want to take away this benefit from the middle class. SS is in excellent shape and will be there for many decades to come unless foolish voters listen to the lies of those who would rob them of their posterity.
36
Why do you say you'll never see a dime of "your" contributions. That is categorically untrue. While it is true the contributions you make go out the door, as opposed to sitting in a box marked Bob Roberts. Similarly, if you belong to a Savings and Loan or Credit Union or have a savings account. That money gets spent on home mortgages, construction projects, new malls etc. Money only lies idle if you put it under your pillow. You have to make sure you elected officials know that screwing around with Social Security and Medicare are complete non-starters. What should happen is
1) at least the employee portion of SS % of payroll needs to increase, perhaps from 6.5% to 7.5%
2) the income cap for contributions, currently at $118,000 needs to be completely removed such that the higher earners continue to pay in beyond reaching the $118k mark.
3) money put into SS needs to be locked away from politicians trying to balance a budget. NO MORE IOUs
4) Maybe we don't need fighter jets the Pentagon insists they don't want
5) maybe we don't need any more aircraft carriers
SS can and should be alive and well when you need it. It's not magic, it is just not deliberately underfunding it.
1) at least the employee portion of SS % of payroll needs to increase, perhaps from 6.5% to 7.5%
2) the income cap for contributions, currently at $118,000 needs to be completely removed such that the higher earners continue to pay in beyond reaching the $118k mark.
3) money put into SS needs to be locked away from politicians trying to balance a budget. NO MORE IOUs
4) Maybe we don't need fighter jets the Pentagon insists they don't want
5) maybe we don't need any more aircraft carriers
SS can and should be alive and well when you need it. It's not magic, it is just not deliberately underfunding it.
24
Too bad for you dude! It's called a society, and we're all supposed to be in this together.
6
First, how much do you spend annually? (Do you have debt?) And, what is your guaranteed income, including pensions and Social Security?
About 80% of Americans take their Social Security benefit prior to age 70, sad to say; in many cases they would be far better off "purchasing" longevity insurance in the form of delaying benefits, "earning" themselves a tax free return of 8%/year from age 66 to age 70, and using other income or assets from their portfolio to do so. Married couples have additional choices in the form of restricted spousal benefits.
To me, these are issues which need to be clarified prior to even discussing a decumulation plan.
About 80% of Americans take their Social Security benefit prior to age 70, sad to say; in many cases they would be far better off "purchasing" longevity insurance in the form of delaying benefits, "earning" themselves a tax free return of 8%/year from age 66 to age 70, and using other income or assets from their portfolio to do so. Married couples have additional choices in the form of restricted spousal benefits.
To me, these are issues which need to be clarified prior to even discussing a decumulation plan.
7
Only 11% of SS claimants wait until age 67 or older to collect benefits. A full 45% accept a 30% cut in benefits by retiring at age 62. Depending on the state of your health, this may be a wise decision. But if you wait until age 70 to collect, and then are fortunate enough to live until age 81, you will make up the difference lost by taking your benefits at the earlier age. And from then on, you will remain ahead of the game.
6
We took SS at age 65. We also took our state retirements at the same age. Social Security increases about 1.5% annually. The state retirements are stagnant. Our retirement portfolios are increasing at about 12-16% annually and we have not yet withdrawn from them, living right now on SS, state retirement and 2 non-IRA portfolios.
The new math offered by Tara Siegel Barnard is too simplistic. Retirement is far, far more complex than simply applying a 4% rule or hoping that you can save $1 million. If you haven't planned for your retirement for the last 30-40 years and established good financial security you're in deep trouble. If you're aged 50 or over and are behind you have to make a lot of sacrifices to catch up. If you're lucky you'll be healthy and still have a job and be able to do it. Save, save, save!
The new math offered by Tara Siegel Barnard is too simplistic. Retirement is far, far more complex than simply applying a 4% rule or hoping that you can save $1 million. If you haven't planned for your retirement for the last 30-40 years and established good financial security you're in deep trouble. If you're aged 50 or over and are behind you have to make a lot of sacrifices to catch up. If you're lucky you'll be healthy and still have a job and be able to do it. Save, save, save!
3
I think it's a mistake to have half your IRAs in fixed income investments during the first 20 years of retirement. My basic rule is to have only enough in fixed income IRAs and savings for 4 years of expenses. The rest of my IRAs, over 80 percent in my case, are in broad based stock index funds, which have averaged close to 10 percent annual return since 1929. In the 4 years after the stock market crashed in 2008, I cut back on my spending and withdrew only from my fixed income funds, allowing my stock funds to grow back and exceed pre crash levels. Even after 10 years of retirement spending and after having experienced the stock market crash early in retirement (the worst case retirement scenario), I have more in my retirement funds than I did when I retired.
23
I think there is a lot of merit to this strategy, and is one that I give my retired parents. If you consider that you will potentially live 30 years in retirement you are talking about a very long investment horizon. Why for the first (working) 30 years would you invest in stocks to get strong returns, but not the last 30 years? But you recognize a crucial difference: you need to live on that money. Set 4 years living cash off to the side to ride out almost any downturn, and invest the remainder in a reasonable long-term mix of stocks and bonds (add some real estate if you like).
I suggest you view your money like Universities manage their endowments--as a perpetuity withdrawing 5% per year. To do this they need to get the power of stock returns. The notion of retiring and pulling your money out of the market (for safety) is antiquated thinking in my opinion but i am not alone. Charles Schwab has provided very similar advice (Your 50 Now What).
If U.S. Fortune 500 companies are not a good investment over the next 50 years, then putting your money in bonds (which won't be paid) or bank accounts (which don't pay) won't matter, you'll need a shotgun and soup cans.
This approach is not risk-free but if you model it, I am not surprised the balance in your retirement accounts has actually gone up (and done so through two significant market downturns). My parents retirement portfolio is largely stocks and has also gained value since they stopped working.
I suggest you view your money like Universities manage their endowments--as a perpetuity withdrawing 5% per year. To do this they need to get the power of stock returns. The notion of retiring and pulling your money out of the market (for safety) is antiquated thinking in my opinion but i am not alone. Charles Schwab has provided very similar advice (Your 50 Now What).
If U.S. Fortune 500 companies are not a good investment over the next 50 years, then putting your money in bonds (which won't be paid) or bank accounts (which don't pay) won't matter, you'll need a shotgun and soup cans.
This approach is not risk-free but if you model it, I am not surprised the balance in your retirement accounts has actually gone up (and done so through two significant market downturns). My parents retirement portfolio is largely stocks and has also gained value since they stopped working.
2
Long-term care costs are the greatest uncertainty, not market returns. I have witnessed all of my grandparents spend down their dollars, demented in assisted-living facilities (aka nursing homes), only to die penniless after being forced to enroll in Medicaid. These were people who would have been considered "rich" by our current leadership; easy-come, easy-go. My aging mother pleads with me to "never let me live like (her) mother". Of course, once one is demented and in poor health, what choice is there? In the past, the elderly lived out their last years at their children's home, where they were cared for by their children until the very end. We now have increasing numbers of childless, unmarried, and widowed elderly and an emerging elder-care crisis. The solution will entail greater social support involving family, friends, and government, along with a greater acceptance of euthanasia. It is a shame that often our pets are treated with more compassion than our elderly.
44
The motto of Nursing Homes should be" "Let no one depart with a penny to their name." And also, in the mean time, all their personal possessions seem to disappear. Whatever planing may have happened, the benefit all goes the the owners of the Nursing Home. Invest in a Nursing Home - it's a sure bet.
These constructs are based on the American Century, which we left some time ago. We are now "leading from the rear," "engaging" with the evil of Iran, "re-setting" with the lovely Mr. Putin and, to not dump solely on the hapless Mr. Obama, engaging in decades long "nation building" amongst the barbarians of the world.
It ain't your father's world or your father's economy or even your father's US Dollar. You better be thinking about foreign investments and commodities if you want to be safe over the decades.
It ain't your father's world or your father's economy or even your father's US Dollar. You better be thinking about foreign investments and commodities if you want to be safe over the decades.
1
Wow, James. Lots of cheap shots at the president followed by poor retirement investment advice. At least President Obama was not the one blithely standing by in the lead up to the 911 attacks, did not attack the wrong enemy in Iraq, and then did not usher in the worse economic meltdown since the great depression. Under Obama's stewardship and despite a do-nothing republican congress, the US and has actually had one of the best, if uneven, economic recoveries. Investing in the US stock market turns out to have been one of the best places to invest over the last six years, and is very likely to remain a foundation for future financial planning. We do live in an increasingly global economy and investments in foreign markets deserve a place in a balanced portfolio. However, since our economy has repeatedly done worse under republican administrations, you must be rooting for the them to win most future national elections to make your predictions true.
3
In 1980 American voters got to make a choice: Low taxes or secure pensions. They chose low taxes. Norwegian voters chose the opposite. Guess who will be eating dog food when they are 80.
37
I don't recall ever being asked that. What was the choice?
2
Reagan vs. Carter. Libertarianism vs. Social Democracy. Yeah, I know. Carter was a disaster and you had to get rid of him. And Reagan was a kindly old man who said he was going to take care of you. He sure did. On a personal level, I made the other choice. I dodged the Libertarian cannonball. I spent 29 years as a federal employee and now have a generous traditional pension. None of that 4% business for me. A little taste of Norway in a Capitalist utopia. It's all about choices.
3
Dogs?
3
The heck with these comments.
Do your own investing. You know with whom. Don't rely on anyone else.
Save. Buy low. Hold. Capture. Be a contrarian.
Do your own investing. You know with whom. Don't rely on anyone else.
Save. Buy low. Hold. Capture. Be a contrarian.
7
Bizarre article. An average portfolio of this size should earn 4% without touching the principle. Above average would earn 7%.
3
4% is considered very low risk
7% injects some additional but manageable risk
10% injects a little more risk
7% injects some additional but manageable risk
10% injects a little more risk
1
The returns quoted above are nonsense. Average American investors tend to earn over time much lower than people quote as they tend to pull money out and put money in at the wrong times. I have seen quotes for average returns only a fraction of a percent above inflation. Example of some analysis on returns: http://blogs-images.forbes.com/advisor/files/2014/04/Picture11.png
So reset your false assumptions, it is very hard to find people consistently achieving returns significantly above inflation.
So reset your false assumptions, it is very hard to find people consistently achieving returns significantly above inflation.
I have just retired (involuntary) and find I am able to live on my investment income. I am even able to continue to save small amounts of money, although it is nothing compared to what I saved while I was working.
I will be able to save more once I start taking social security and my pension in three or four years. I intend to increase my assets until I am at least 80. Old age is terrible, but it's even worse if you don't have any money when you need it.
I will be able to save more once I start taking social security and my pension in three or four years. I intend to increase my assets until I am at least 80. Old age is terrible, but it's even worse if you don't have any money when you need it.
8
I work with people every day who have been retired for years. Some retired at 59 (or 55!) and some at 62. It seems very few are working until 66. None of them have much in the bank, but they do quite nicely on their Social Security check of 1500 or 1800 a month, maybe with a military retirement thrown in. Now, the smarter ones have no debt, own their own homes, but many others just pay rent (this is the west, not Manhattan) and they all get by, actually with quite a bit of happiness. They don't eat in the good restaurants, their vacation amounts to driving a couple of hundred miles to visit family. But they have lovely yards, well-behavied companion animals, and friends. For them the 3 or 4 percent rule has no meaning. They've probably never heard of it.
36
Glad to hear your friends are surviving on $1500 to $1800 per month. If however, they are also receiving military retirement funds, then they are obviously living on more than that figure. Also what about medical insurance? Do they pay for that or are they hedging their bets that they don't get sick. Maybe they are doing "okay" for now, but if a serious illness or some other problem enters, I tend to think they may not fare so well.
I'd love to see their budgets. The poverty line is $11,770 and $1500 is less than $400 above that. If they truly own their homes and don't rent, that 1500 dollars has to cover food, homeowners insurance,property taxes, utilities, grooming supplies (toothpaste, shampoo, etc), home maintenance ( all homes require at least minimal maintenance) clothing, etc.
And that's just a start for expenses. Who takes them grocery shopping? Do they own cars? That would entail auto insurance and gas.
And that's just a start for expenses. Who takes them grocery shopping? Do they own cars? That would entail auto insurance and gas.
3
R Harvey, thanks for your perspective. I'm in Spokane also, single at 60 YO, still have a good job, but fretting about not having a $1M retirement account like "I should." My only challenge is that 9 years ago, I purchased my dream property at an age where most might be close to paying off their mortgage...I have a $900 payment to take into retirement.
1
Retirement, will be there in 4 weeks. Approaching it in four phases. No 4% rules. Don't need it. Phase one, downsize the house. Trade it in on a cheaper smaller one. Phase two, get the financial ducks in a row. Takes time, couple years. First year establish non work life budget based on reality of having more time to think about spending. Basic financial math. When you have more time to think before you spend you spend less. We live in a consumption society based on fast purchases. Time to slow down the consumption. Phase three. Move to the smaller place. It will cost less and doesn't need to be near a highway or major airport. Phase four. Social network. rebuild old friendships and start making new friends. Read more, sleep more, play more, pray more, and be more grateful about everything.
40
Wow, Tom! I can't see a single thing I disagree with. Blessings to you on your upcoming retirement, and good luck!
7
I agree with all of what you say except the consumption part which I believe people need to slow down from the get go both for moral, conservation and financial reasons. We do not need so much and/or so many of the things we feel we should and do...when I see those people lining up for days to be the first to buy a new iPhone from the iPhone they lined up for days to get just a YEAR previously, I am to say the least surprised. I have never bought a new car or owned a credit card and always saved a % of my salary from the start , when I earned $11,000 P.A in my first job in 1984 to my last and retiring at 40
I paid of my home mortgage 7 years after taking it out.I have no SS, dependent on just my savings and the investments from them.
What has made the difference and allowed me to enjoy retired life earlier and do so securely and is the most important thing a person can do ...IS THIS:
Do not consume as society suggests you can , need or should. You can enjoy life as much as anybody else AND not fall for the mass consumer mentality that makes us buy the things we do but do not need,
Never use Credit. Too many buy or live on Credit when they shouldn't. Buying anything on credit means you don't have the money.Don't buy it until you do.
Save. From the first pay you get, till the last.
Just doing these 3 things will set you up for life and security more than anything else.
I paid of my home mortgage 7 years after taking it out.I have no SS, dependent on just my savings and the investments from them.
What has made the difference and allowed me to enjoy retired life earlier and do so securely and is the most important thing a person can do ...IS THIS:
Do not consume as society suggests you can , need or should. You can enjoy life as much as anybody else AND not fall for the mass consumer mentality that makes us buy the things we do but do not need,
Never use Credit. Too many buy or live on Credit when they shouldn't. Buying anything on credit means you don't have the money.Don't buy it until you do.
Save. From the first pay you get, till the last.
Just doing these 3 things will set you up for life and security more than anything else.
Very interesting article. Unfortunately what is missing is that the current models for projecting retirement scenarios are something out of a Dickens novel.
We have a situation where retirees with defined benefit pension plans are now limited to about ten percent of the non-government and non-civil service jobs, complements of the Republicans and Conservatives.
The last segment of the population with the famous three-legged stool of pension, Social Security, and savings/investments is now down to a two-legged stool with the Republicans working to limit and destroy Social Security, after having already substantially damaging personal savings and investments in 2008.
For some strange reason, most Americans are blithely accepting that the top tenth of one percent of Americans retires in unparalleled income and luxury, and the rest are told "Thank you for a lifetime of flat wages; now die".
The media sees no problem (isn't telling people to save a million dollars a bit specious?), the Republicans and Conservatives see no problem as long as there are still income and assets to move up the food chain, and most of the Democrats are too busy hiding from answering questions re what happened to the middle class".
We have a situation where retirees with defined benefit pension plans are now limited to about ten percent of the non-government and non-civil service jobs, complements of the Republicans and Conservatives.
The last segment of the population with the famous three-legged stool of pension, Social Security, and savings/investments is now down to a two-legged stool with the Republicans working to limit and destroy Social Security, after having already substantially damaging personal savings and investments in 2008.
For some strange reason, most Americans are blithely accepting that the top tenth of one percent of Americans retires in unparalleled income and luxury, and the rest are told "Thank you for a lifetime of flat wages; now die".
The media sees no problem (isn't telling people to save a million dollars a bit specious?), the Republicans and Conservatives see no problem as long as there are still income and assets to move up the food chain, and most of the Democrats are too busy hiding from answering questions re what happened to the middle class".
84
Most of us would be lucky to save $100K much less a million. What's the rule for that?
15
Thankfully we are all free to spend less than our income, and average incomes here are still far higher than the vast majority of humans in other geographies. Bravo to the thrifty ones, that save. We shouldn't depend on big government, it ain't sustainable or reliable.
4
The rule is stop living beyond your means. Or if you are simply not making enough get a better job.
With most retirement funds tied up in tax advantaged accounts such as iras and 401 ks isn't the IRS and the minimum required distribution rule (RMD) taking away a lot of the planning flexibility implied in this article ?
11
You can simply reinvest the RMD and continue to treat it as part of your retirement/pension account-- you don't have to actually spend it.
1
The tradiational IRA/401k money was tax deferred until age 70.5. It was intended for retirement. You must plan to live 120.
1
No. Just because you have to take your RMD (which will be less than 4% of your combined balances until age 74 or so) doesn't mean you have to spend it (other than paying the income tax on the distribution). You can even take the distribution in-kind, so you don't have to sell out of a security you like, and you can move it into an after-tax investment account (with a new cost basis) and then plan accordingly from there.
Definitely not simple math & planning, however. Retirement planning is not for the faint of heart. I can play out so many "worst case" scenarios in my mind, yet I tend to see the world as a rosy place. So, we've hired an advisor to get us past the best case/worst case dichotomy.
Definitely not simple math & planning, however. Retirement planning is not for the faint of heart. I can play out so many "worst case" scenarios in my mind, yet I tend to see the world as a rosy place. So, we've hired an advisor to get us past the best case/worst case dichotomy.
2
Here's what I find most unfair re retirement savings:
The IRS taxes standard IRA withdrawals not as capital gains, but at the much higher earned income rate--even though the increase in equity value, dividends and interest, is clearly capital gains. So I might pay 25-35 % tax on an IRA withdrawal.
However, someone in that same tax bracket who invests the same amount in non-IRA tax-free holdings would be taxed at the capital gains rate of 15%.
Roth IRAs appeared on the scene much later than standard IRAs, so more older people have invested in standard IRAs. Rollovers to Roths are often prohibitively expensive due to the high tax rate that must be paid, and the older the IRA holder, the less the benefit that results from doing such a rollover.
The IRS taxes standard IRA withdrawals not as capital gains, but at the much higher earned income rate--even though the increase in equity value, dividends and interest, is clearly capital gains. So I might pay 25-35 % tax on an IRA withdrawal.
However, someone in that same tax bracket who invests the same amount in non-IRA tax-free holdings would be taxed at the capital gains rate of 15%.
Roth IRAs appeared on the scene much later than standard IRAs, so more older people have invested in standard IRAs. Rollovers to Roths are often prohibitively expensive due to the high tax rate that must be paid, and the older the IRA holder, the less the benefit that results from doing such a rollover.
15
This is not an unfair situation.People who have non IRA savings already paid their full income tax on the money.For those who took a tax break upfront and put the money in an IRA their tax will be due in retirement.They will have capital gains but that's on money that was not taxed upfront so paying income tax on the accumulated gains is reasonable.One could have paid taxes instead of opening an IRA and invested the money,then they too would get the capital gains tax rates.
8
Really???? I saved 25% earning and squirreling that money away only to pay about 8% when I take it out.
The original Dedeuctible IRAs are pre-tax. We knew going in that we were taking the deduction now in anticipation of taking withdrawals when we were in a lower income tax bracket. Roth IRAs came along with the opposite deal -- pay the income tax now and take the distributions tax free.
This is not new -- they are both just tools. You plan your investing accordingly.
This is not new -- they are both just tools. You plan your investing accordingly.
1
New 4% rule: in any year spend 4% less than your retirement savings produced for earnings in the prior year. Savings are for producing income, not for income themselves.
If you want to max safe withdrawal: spend 1/2 of savings on annuities.
Annuities are also great for surviving spouse who lacks "financial interest".
End of life medical needs? Stay with good secondary to Medicare. Annuities are also good here as they make you and spouse look good for retirement center needs and can not be exhausted.
If you want to max safe withdrawal: spend 1/2 of savings on annuities.
Annuities are also great for surviving spouse who lacks "financial interest".
End of life medical needs? Stay with good secondary to Medicare. Annuities are also good here as they make you and spouse look good for retirement center needs and can not be exhausted.
3
Pickenspilot may have something figured out for himself, but I don't appreciate his opinions that are presented more like the accepted norm which they are not. Annuities are ridiculously highly commissioned, and are so complex a common person can not really understand them. I would advise anyone considering an annuity to shop, shop, shop, and don't accept any one advisors recommendation.
There is nothing wrong with delving into saving to provide for your current financial needs assuming you understand your actual financial needs and the affects such withdrawals have on your longer term. I'd be glad to provide scenario's where it would be completely logical (and recommended), but I don't want to beat a dead horse.
I have to conclude that you must have some self interest is "pushing" annuities to the extent that you are doing. Annuities have their niche, but it is a niche - not for everyone.
P.S. I used to be licensed to sell annuities and have a little knowledge of the product. I did not feel comfortable selling such a highly commission product unless the "fit" was perfect.
There is nothing wrong with delving into saving to provide for your current financial needs assuming you understand your actual financial needs and the affects such withdrawals have on your longer term. I'd be glad to provide scenario's where it would be completely logical (and recommended), but I don't want to beat a dead horse.
I have to conclude that you must have some self interest is "pushing" annuities to the extent that you are doing. Annuities have their niche, but it is a niche - not for everyone.
P.S. I used to be licensed to sell annuities and have a little knowledge of the product. I did not feel comfortable selling such a highly commission product unless the "fit" was perfect.
3
While a place like Vanguard has semi-decent annuities without exorbitant fees, most annuities, especially those that are sold by salesmen, STINK. Everyone should learn why.
1
When I go to my fidelity 401k account they show that the average account has 90k not a good sign for the future retirees!
3
I wondered about that, the average account includes 18 year olds as well as retirees.
The average may be 90K, but it all depends on the age of the account owners doesn't it? At 30 years old 90k would be a good start, but I understand your observation. I'm afraid this may reflect the attitude that someone else (God forbid the government) will take care of them.
1
Twenty five years ago when they rolled out the 401k at my company there was little to no guidance at all. I had a defined pension at the company as well, Only in the last couple of years has the company improved the support level for financial guidance. I have always liked the stock market as a hobby but what about all the people that are uninterested? I used to beg the guys that I worked with to learn about the market, watch cnbc instead of espn and make some money for yourselves.
3
A 50/50 stock bond allocation in my opinion is foolish for long term dollars. ie. a vast majority of retirement funds will not be touched for at least 7 years. This makes bonds a poor choice.
7
Over 10,000 people are turning 65 every day for the next 20 years in the US. The elderly population will double over the next 25 years. If people think the stock market will sustain this level of people exiting the workforce...they are in for the shock of their lives.
8
No need to worry Nick. 70% of stocks are owned by only 5% of American households. And the wealthiest 10% own 81% of all shares of stock owned by US households. And they will not be selling out when they retire since they do not need that much cash! 53% of American households own no stock at all! And half of all stock is owned by households with annual incomes over $250K. So the old adage about needing to have money to make money is right on the money!
The author should have mentioned QULACs, which are IRS qualified longevity fixed annuity products. QULACs permit a tax free withdrawal from an IRA or 401-K (which also reduces the minimum required withdrawal at age 70) to buy a guaranteed lifelong income stream starting at up to age 85. (If you die before, you lose you investment, although you can get spousal rights).
QULAC payments are surprisingly high, because you are basically pooling the "risk" you will live long with others. In other words, you are getting a discount because the insurance company is calculating the odds you will die without a benefit. Unfortunately, QULACS are relatively new products which are not yet offered by all major insurers and/or approved by all state insurance departments.
QULAC payments are surprisingly high, because you are basically pooling the "risk" you will live long with others. In other words, you are getting a discount because the insurance company is calculating the odds you will die without a benefit. Unfortunately, QULACS are relatively new products which are not yet offered by all major insurers and/or approved by all state insurance departments.
1
Anyone who plans to spend now early in retirement and then cut spending in the future is ignoring reality. As we grow older we are going to need more assistance to do less things, that equals expense. So throwing out that false premise means playing the budget travel rule like the Europeans. It is really sad that we have become like our poor cousins across the Atlantic, which we can only thank liberal economic and regulatory policies for.
1
Henri, I took that to mean, as we are doing, spending as in vacations to Europe or Alaska or Hawaii, things that will become increasingly more difficult later in life.
As I said, I am spending a little bit of it now, I suspect less than or equal to what it will earn, deferring until closer to 70 to file for SS. Once I do that, I will, essentially, not need to touch our savings except for vacations every other year to places we want to see while we are still among the living. Even that will be far less than the interest per year. Later, our vacations will be confined to going to Fl or AZ. But, in the mean time that money is still cooking and, should another dip/correction/bubble occur, as we aren't touching the savings it will have time to recover. Also, over time we will transition chunks of money from the riskier portfolios to the less risky portfolios.
As I said, I am spending a little bit of it now, I suspect less than or equal to what it will earn, deferring until closer to 70 to file for SS. Once I do that, I will, essentially, not need to touch our savings except for vacations every other year to places we want to see while we are still among the living. Even that will be far less than the interest per year. Later, our vacations will be confined to going to Fl or AZ. But, in the mean time that money is still cooking and, should another dip/correction/bubble occur, as we aren't touching the savings it will have time to recover. Also, over time we will transition chunks of money from the riskier portfolios to the less risky portfolios.
been retired since 1994 so using the 4% rule was where i started i,e, it was not enough so i invested 80% in equity stocks after 5 years/ i now have the same amount i retired with after 20 years and moved down to 60% in equities
3
Well, lost in this article is the notion that trying to retire on individual accounts is a non-optimal policy. It is obvious that atomizing the retiring public so they can try to solve this impossible riddle is what has caused this problem.
A better answer is to have a larger portion of retirement funded by a public annuity such as an enhanced Social Security. If you have a big surplus beyond your needs, individual account are OK. For most people, trying to guess when you will die, what interest rates and investment gains will be, or when the next financial crisis will wipe out half of your savings is an impossible task. The only winner is the financial industry that pushes this dubious strategy.
A better answer is to have a larger portion of retirement funded by a public annuity such as an enhanced Social Security. If you have a big surplus beyond your needs, individual account are OK. For most people, trying to guess when you will die, what interest rates and investment gains will be, or when the next financial crisis will wipe out half of your savings is an impossible task. The only winner is the financial industry that pushes this dubious strategy.
15
Short of a world war resulting geo political event, much of the last downturns were telegraphed. .com bubble - telegraphed, biotech bubble - telegraphed, mortgage bubble - telegraphed.The mistake I made early one was not realizing the funds by the big fund managers are NOT agile enough to be defensive when they need to be.
And some one with a high school education working an hourly wage job with life coming at them fast every day is supposed to be planning for this?
I laugh every time I hear conservatives like Joe Scarborough refer to "runaway entitlement programs." The average social security benefit is about $1300 per month, or about what Scarborough spends on his kids birthday party.
I laugh every time I hear conservatives like Joe Scarborough refer to "runaway entitlement programs." The average social security benefit is about $1300 per month, or about what Scarborough spends on his kids birthday party.
24
totally agree but the reality is yes, that person, we all, have to. The other option is living under an overpass.
Social Security, per FDR, was never intended to be an entitlement program. Do your research.
Yep.
I love hearing how SS, Medicare and Veterans' benefits are entitlements.
Yet corporate bailouts, carried interest, and other tax maneuvers are manna.
I love hearing how SS, Medicare and Veterans' benefits are entitlements.
Yet corporate bailouts, carried interest, and other tax maneuvers are manna.
5
Also, many of today's aging late-baby boomers cannot afford, literally, to defer as much of their weekly paycheck as they used to, because of having both kids as well as longer-living elderly parents for whom they are increasingly providing informal caregiving. These boomers also include aging LGBT who were of a generation that statistically remained single longer, and so they may have less combined spousal or partner assets to assist them with their retirement and healthcare savings as they now age.
5
I don't know that we need to add LBGT to this discussion. There are more single income homes than there are members in the LBGT sector. To be sure, regardless of circumstances, it is a daunting process to prepare for the third of your life when you won't be working. There is no plan B, think of it as personal responsibility. If people don't plan for their last third of life, nobody else is going to pick up the slack.
For everyone that thinks the 401Ks get you say 30% right away on taxes - don't forget if you are in the 1M crowd at retirement, you get to pay that 30% right back to the government, including on earnings. so unless there is an employer match, the money is better spent paying off, say college loans that you took for your kids - thats a 7% return right there.
Well, those with 7 figure savings are likely investing much of it in tax free municipal bonds.
The Times has run a number of good articles in the last few years on immediate annuities. The President has even supported a mandate that large 401k administrators offer longevity insurance to their investors (a deferred annuity). This current article doesn't mention immediate annuities at all! A male at age 70, even at today's low interest rates, would get a 7.5% payoff per year (admittedly not inflation adjusted) on his initial premium. An immediate annuity combined with waiting until age 70 to take Social Security benefits solves much of the problem cited in this article. Your children will be compensated for having less inheritance by the piece of mind knowing you have a steady income stream even if you live to 100.
4
We are making basically the same point although I think longevity insurance is better.
1
I am 85 and long time retired. I find the entire article and all the comments to be missing an important consideration -- the very high cost of the last years of life if you have to go into a nursing home. I saw what happened to my parents and other elders. Some people have those high expenses for as much as 10 or 15 years. Those expenses can easily reach $75,000 to $250,000 or more per year (according to the web-site http://longtermcare.gov/costs-how-to-pay/costs-of-care-in-your-state/). If I do not want to spend down to a low minimum as required to be able to go into a Medicaid facility with minimum quality of service after my assets are all gone, I must not reduce my final pot of money below at least $750,000 at the time of going into the nursing home. Then, if it turns out you do not need the nursing home that you have held money for, you might die with that wad of money left, which your heirs might appreciate.
Buying insurance for that big expense may be the only way out, but it can be somewhat of a gamble because I know people who bought such insurance beginning when they were relatively young to minimize the monthly insurance premiums, then after paying on it for many years had their premiums increased so much that they had to drop it -- and lost all coverage. If you end up not needing the nursing home, you have put a lot of money into the insurance that you could have enjoyed while healthy.
Buying insurance for that big expense may be the only way out, but it can be somewhat of a gamble because I know people who bought such insurance beginning when they were relatively young to minimize the monthly insurance premiums, then after paying on it for many years had their premiums increased so much that they had to drop it -- and lost all coverage. If you end up not needing the nursing home, you have put a lot of money into the insurance that you could have enjoyed while healthy.
10
Very good point about the cost of nursing home care and the need for a "wad" of money at the end.
Sadly, we do not have functional nursing home insurance. The fundamental business problem is that there is too much adverse selection. The result is that most of the carriers are predators who scare insurance regulators into letting them prey on the elderly. I help the elderly with these claims and I have not yet read a policy that was not a sin against the policy holder.
Sadly, we do not have functional nursing home insurance. The fundamental business problem is that there is too much adverse selection. The result is that most of the carriers are predators who scare insurance regulators into letting them prey on the elderly. I help the elderly with these claims and I have not yet read a policy that was not a sin against the policy holder.
8
here is the issue I have with LTC or life insurance. It's not really life insurance, we all are going to die. It's premature death insurance. As fewer and fewer people are going into the take care of the elderly folks waiting to die, their price tag goes higher and higher. If one puts their money into irrevocable trusts, transfer their home to their heirs, etc in advance of requiring LTC, by the time they get too infirmed to use in home visiting nurses and things Medicare will pay for, they maybe won't know the difference between the 5 star nursing facility and the state run home. And, yes, that sounds awful but perhaps with a bubble of retiring boomers people will get serious about death with dignity issues. That gets into people's personal relationship with their maker but, speaking solely for myself, if my life is reduced to drooling diaper wearing unaware of surroundings and loved ones, I would declare that is vegetable not human. And that would be very much akin to being in a vegetative state. I wouldn't want to live like that.
There is nothing wrong with the 4% rule. The problem is investing "safely" in fixed income securities yielding 2% or less. Many non-profits, including leading universities, discovered a few years ago that they were losing the ability to attract and retain leading professors, or maintain their facilities, by investing "safely". There was no risk, but they were losing ground to inflation and the competition. On the other hand, numerous business school studies have shown that over any period of 10 years or more, equity investments almost invariably yield more than 6%; over the past 10 years, it has been closer to 12%. There is no problem withdrawing 4% when you are earning 6% or better over the long term.
When should you become conservative and move from equity to fixed income? Only if you expect to need cash over a short term and can't take risks about meeting legally mandated cash flow (e.g., a pension trust that knows that it will have to fund cash distributions to retirees over the next year or two). But if a retiree thinks that his life expectancy is only two or three years, then it still doesn't make sense to withdraw only 2%. Spend 10%, 20% even 50%. OK, 50% is an exaggeration, but I am trying to make a point. The error in this analysis is telling the retiree to withdraw only 4% when you should be telling him it is a mistake to put all, or even most, of his investments, in "safe" securities that yield far less than 4%.
When should you become conservative and move from equity to fixed income? Only if you expect to need cash over a short term and can't take risks about meeting legally mandated cash flow (e.g., a pension trust that knows that it will have to fund cash distributions to retirees over the next year or two). But if a retiree thinks that his life expectancy is only two or three years, then it still doesn't make sense to withdraw only 2%. Spend 10%, 20% even 50%. OK, 50% is an exaggeration, but I am trying to make a point. The error in this analysis is telling the retiree to withdraw only 4% when you should be telling him it is a mistake to put all, or even most, of his investments, in "safe" securities that yield far less than 4%.
4
You can do better by 1. deferring Social Security payments to 70 and 2. buying a longevity insurance (QLAC) for $125000 that starts payment at 85 and then 3. taking much higher withdrawals between 65 and 70 (6-7 per cent of the remaining $875000) and reducing these withdrawal rates at 70 and at 85.
You could have just stopped at 1) have a 7 figure savings account. If you enter into retirement with a million dollars, all you need is common sense. Why pay $125,000 on a bet you'll live past 85? That million dollars earns (at 4%) $40,000/yr. That plus SS would provide a very comfortable lifestyle and you'd never touch your savings.
A tale from academia. It presents a nice model. Virtually all professors are part of the TIAA-CREF system. Most colleges and universities put an equivalent of 10% of annual salary into TIAA-CREF. Most professors also have an additional 3% (pre-tax) put in as well.
I started in 1966 and retired in 2005. It's quite astonishing what 13% invested wisely for a half-century can do. FWIW, I always had the lion's share invested in the CREF portfolio which invests in stocks. I still keep the majority in stocks.
I've been drawing on this reservoir for a decade now and not only will there be plenty left no matter how much longer I live, there will be plenty for the kids and grandkids.
I started in 1966 and retired in 2005. It's quite astonishing what 13% invested wisely for a half-century can do. FWIW, I always had the lion's share invested in the CREF portfolio which invests in stocks. I still keep the majority in stocks.
I've been drawing on this reservoir for a decade now and not only will there be plenty left no matter how much longer I live, there will be plenty for the kids and grandkids.
18
Of course, there are not many real professors these days. Most of the instruction is done by adjuncts, part-timers, serfs no matter their title. What sort of retirement do you think they will have in the future?
11
What would the results have been had you invested in the TIAA annuities?
yes - life was kind to the tier I hires...i would not flaunt it as benefit packages today are nothing like those that you received. those days are over forever
5
I am amazed at how poorly prepared so many readers of this newspaper are for retirement.
17
You noticed that too did ya????
1
the retirement landscape changed with the 401k revolution.. but its not that 401s can't work..it's that the employers don't put but a fraction of the amount they used to put in defined benefit plans... the revolution was the license for the employer to end its obligations to its employees...they have opted out
48
The article ignores two major points. Most if not all, will be faced with RMD's (required minimum distributions0 @ around 3.8% and health insurance needs and costs.
Irrespective of a person's situation or the market, RMD's will require an annual distribution. Without health insurance and Long term care (LTC) plan you are at risk to catastrophic expenses.
I have LTC (had it for years), two pensions, social security with one deferred until 70 and $800K+ in a IRA. I plan to spend liberally in my 60's and 70's and then will reduce spending considerably as I will have done all I wanted to.
But one has to be flexible and enjoy the moment and wish for good health and good friends. Don't worry about the destination, enjoy the ride!
Irrespective of a person's situation or the market, RMD's will require an annual distribution. Without health insurance and Long term care (LTC) plan you are at risk to catastrophic expenses.
I have LTC (had it for years), two pensions, social security with one deferred until 70 and $800K+ in a IRA. I plan to spend liberally in my 60's and 70's and then will reduce spending considerably as I will have done all I wanted to.
But one has to be flexible and enjoy the moment and wish for good health and good friends. Don't worry about the destination, enjoy the ride!
16
At 70, for the vast majority of people Medicare provides sufficient LTC. If you live modestly and start with a sane amount of money by the time one needs LTC their accounts will be in the 7 digit category.
RMDs aren't really a significant point that needs to be covered though. If RMDs of 3.8% are over your yearly expenses, then you simply deposit the excess into a regular taxable account. Nothing says that you can't reinvest the money. It just no longer has the same tax benefits as it once had, which while nice, isn't extremely relevant to the article at hand.
3
You don't have to sell the security to take an RMD from an IRA. I'm not sure if distributing in-kind is an option for a 401k, but even if you have to sell and take a cash distribution, you don't have to spend it.
No one is mentioning that if your spouse becomes very ill with dementia, or some other totally debilitating illness, and has to be placed in a care home, the remaining spouse will have to pay down most of the family resources to the care home before any government aid for care will become available. Because we have no clue about what is going to happen in the next few months, let alone 30 years, we really can't count on our nest egg not falling out of the nest.
Some people (but not many) have been paying into a long-term care plan, but check the fine print: many of them only pay for two or three years of care.
Some people (but not many) have been paying into a long-term care plan, but check the fine print: many of them only pay for two or three years of care.
92
Personally, I think LTC insurance plans are a hugely bad investment. Not everyone gets Altzheimers. If one has early onset, there is no plan will pay for them to have 5 star care for 30 years or more, yet it would bankrupt all but the most affluent millionaires. This country has to come to grips, as do families, with what to do should that fate be visited upon them.
5
LTC plans are divestment plans. They were designed to cover the costs of care for the 'look back' time while one gave his/her money away.
2
I'm a skeptic on long-term care plans. Here in Illinois, the 'pay 1 lump sum' plans have turned out to be marketed by fools to fools. The companies lowballed the costs, then demanded more money or the 'guaranteed' policy would be cancelled. (these "pay up or lose what you've put in" increases are legal according to state law).
Plus, with life insurance it's pretty clear when you are able to collect. Who knows what sort of disputes I would have with my insurance company when I'm 85 and feeble?
Plus, with life insurance it's pretty clear when you are able to collect. Who knows what sort of disputes I would have with my insurance company when I'm 85 and feeble?
Fortunately, my investments are only 34% of my retirement income (on a 4% withdrawal rate). SS, an inflation-adjusted annuity, and a small defined benefit plan make up the rest. So even if the 4% rule fails me, I probably won't be eating cat food.
Based on these and other comments, it appears many people seriously underestimate power of compound return and employee match in 401K plans. An balanced portfolio of low fee funds in a 401K with a 5% employer match can return $6 or $7 for every $1 invested over 20 or 30 years, as long as you keep saving and buying in during downturns. So having a $1 million portfolio may require saving $150,000 over 40 years, a few thousand a year, manageable enough for households of middle income.
9
The point of a 401(k) is they do cost averaging, not buying on dips. If a person making $50,000/yr, assuming no raises ever, saved 10% per year that would be around $800,000 after 40 years.
4
Not quite as you state it, without discussing the presumed return over that 40 years, which can hardly be presumed, and particularly the market action in the later years can cause catastrophic damage. Contributions of 10% of 50K is only $5000. annual, 50K in ten years, 100K in 20 years, and only 200K after 40 years. See how this works out without assuming good, relatively consistent, returns.
This approach assumes people live 30 years beyond quitting work. That means either retiring too young or growing too old. Why would anyone want either choice?
1
Well, if you don't plan on it, it might just happen. The average age is early 80's. For everyone that expires in early 70's someone else lives to early 90's. If you look at the SS actuarial tables they are broken down by percentages, if you live to be x your chances of living to y are, etc. That's why
5
We have control over how long we live.
Yes, if we knew how long we were going to live planning would become simple. But most of us don't know.
2
Why does any sane person vote for Republicans. This party seems to be dedicated to ending all pension. The average person who doesn't intend to work until he drops dead needs a pension.
84
This is a bipartisan problem. Look what has happened to Social Security over the years.
7
Look at what is happening in Illinois and New Jersey with over promised pensions to government workers being funded by residents making much less. Hardly think it's just a "republican" problem. Wake up and smell the coffee!
5
Remove the contribution cap, that will correct that problem.
2
Why should I care about people over 65 (most of) whose real-time contribution to the economy is ZERO? These are the people who turn out in droves to vote against affordable health care to poor and middle-class working folks or subsidies for child care while making sure we continue inflation adjusted social security payments and Medicare.
And what is the worst that could happen if the 65 year old millionaire runs out of money after only 20 years? Die a premature death at 85?
Prior to the 20th century, retired old people used to live in the poor-house or with their relatives consistent with their real-time contribution to the economy. Now, in a few short decades, by voting en-bloc in elections, they have totally turned the tables around not only here in the US but in many countries around the world so the working poor, by law, have to support the habits of the retired. Here are my suggestions:
1. Discount to movies for the working poor and middle class and not to rich retirees.
2. Discount on public transport to the working poor and middle class and not to rich retirees.
3. No inflation adjustment to social security unless there is an inflation adjustment to all working people, by law, from their employers.
4. Cap on total spending for an individual in Medicare.
Alright, this rant is digressing from the main thrust of the article which is about how to make a million go for 30 years without working. But you get the point, I hope.
And what is the worst that could happen if the 65 year old millionaire runs out of money after only 20 years? Die a premature death at 85?
Prior to the 20th century, retired old people used to live in the poor-house or with their relatives consistent with their real-time contribution to the economy. Now, in a few short decades, by voting en-bloc in elections, they have totally turned the tables around not only here in the US but in many countries around the world so the working poor, by law, have to support the habits of the retired. Here are my suggestions:
1. Discount to movies for the working poor and middle class and not to rich retirees.
2. Discount on public transport to the working poor and middle class and not to rich retirees.
3. No inflation adjustment to social security unless there is an inflation adjustment to all working people, by law, from their employers.
4. Cap on total spending for an individual in Medicare.
Alright, this rant is digressing from the main thrust of the article which is about how to make a million go for 30 years without working. But you get the point, I hope.
9
So, LV, you would like no elderly discounts from businesses (they can just honor the "siesta" hour from noon to 3 and close when business is slow during the day), no inflation adjustments to SSI (let them eat cat food!), and a cap on Medicare (no one told the elderly to get old--their choice!). May we assume you would like these cut backs to last until YOU are 65+? It will happen, you know.
37
"who's real-time contribution to the economy is zero". Well, because someday you will be over 65 and what you deny to them others will deny to you. I voted for ACA and made several phone calls on behalf of it's passage. If you paid attention, it is not about millionaires. That, actually, was a poor choice but: I have x what is 4% of x:
1) $1,000,000 4% / yr is $40,000 monthly is $3,333
2) $500,000 4%/yr is $20,000 monthly is $1,667
3) $100,000 4%/yr is $4,000 monthly is $333
4) $30,000 4%/yr is $1,200 monthly is $100
5) $0 4%/yr is $0 monthly is $0
For someone contemplating retirement the monthly dollar amount is what's you can add to your social security. If it is too little to live on, well, you have some life choices to make.
1) $1,000,000 4% / yr is $40,000 monthly is $3,333
2) $500,000 4%/yr is $20,000 monthly is $1,667
3) $100,000 4%/yr is $4,000 monthly is $333
4) $30,000 4%/yr is $1,200 monthly is $100
5) $0 4%/yr is $0 monthly is $0
For someone contemplating retirement the monthly dollar amount is what's you can add to your social security. If it is too little to live on, well, you have some life choices to make.
11
Why should you care about anyone but yourself? Sounds like that is your basic philosophy.
24
"So a retiree with $1 million could securely spend nearly $30,000 annually..." Only a tiny percentage of Americans will have $1 million at retirement. And that $30,000 won't exactly fund the good life. Tell me again why Republicans want to cut Social Security and gut Medicare?
74
Did you expect Republicans to propose tax increases on the high income folks instead? Millions of Americans have been voting against their economic self interest for years and now they have to pay the price. For starters, the Middle East wars have turned out to be a lot more expensive than Bush 43 expected.
31
Um, go back and look up what the Clinton Administration did when they tied Social Security to Medicare. Then go look at what the Doctor Fix will do to Medicare premiums.
This is a bipartisan problem.
This is a bipartisan problem.
Better scheme: save and/or invest 50% of your earnings every year until retirement. Worked for me.
21
You must make a lot of money to be able to live on 50% of it for years and years "until retirement". Should one start at age 20?
2
The other advantage to saving a substantial amount of your income is that you will already be living with the lower expectations of the remaining income. When retirement comes and you stop saving, you will discover that you already are able to live on a reduced income.
Save 50% of your income? Congratulations, you're part of the 1%, give yourself a pat on your back. Don't mind the 46,000,000 other citizens who are stuck on food stamps and tens of other millions who are just scraping by.
9
It doesn't take a genius to figure out that the American retirement system is bankrupt, so to speak. 401 (k) plans don't work for most people. Why? Because they are too strapped paying for health care and college tuitions for their children. They end up with maybe $100,000 in their retirement account. You don't have to be Einstein to figure out that over 30 years of retirement, that amount is little better than nothing at all. Most American's don't know how to invest either; they don't understand compound interest or balanced portfolios, etc. Since the government doesn't require the private sector to provide pensions anymore, the burden is all on the individual. You either sink or swim on your own. It's capitalism at its finest, or its worst, depending on how financially savvy you are. Our society caters to the wealthy these days, so they can have gloriously funded 401 (K) plans, and take advantage of all kinds of tax breaks. But for the struggling middle-class it's a different scenario. I don't know when this will change, but it has to change in order for a stable society to survive in this country. Sounds serious? It is.
59
Actually, many do understand the importance of a balanced portfolio, etc. The problem is, even those who chose 401K investments wisely were affected by the Great Recession, with no place to hide. The millionaires always cited in articles such as this one can afford to ride it out as even their choices labeled "conservative" plummet. But most simply can't afford to lose virtually everything, especially of they're 50 or older. If the experts are wrong and the market doesn't rebound before they seek to retire, that's it, they're done. So they pull out before things hit bottom.
The 401(k) is an awful deal... you delay taxes and the withdrawal may force you to pay more for Medicare. The Roth 401(k) is a better option. Learning how to create your own pension is another option too. You can do that with safe, guaranteed annuities
6
" Our society caters to the wealthy these days, so they can have gloriously funded 401 (K) plans". No, I believe most employers now offer 401(k) plans. If they don't you can create and fund your own IRA which behaves identically to a 401(k).
If someone made $400/wk and saved $40/wk that would be $2,000/yr
If someone made $1,000/wk and saved $100/wk that would be $5200/yr
If you never got a raise and saved that $5200/yr at the end of 40 yrs, not even counting compounding, that would be over $450,000 at 4% at 6% it would be about $800,000
If someone made $400/wk and saved $40/wk that would be $2,000/yr
If someone made $1,000/wk and saved $100/wk that would be $5200/yr
If you never got a raise and saved that $5200/yr at the end of 40 yrs, not even counting compounding, that would be over $450,000 at 4% at 6% it would be about $800,000
7
The problem is just what this column says: we are living through a long period of very low interest rates. Artificially low rates, kept low by a Federal Reserve beset with tunnel vision that focuses on only one thing: the need to stimulate the economy and create jobs, and the perception that this can only be accomplished with interest rates at zero.
Retirees and near retirees - people who saved diligently for the time when they would no longer be earning money - are paying a heavy price. Other than social security, which is vital but which pays modestly, retirees had long planned to live comfortably off of their savings.
But, thanks to interest rates at zero, that is no longer an option and hundreds of thousands of retirees are at risk of outliving their savings.
The solution is for the Fed (and the Editorial Board of the Times) to acknowledge that there are downsides to keeping interest rates at zero or near zero for an interminable period of time, and one of these is the devastating effects these policies are having on a vulnerable segment of society, elderly retired folks.
It is long past time for the Fed to allow the market to work, and to allow interest rates to modestly rise. And it is long past time for the Times Editorial Board to stop printing an unending stream of editorials that completely ignore the downsides of zero interest rates.
Retirees and near retirees - people who saved diligently for the time when they would no longer be earning money - are paying a heavy price. Other than social security, which is vital but which pays modestly, retirees had long planned to live comfortably off of their savings.
But, thanks to interest rates at zero, that is no longer an option and hundreds of thousands of retirees are at risk of outliving their savings.
The solution is for the Fed (and the Editorial Board of the Times) to acknowledge that there are downsides to keeping interest rates at zero or near zero for an interminable period of time, and one of these is the devastating effects these policies are having on a vulnerable segment of society, elderly retired folks.
It is long past time for the Fed to allow the market to work, and to allow interest rates to modestly rise. And it is long past time for the Times Editorial Board to stop printing an unending stream of editorials that completely ignore the downsides of zero interest rates.
34
The low interest rates are the secret tax on savers that kept global capitalism afloat after 2008. They continue because they fuel the recovery, lower inflation, and keep the dollar strong and the world's reserve currency. But make no mistake, they are the de facto tax on many in the middle class, and the resulting inflation, though historically low, eats away at retirement savings. Of course, the alternative--equity markets--promise profits and then disastrous drops. Sigh.
25
I agree. We can't even buy a "safe" CD at 7%…. more like 1.78 %. My mom laddered her retirement money with CD's and the unused ones kept growing money for her at a higher rate. That strategy would never work today.
Few people notice that this way of growing retirement money past retirement has been taken away from ordinary people. Instead, we have to "gamble" in the stock market. It could be a future disaster.
Few people notice that this way of growing retirement money past retirement has been taken away from ordinary people. Instead, we have to "gamble" in the stock market. It could be a future disaster.
23
As a retiree, I continue a balanced portfolio of 60% equities and 40% bonds. The latter do little for me now, but in some past years they were the foundation. That, and wide diversification provided by my fee-only advisor, kept me in the black throughout the recession.
I don't understand the rationale for switching to bonds upon retirement, maybe very gradually in old age.
I don't understand the rationale for switching to bonds upon retirement, maybe very gradually in old age.
3
Remember when you could earn 5.25% on a basic savings account at every bank? When they deregulated the banks and they incorporate in Delaware & South Dakota to charge astronomical interest rates on credit cards was the beginning of the end. Add in free trade and many are holding on hoping they won't be eating the cat food their neighbors are.
1
Dear Tara,
Your article is very interesting but overlooks another alternative for individuals who are concerned about how much they can spend or worry about running
out of money. If one simply withdraws current dividends from stocks and
interest from bonds,she will never run out of money since she is not touching
capital (except for income taxes on capital gains). For example, a portfolio
consisting of 50% large cap stocks and 50% intermediate taxable or muni
bonds currently yields about 3% and the dividend portion pretty much adjusts
for inflation. The beauty about this approach is that the investor will have the
peace of mind of having capital available if need be,but is not worried about
about depleting the portfolio as part of her regular drawdowns.
i'm puzzled why no article on this topic of withdrawals that I've read over the years has ever mentioned this alternative.
Hans Ziegler
Your article is very interesting but overlooks another alternative for individuals who are concerned about how much they can spend or worry about running
out of money. If one simply withdraws current dividends from stocks and
interest from bonds,she will never run out of money since she is not touching
capital (except for income taxes on capital gains). For example, a portfolio
consisting of 50% large cap stocks and 50% intermediate taxable or muni
bonds currently yields about 3% and the dividend portion pretty much adjusts
for inflation. The beauty about this approach is that the investor will have the
peace of mind of having capital available if need be,but is not worried about
about depleting the portfolio as part of her regular drawdowns.
i'm puzzled why no article on this topic of withdrawals that I've read over the years has ever mentioned this alternative.
Hans Ziegler
13
If the funds were in a tax-advantaged retirement account, there would be no tax on capital gains distributions, just tax (as ordinary income) on withdrawals.
The problem with your approach is that in years of economic stress stocks pay little in dividends while retirees still have expenses.
The problem with your approach is that in years of economic stress stocks pay little in dividends while retirees still have expenses.
What's with this fear of not having enough dough? Just keep working, don't spend after being exposed to the marketing BS. And then when you can't get around like you used to do, it's time to kick the bucket or buy the farm. If you cannot fear losing your money then you will not fear death either. Just go on living and do not be afraid and you will be a lot better off in the end.
6
Well Gee if as when you are working you spend less than your after tax income you never run out of money. No percentage is required, just simple logic.
4
Too frightening. Fingers in ears. "la la la la"
19
Why is this scary to you? I had read in this very same newspaper that all those in Portland had figured out how to retire in their 20's.
1
Wading through, er, READING this article reminds me why it's a bad idea to eliminate Social Security investment and make people put their money into investments. If you can't figure out the math for living on your retirement, how are you going to figure out the right investment policy to create a retirement fund? As @w.corey said, remove the cap on Social Security withholding and make sure all the money meant for SS and Medicare goes to those programs.
53
Too late for making sure money for medicare goes to medicare. When the Democrats passed Obamacare, they partially financed it by stealing medicare funds, effectively robbing the elderly of the benefits of a program they have been paying for since 1963 and redistributing them to people who have never paid for health insurance in their entire irresponsible lives.
Adding insult to injury, Democrats who passed this attack on the elderly all have their platinum federal employee health insurance. God Bless Obamaland!
Adding insult to injury, Democrats who passed this attack on the elderly all have their platinum federal employee health insurance. God Bless Obamaland!
"So a retiree with $1 million could securely spend nearly $30,000 annually for 30 years......"
"How do you become a millionaire and not pay any taxes", asked the comedian Steve Allen. Answer..."First you get a million dollars."
"How do you become a millionaire and not pay any taxes", asked the comedian Steve Allen. Answer..."First you get a million dollars."
9
The 1st $50K of dividend income is federal income tax free.
It was Steve Martin, not Steve Allen. My wife a d I contribute the maximum, her to a 401K with no employer match, and me in an IRA. We're over 3/4 of the way there with another 10 years employment ahead. It CAN be done.
9
The reality is, less than 2% of 401k balances are over $1,000,000. Those are some long odds for the vast majority.
2
There's always the Walter White approach!
9
Just to pick a bone witht the headline, the MATH isn't new. The formula has always been the same taking into account Present Worth, Assumed Interest Rate, Withdrawl Amount, Withdrawl Period, etc. The only thing that has changed are the assumed number plugged into the equation, which gives NEW RESULTS. The math however, remains the same.
2
Two of the best things I ever did were getting a stable, moderately well paying job with the federal government, and buying less house than we needed. At age 56, by salting away 15% of my salary, I have nearly $600K in my 401k, and should have $875K when I retire at 62. I'll also get a pension of about $40K a year, and put in for early social security of about $22K. I could have made a lot more in the private sector, but the stability outweighs anything else. (I worked in financial in New York and was mergered or McKinseyed out of more jobs than I can remember.) And we didn't trade up to a bigger house when we could have--we have a comfortable place with a modest mortgage.
Much of this, of course, was pure dumb luck.
Much of this, of course, was pure dumb luck.
35
Do not take SS at 62 if you don't need it, that will be the DUMBEST thing you ever do...wait as long as you can (as the benefit goes up every year). You're better off filing on one another's benefits at 62 & collecting your own benefit at 67/70.
6
A "pension"...what's that?
I have never had a job that offered a pension and the only people I know that have a pension are government employees.
This is one of the reasons many citizens are angry.
I have never had a job that offered a pension and the only people I know that have a pension are government employees.
This is one of the reasons many citizens are angry.
21
Direct your anger at the private sector...they're the one's who eliminated their pensions after all.
6
Amazing. An 848 word article on the risk of living too long and running out of money in retirement and not one of them is "annuity". I don't get it.
10
Great point. Even at current low interest rates, a male at age 70 would be paid 7.5% per year of his initial premium for an immediate annuity. Essentially a 'personal pension'. (Too bad for your kids, let them save for their own retirement).
Surprisingly, the article did not focus on the yearly appreciation of the retirement funds. In most cases the appreciation (including interest and dividends) more than replaces the 4% of the funds taken out annually. Of course if a depression or severe rescission occurs maybe one has to cut the retirement income, but it should be noted even in the recent rescission people, other than those who invested completely in equities, did receive income from thier investments. So an ancillary question is how much money do you want to leave to your heirs.
1
A recent paper [Robert D. Arnott and Denis B. Chaves, 2012] shows statistical evidence for the impact of a large retiring population on GDP growth and stock prices.
They show that when retirees are disinvesting in order to buy goods and services that they no longer produce, stock prices erode. There is a next boom generation, the Millennials, but they won't be in the peak ages for stock acquisition (40-60) for another 20+ years.
When there is a surplus of sellers over buyers, then asset prices go down. The 4% number is based on historical asset price gains during a period when US GDP (and wage) growth was high, and the middle class started investing en masse.
Add to this, US investment in the past decade has been in financial engineering, not in infrastructure and capital investment in the general economy. The latter boost GDP growth, eventually, but the former does not.
Consequently 4% looks too optimistic to me. If you are still feeling optimistic, recall wage growth is stagnant and there is still a household debt bubble to deleverage.
They show that when retirees are disinvesting in order to buy goods and services that they no longer produce, stock prices erode. There is a next boom generation, the Millennials, but they won't be in the peak ages for stock acquisition (40-60) for another 20+ years.
When there is a surplus of sellers over buyers, then asset prices go down. The 4% number is based on historical asset price gains during a period when US GDP (and wage) growth was high, and the middle class started investing en masse.
Add to this, US investment in the past decade has been in financial engineering, not in infrastructure and capital investment in the general economy. The latter boost GDP growth, eventually, but the former does not.
Consequently 4% looks too optimistic to me. If you are still feeling optimistic, recall wage growth is stagnant and there is still a household debt bubble to deleverage.
7
I inherited some money in 1998 and (with no experience) invested it in mutual funds. I've been taking out 5% a year and still have the amount I inherited. If I achieve that it doesn't seem like it should be so difficult.
4
...but what if.....you had spent the past 17 years educating yourself about the fundimentals of investing.....to find that your mutual fund has been skimming off a big chunk of your portfolio income as fees and you could have made the same no-brainer investments at no cost....
3
You're still earning less and less due to inflation.
I'm not too bothered by the uncertainties involving the rate of withdrawal. What is shocking is the income tax I have to pay on the money I am forced to withdraw from my retirement account. The government punishes me for having a bit of money beyond my Social Security. (See: articles by Scott Burns.) If the very rich had to pay the percentage I pay to the IRS, we might have some money to spend our own citizens. Or, if the rich had to pay the rate I pay, we most probably would have new tax laws to take care of those poor put-upon billionaires.
10
You didn't have to take the tax break when you saved the money, in which case you wouldn't have to pay the taxes now. That was the deal and you took it. Stop complaining.
16
Sorry, did you miss the part about your 401K/IRA being *untaxed* when you made the contributions, effectively lowering your taxable income at the time?
16
This is not news. You knew going into to your IRA or 401k that the upfront tax deduction would be paid for on the back-end.
Not that I disagree that our tax system is rigged for the well-to-do and those who can hire the best tax advisors. THAT is what screws the middle & upper middle class, and THAT is what must be fixed. Yet, I hold out little hope of that knowing where the lobbying and political campaign money comes from.
Not that I disagree that our tax system is rigged for the well-to-do and those who can hire the best tax advisors. THAT is what screws the middle & upper middle class, and THAT is what must be fixed. Yet, I hold out little hope of that knowing where the lobbying and political campaign money comes from.
I don't understand why "underspending" is a problem -- what is wrong with leaving an estate for your inheritors?
5
Just one more part of retirement that Bernanke, Yellen, Fischer and their ilk
have destroyed with their ecoxperiment of ZIRP and QE which has removed
$750 billion of consumption a year from this economysince 2009 by savers bank account holders and mmkt. account owners while debtors, deadbeats, speculators, stock buybacks, job destroying cheap money
mergers and acquisitions continue to rot this economy for their
buds on wall street.
And the media touts them as heroes. What a joke.
But that revolving door trickle down is sure working for Bennie, isn't it? But not so well for folks in their late 70's thru 90's having to live on their principal.
have destroyed with their ecoxperiment of ZIRP and QE which has removed
$750 billion of consumption a year from this economysince 2009 by savers bank account holders and mmkt. account owners while debtors, deadbeats, speculators, stock buybacks, job destroying cheap money
mergers and acquisitions continue to rot this economy for their
buds on wall street.
And the media touts them as heroes. What a joke.
But that revolving door trickle down is sure working for Bennie, isn't it? But not so well for folks in their late 70's thru 90's having to live on their principal.
3
The average dividend yield on the S&P 500 is about 3%. If that's where you invest, you're almost there even ignoring price appreciation. There are companies that have increased dividend payouts for over 25 straight years. They are extremely loath to break su h a streak.
2
What I never understand is why anyone would consider just spending that million dollars Here in San Francisco, $1M would buy an ok duplex in an ok neighborhood. Each would generate about $3000 per month in rent. That is $72k in gross income per year. And you still have your principle. Even after propety taxes and upkeep ... even if you are paying a property manager 20% ,you are still always doing better than in the 4% scenario. And your inital investment is still there.
5
And how many people have $1,000,000 cash and business acumen to buy this fictional cash cow of a duplex? Only the 1% can take part in the dream of becoming a landlord in San Fran.
2
Because property values never drop, water heaters never need replacing and the unit is 100% rented at all times.
Things always work out when you ignore risk.
Things always work out when you ignore risk.
3
There is a serious deficiency in this otherwise valuable article. It does not differentiate between whether your retirement savings are in after-tax funds (in which case you would own all of the 4% you might withdraw) or in IRA-type funds (in which case your withdrawals are taxed). So, 4% withdrawals from an IRA might result in less than 3% in your pocket.
8
A related point-- We're all told to use "dollar cost averaging" when buying stocks-- that is, put a fixed amount of money into stocks every month (or year, or whatever). That way, you're guaranteed to buy more shares when prices are low.
In retirement, I assume that "share cost averaging" is a good way to sell stocks. That is, sell a fixed number of shares every month (or whatever), to guarantee withdrawing more money when share prices are high.
If this advice is wrong, I hope someone will correct me.
In retirement, I assume that "share cost averaging" is a good way to sell stocks. That is, sell a fixed number of shares every month (or whatever), to guarantee withdrawing more money when share prices are high.
If this advice is wrong, I hope someone will correct me.
1
Selling a fixed number of shares means knowing when the shares will run out. For example, selling 2 shares a year of a 100 share investment means no more shares in 50 years. It ignores dividends and capital growth that may greatly exceed inflation most of the time, causing far greater selling than needed for expenses, shares that could be saved for future down market needs, while at the same time it also means selling shares in bad times getting very poor value for those shares. In bad times, it is much better to live off SS and pensions, dividends and interest, and cash reserves. I recommend 3-5 years of cash reserves, calculated as the minimum annual expenses (frugal living during bad markets) minus fixed income of SS, pensions, interest, and dependable dividends, and that times 3 to 5. I think share cost averaging is a bad plan that will lead to unnecessary gyrations in spending.
How much do you need to retire and live well?
It all depends on where you live after flipping the sale of your house in a high priced area (e.g. NY, NJ, CT) to a comparable or better house in a low tax area (e.g. Nevada), with no mortgage, of course.
$30,000 in Social Security and $50,000 in retirement money annually is enough in the Reno area. Once RMD comes in at age 70 1/2, you will have to find ways to spend the extra money. Suggestions: Set up college funds for grandchildren, eat out more and better, go on more vacations. If there's still money left, redo the kitchen (for wife) and install a solar powered backup battery (for blackouts) with an outlet to recharge a Tesla (for husband). If nursing home or medical expenses don't use everything up, leave the remainder to children and charity.
(Assumption: living/working in NYC for 40 years will have taught you how to invest and AA (asset allocation) as you near retirement.)
It all depends on where you live after flipping the sale of your house in a high priced area (e.g. NY, NJ, CT) to a comparable or better house in a low tax area (e.g. Nevada), with no mortgage, of course.
$30,000 in Social Security and $50,000 in retirement money annually is enough in the Reno area. Once RMD comes in at age 70 1/2, you will have to find ways to spend the extra money. Suggestions: Set up college funds for grandchildren, eat out more and better, go on more vacations. If there's still money left, redo the kitchen (for wife) and install a solar powered backup battery (for blackouts) with an outlet to recharge a Tesla (for husband). If nursing home or medical expenses don't use everything up, leave the remainder to children and charity.
(Assumption: living/working in NYC for 40 years will have taught you how to invest and AA (asset allocation) as you near retirement.)
3
Gee who gets 30K in Social Security???
1
The 4% rule is for planning, your expenditures will follow a different curve. Your expenditures diminish as your health fails and you downsize your activities and processions. Mom is 95 and spends virtually no money. If I did not care for her, she would be living in a Tiny House with a Dish and be perfectly happy watching TCM and the news (we get three newspapers, also). As it is, she rarely leaves the living room, and she is in good health. I'm 70 and go fishing or work in the garden. Sometimes I entertain my friends who live locally. I live my life as my teen age years, minus the more strenuous hiking and skiing. We have rental property to supplement SS. We find it difficult to spend any of our savings. The last thing you want to do is accumulate more possessions. One of our rental properties is a Tiny house (325 sq. ft.) and I will move there when mom passes.
10
How about a percentage that is adjusted (perhaps every 6 months or year) to the one's current amount of assets? In this scenario, as the market fluctuates, so would the amount withdrawn.
Since you do not know how long you will live, set up an annuity to guarantee some minimum level of income should you live to 105, then worry less about taking more or less out per year based on market performance. My very old relatives do not spend much on recreational travel and dining. They could have enjoyed their retirement more when they were younger say 70-85.
1
Well Gee an annuity at today's rates is basically worthless unless you are very afraid of investing.
How can someone who earns $15,000/yr manage to save for retirement? The politicians talk about the middle class all the time during election campaign, but always turn a blind eye on the poor. These people work as hard as the middle class, the difference is that our leaders rely on them to supply cheap labor for the rich and the middle class.
21
Those making only $15,000 per year receive a higher portion of their income in social security. For the first $9,000 in social security earnings you receive 90% in social security benefits . This is referred to as the first band. The second band which goes from $9,001 to in the 32-34k range you get back around 34% of your income, in the next band it drops to some where in the mid 20% then in higher bands it drops under 20%. Despite up until the $117K everyone paying the same withholding rate. Then of course those who make over $117k get nothing on those dollars from Social Security.
So a person making $15k a year basically gets a windfall off of Social Security.
An easy way for a person making $15 k a year to save for retirement is to take that earned income credit aka that tax check, which with just one kid is about $5k a year and put $2k a year in an IRA. Roth would probably be best because you are low income, you could hope your circumstance improves and you are higher income later. IRA income can't be counted against your other benefits and are excluded from bankruptcy.
So a person making $15k a year basically gets a windfall off of Social Security.
An easy way for a person making $15 k a year to save for retirement is to take that earned income credit aka that tax check, which with just one kid is about $5k a year and put $2k a year in an IRA. Roth would probably be best because you are low income, you could hope your circumstance improves and you are higher income later. IRA income can't be counted against your other benefits and are excluded from bankruptcy.
2
This whole plan is out of whack in my opinion. It leads to uncertainty and a feeling of doom when the market crashes 50% or more during a recession, which seems to be every eight years or so. As I age I want greater simplicity and a more secure feeling about our finances.
Better and simpler way...invest in dividend paying stocks of top notch companies with at least 25 years years of consistent dividend paying history (like Coca-Cola) and a DGR (Dividend Growth Rate) of 5-10% a year. Keep reinvesting during accumulation years and live off the dividends in retirement. This way you never run out of money.
I just wish someone had taken the time to explain that to me when I was 25. Thank God for the internet blogs that show how ordinary people make and keep their monies on less than stellar salaries. I think that Jason of Dividend Mantra.com has done a great job of explaining and showing how easily it works.
We don't have to be a Warren Buffet to achieve a satisfactory lifestyle in retirement.
Better and simpler way...invest in dividend paying stocks of top notch companies with at least 25 years years of consistent dividend paying history (like Coca-Cola) and a DGR (Dividend Growth Rate) of 5-10% a year. Keep reinvesting during accumulation years and live off the dividends in retirement. This way you never run out of money.
I just wish someone had taken the time to explain that to me when I was 25. Thank God for the internet blogs that show how ordinary people make and keep their monies on less than stellar salaries. I think that Jason of Dividend Mantra.com has done a great job of explaining and showing how easily it works.
We don't have to be a Warren Buffet to achieve a satisfactory lifestyle in retirement.
10
If social security is part of your portfolio you can never run out. And I would suggest someone who has a gap insurance plan taken in the first six months after they turn 65, are protected on health costs. The final thing is what are your costs related to age. Some in the 65-80 age range will spend more then someone after 80. You just can't do as much, period.
2
Jonathan Guyton's suggestions for managing withdrawals year by year are way too erratic and complicated. For the past 15 years I have followed the drawdown route used by foundations, which is to use a 5-year rolling average to calculate my annual withdrawal of 2.4%. This approach is very conservative but it tends to smooth out the differences from one year to the next. I've lived through the dotcom bubble and the mortgage crisis without serious changes to my modest lifestyle.
6
My husband and I are just 60, and plan to work for as long as we can. We thought we were okay for retirement until we took in his 93-year-old mother, whose mind is gone but whose body goes on. Her retirement funds are rapidly diminishing as we pay for 24-hour care for her, and now ours are being tapped as well, as her ability to do anything for herself decreases almost daily. Still, thanks to triple bypass surgery 10 years ago and a bucket of daily meds, her ticker is strong. This could be the thing that ruins us, really. No one planned for her longevity - and how could they? - and there's no help for long term care, either at home (as we promised her long ago) or in a facility. So her retirement funds, and ours, go to her body maintenance. I don't begrudge her these years but I wonder what the medical community is thinking when they perform surgery to extend an 83 year-old's life for another 20 years, when there is no support for her or her family, and no treatment for the dementia that almost inevitable sets in.
268
And just who is requiring you to spend your retirement on a 93 year old? Medicare and Medicaid are the alternatives.
1
Humble Pi... I can fully relate to your situation. When my wife and I retired (I'm now 85), I thought we were pretty well fixed to live out our years without giving too much thought to running out of money. Surprise! Surprise! Even with our carefully planned retirement finances, a monkey wrench got thrown into the mix. About 7 years ago my wife developed Alzheimer's and after a couple years I found it impossible to look after her needs. I placed her in a facility where they could provide much better care than I could provide. All her expenses were paid for out of pocket to the tune of $100,000+/year. My new concern became how long will I financially be able to look after my own modest needs? Last year she peacefully passed away. In a country as rich as ours it shouldn't have to be that way. Call it what you will but I don't think people in the western European countries face those kind of situations. There must be a better way. Good luck!
146
vulcanalex... I wish it could be that simple. Medicare does not cover long term care. Medicaid applies only when you run out of money and applies to nursing homes or home care. A nursing home is not the same as a long term care facility.
12
My wife and I find it useful to know well and in detail our cost of living as we approach retirement, including a solid LTC policy. We assume that inflation will closely follow longterm bond rates, one 'zeroing out' the other. We multiply our cost of living by the number of years expected to establish our total principal needed. We account for the added income expected from SS. We actively eliminate all debt. We have decided about leaving a legacy. We make a plan together, have it assessed by a planner, and review our assumptions every 12-18 months. This baseline program has fostered a productive shared dialog into our retirement. Interested to read and discuss variations to this by other readers.
I have been a practicing Certified Financial Planner for close to 25 years. While there is little that should be considered an iron-clad rule, the 4% distribution rate still makes sense to me as a guideline. I address this in my recently published book, The Redefining of Retirement, available through Amazon.
An except is as follows:
If we consider that the long term historical average investment returns, from 1926-2012, of a moderate risk portfolio, balanced between 40 and 60 percent stocks and the remaining in fixed income investment such as bonds, was around 8 percent, we might better understand a rationale this 3–4 percent withdrawal rate. During this same period of time inflation averaged around 3 percent. ..When considering a distribution rate from retirement savings and investments, presumably we would like to be able to periodically increase the amount to compensate for the increased costs of living. If we consider being able to earn 8 percent over the longer term, with inflation averaging around 3 percent. What we really have to work with for a sustainable supplemental income distribution is 5 percent. Moreover, there are costs to investing as well as taxes. If we are prudent we should be further reducing our net average expected real investment gain into the 3–4 percent range and, consequently, a reasonable rate of supplemental retirement income to the same range.
An except is as follows:
If we consider that the long term historical average investment returns, from 1926-2012, of a moderate risk portfolio, balanced between 40 and 60 percent stocks and the remaining in fixed income investment such as bonds, was around 8 percent, we might better understand a rationale this 3–4 percent withdrawal rate. During this same period of time inflation averaged around 3 percent. ..When considering a distribution rate from retirement savings and investments, presumably we would like to be able to periodically increase the amount to compensate for the increased costs of living. If we consider being able to earn 8 percent over the longer term, with inflation averaging around 3 percent. What we really have to work with for a sustainable supplemental income distribution is 5 percent. Moreover, there are costs to investing as well as taxes. If we are prudent we should be further reducing our net average expected real investment gain into the 3–4 percent range and, consequently, a reasonable rate of supplemental retirement income to the same range.
According to the NYimes in a July 2014, article, the median household net worth is $56,335. And much of net worth is represented by housing, which is a currentexpense rather than income. That tells me that few Americans are going to have a $1 million portfolio as entertained by this discussion.
And the larger forces of corporate looting of the economy and increased automation of more and more jobs, will work to reduce median net worth further.
And the larger forces of corporate looting of the economy and increased automation of more and more jobs, will work to reduce median net worth further.
5
The article and the comments for the most part are about retired people with some means or greater means. But if you look at the reported statistics about what baby boomers will be retiring with over the next 15 to 20 years the numbers are more than alarming. I've read that 80 percent or more have less than $100,000 set aside for retirement, including significant percentages who have essentially no private retirement means and think they can live on SS alone, which averages less than $15,000 a year for most retirees.
So for tens of millions of soon to be retired people the fact is this: 4 percent of nothing is nothing.
So for tens of millions of soon to be retired people the fact is this: 4 percent of nothing is nothing.
9
The trouble with advice on withdrawal rates is that it completely ignores the whole picture. The advice on how to live in retirement should be holistic - about health, exercise, foods, hobbies and so on.
When one takes the holistic view of retirement, at least in my case our expenses are way down. My cloths and shoes don't wear out. We don't eat out much since healthy choices are limited. Out food is mostly whole plant based foods that doesn't cost too much. We have accumulated lots of junk that we need to get rid off, not add more to it by senseless buying! Are we frugal? Some think so. But we only buy organic foods, so some think we are big spenders! One of my children summarized out lifestyle - We are frugal in the sense we don't buy many things but what we buy is of the highest quality even if it costs way too much!
When one takes the holistic view of retirement, at least in my case our expenses are way down. My cloths and shoes don't wear out. We don't eat out much since healthy choices are limited. Out food is mostly whole plant based foods that doesn't cost too much. We have accumulated lots of junk that we need to get rid off, not add more to it by senseless buying! Are we frugal? Some think so. But we only buy organic foods, so some think we are big spenders! One of my children summarized out lifestyle - We are frugal in the sense we don't buy many things but what we buy is of the highest quality even if it costs way too much!
7
The cost of retirement living may not go down with old, old age and may go up if the retiree needs much help at home or moves into a senior living environment like a nursing home, assisted living or independent living, all expensive. With a $1million portfolio, even if smaller over time, it's not likely that there will be Medicaid support in a nursing home and it doesn't pay at all in other settings. There is also a common belief, entirely wrong, that Medicare pays for some of this. Level or reduced spending in your 80's or 90's? Forget it!
3
I am fascinated by the omission of two things:
1) There is no mention of Social Security. Using the asset starting point of the article - $1M - anyone would have over $2200/mo as a floor income stream. (Assuming that the person has worked for at least 25-35 years in a job paying well enough to amass $1M.) If two spouses receive payments, then the floor is over $3000/mo. That's a nice anchor to tie to.
2) There is no mention of asset weighting. A 50/50 plan? Please. My personal experience, and that of many of my friends is that 60/40 is the max, and more useful is a 70/30 mix, heavy on equities.
A few thoughts about the concept of diversification in the equities. Stay away from individual stocks. Use a weighted mix of large-, small-, and international mutual funds, avoiding sector-heavy funds (e.g., technology). Avoid any fund with a strategy that involves financial instruments, and that cannot be explained clearly to a lay person. Use stocks and funds that pay dividends, and re-invest them. Above all, DO NOT CHASE RETURN. include Social Security when planning your income stream; the withdrawal rate will fall markedly.
These principles have enabled us to double our original rollover, even with the market hits of 2000 and 2008, and after withdrawals.
One last concept: don't be greedy, feeling as if you have to flaunt your wealth. Enjoy life, not your bank account.
1) There is no mention of Social Security. Using the asset starting point of the article - $1M - anyone would have over $2200/mo as a floor income stream. (Assuming that the person has worked for at least 25-35 years in a job paying well enough to amass $1M.) If two spouses receive payments, then the floor is over $3000/mo. That's a nice anchor to tie to.
2) There is no mention of asset weighting. A 50/50 plan? Please. My personal experience, and that of many of my friends is that 60/40 is the max, and more useful is a 70/30 mix, heavy on equities.
A few thoughts about the concept of diversification in the equities. Stay away from individual stocks. Use a weighted mix of large-, small-, and international mutual funds, avoiding sector-heavy funds (e.g., technology). Avoid any fund with a strategy that involves financial instruments, and that cannot be explained clearly to a lay person. Use stocks and funds that pay dividends, and re-invest them. Above all, DO NOT CHASE RETURN. include Social Security when planning your income stream; the withdrawal rate will fall markedly.
These principles have enabled us to double our original rollover, even with the market hits of 2000 and 2008, and after withdrawals.
One last concept: don't be greedy, feeling as if you have to flaunt your wealth. Enjoy life, not your bank account.
3
One thing nobody has mentioned, and this goes to supply and demand. When the supply of investment grade assets remain fixed and the demand for them increases so do their price.
Like it or not most American workers have, or should have, a 401(k). There are billions of dollars every year, if not more, flowing into the stock market. Given the relatively fixed number of publicly traded companies, there is more money vying for shares of those companies or in purchasing their bonds. This, in turn, raises their price as the demand is increasing.
Historical behavior of the stock market generally doesn't take that supply/demand into account. You'd need to start with perhaps mid to late 80's forward. There was a biotech bubble in 87, a .com bubble in 2001, a housing bubble in 2008. All these, while scary at the time, do resolve.
Like it or not most American workers have, or should have, a 401(k). There are billions of dollars every year, if not more, flowing into the stock market. Given the relatively fixed number of publicly traded companies, there is more money vying for shares of those companies or in purchasing their bonds. This, in turn, raises their price as the demand is increasing.
Historical behavior of the stock market generally doesn't take that supply/demand into account. You'd need to start with perhaps mid to late 80's forward. There was a biotech bubble in 87, a .com bubble in 2001, a housing bubble in 2008. All these, while scary at the time, do resolve.
My point was none of these hiccups took long to recover from, a long term view and moderate risk, a young person saving 10% of their income would do very nicely after 40 yrs. I was over 20 yrs into my career when they rolled out 401(k)s and didn't have an employer with a pension plan. For those that started working after, say, mid 80's, you have no excuse not to be pretty well off by mid 60's.
What percentage of the population will have $2 million to retire on and be fixated on maintaining exactly the perfect level of outlays so as to be able to keep their balance at a perfectly targeted level and obviate all market risk, as if the way you spend the money is what makes your savings account behave like an annuity?
This is a bizarre way of talking about money in the first place. The ability of retirees to treat their retirement money like an annuity is dependent not only or even primarily on their own behavior as consumers, but on the willingness of the financial industry to provide honest, reliable annuity products and to refrain from engaging in larges scale fraud and/or incompetence leading to periodic market crashes.
In practical terms, today's financial industry is structured to be boom/bust and no 'withdrawal tactic' is going to keep you from losing your money in a meltdown. And no, we won't all have $2 million at 65. What we need is a better regulated financial sector and a strengthened Social Security system. And the NYTimes should focus the time and effort that goes into these long articles on retirement $ more on the needs of average people, not just the tiny percent of folks who can afford to hire multiple advisers to manage the savings down to $0.00 on the day they draw their last breath by way of complex, pie-in-the-sky spending schemes.
This is a bizarre way of talking about money in the first place. The ability of retirees to treat their retirement money like an annuity is dependent not only or even primarily on their own behavior as consumers, but on the willingness of the financial industry to provide honest, reliable annuity products and to refrain from engaging in larges scale fraud and/or incompetence leading to periodic market crashes.
In practical terms, today's financial industry is structured to be boom/bust and no 'withdrawal tactic' is going to keep you from losing your money in a meltdown. And no, we won't all have $2 million at 65. What we need is a better regulated financial sector and a strengthened Social Security system. And the NYTimes should focus the time and effort that goes into these long articles on retirement $ more on the needs of average people, not just the tiny percent of folks who can afford to hire multiple advisers to manage the savings down to $0.00 on the day they draw their last breath by way of complex, pie-in-the-sky spending schemes.
7
Or we need folks who have reasonable expectations of their retirement. No vacations around the world, simple life with a paid off house in a low cost of living area. Simple!! Social Security is already bankrupt and more regulation just adds to costs not to returns.
It's incredible that these withdrawal rules always start with an assumed $1 million in investable assets. Such people are known as millionaires and they account for only 5% of the population. People who have accumulated $1 million by age 60 are fairly rare and very likely they earned very high incomes during most of their working years. Thus, it's very likely their social security benefit will be close to $40,000 per year in current dollars if they delay applying for benefits until age 70. Now that $40,000 per year is also inflation indexed so it will rise in the future with inflation. And that figure would also be higher in 2019 for someone who is 66 today and who begins receiving benefits in 2019. Why would anyone plan to take a fixed percentage out of retirement savings and increase it each year with the rate of inflation when starting at age 70 they start receiving an income of $40,000 that they did not have before? Anyone who totally ignores $40,000 of extra inflation indexed income for life is no financial planner and should not be taken seriously.
Obviously, the same applies to any private pensions but here I'm only considering social security, 85% of which is taxed as ordinary income. People will then likely be in a higher tax bracket when reaching age 70. It would then be optimal to withdraw more from an IRA before age 70 via Roth conversions. Yet, every article I've ever read read on the 4% rule ignores SS income and taxes.
Obviously, the same applies to any private pensions but here I'm only considering social security, 85% of which is taxed as ordinary income. People will then likely be in a higher tax bracket when reaching age 70. It would then be optimal to withdraw more from an IRA before age 70 via Roth conversions. Yet, every article I've ever read read on the 4% rule ignores SS income and taxes.
5
Just what is a very high income. Middle class people who live below their means and save can easily accumulate 1M in investments. Now those who spend every dollar that they make will never have anything, and the poor won't either.
3
The ugly side of prolonged low interest rates set by the Federal Reserve policy--beyond the risk-taking and higher debt levels they incentivize-- will be an entire segment of older Americans whose modest but hard-earned savings will not adequately supplement their retirements. My parents had only modest savings in the 1980s, but the interest they earned saw them through their older years. While I have no desire to return to the days of 15 percent mortgage rates, earning 0-1 percent on savings will spell great hardship for many seniors, whose alternative is to take on ill-advised risk in the stock market--a Hobson's choice.
5
Why are you moving toward a bond-heavy strategy with a long expected time to live? A bad choice, keep a balanced portfolio.
Whenever I read an article like this I always ask myself "How do other countries deal with this problem?" Retirement security, infrastructure, education, healthcare -- can we learn anything from other countries? Does a German retiree have to endure this kind of financial mumbo-jumbo? If not, why? At the same time that our retirees have to endure such financial insecurity we are experiencing record wealth accumulation at the top. Are these two conditions related? Is that German retiree more secure because he voted for different politicians than we did? That's where I would start.
9
Everyone's situation is unique but if you have a million dollar portfolio when you quit working I would advise you read "Get What's Yours" by Laurence Kotlikoff, Philip Moeller and Paul Solman.
http://www.getwhatsyours.org
It will significantly change the timing and amount of withdrawal and spending in retirement if you are truly worried about running out of money. Married, in good health and with forebears who lived long lives I was worried about one of us, if not both, living to see the nest egg dwindle to nothing. But I am actually spending quite a bit more than even the most aggressive strategy mentioned here. And will be until I turn 70. At which point I will be able to spend a bit less and my IRA withdrawals will be set by IRS rules not by need.
I know the common practice today, especially among the wealthy is to discount the value of Social Security but this is just foolish. Any future in which Social Security is significantly reduced *for current recipients* or for anyone over 55 in the upcoming election year is a future in which your hard won portfolio will be just so much dross.
Suddenly pauperizing 20% of the population would destroy not just our capital markets but the very concept of capitalism itself. Not to mention what it would do to the concept of long term contracts and government fidelity.
http://www.getwhatsyours.org
It will significantly change the timing and amount of withdrawal and spending in retirement if you are truly worried about running out of money. Married, in good health and with forebears who lived long lives I was worried about one of us, if not both, living to see the nest egg dwindle to nothing. But I am actually spending quite a bit more than even the most aggressive strategy mentioned here. And will be until I turn 70. At which point I will be able to spend a bit less and my IRA withdrawals will be set by IRS rules not by need.
I know the common practice today, especially among the wealthy is to discount the value of Social Security but this is just foolish. Any future in which Social Security is significantly reduced *for current recipients* or for anyone over 55 in the upcoming election year is a future in which your hard won portfolio will be just so much dross.
Suddenly pauperizing 20% of the population would destroy not just our capital markets but the very concept of capitalism itself. Not to mention what it would do to the concept of long term contracts and government fidelity.
7
Alas, virtually all the scenarios focus on investing in an uncertain environment, and pay no attention whatsoever to longevity considerations. The first bit of advice I would give is for both partners to thoroughly research the longevities of their ancestors. If people in your family are regularly dying off by age 75, there is not a lot of sense, does it?
What I do is calculate my 10% lifetime every year. Here is how you do it (with hypothetical numbers): At age 65, the expected lifespan of a male is 13 years, so there's a 50% probability of my living to 78. At 78, the expectancy is 9 years, so there is a cumulative 25% probability of my living to 87. At 87, the expectancy is 4 years, so that means there's a cumulative 12.5% probability of my living to 91, and at 91, the expectancy is 3 years, so I figure there's only about a 10% chance of my living to 92. Thus in this hypothetical instance if I spend to expend everything in 27 years, there's only a 10% probability of my running out of money, if I'm an average bloke.
Another big mistake is to assume that you will actually achieve a positive return on investments. I the long term, that is a safe assumption, no doubt but it is risky at age 65 and becomes more risky with each passing year. It is far more conservative and realistic to plan on keeping pace with inflation.
What I do is calculate my 10% lifetime every year. Here is how you do it (with hypothetical numbers): At age 65, the expected lifespan of a male is 13 years, so there's a 50% probability of my living to 78. At 78, the expectancy is 9 years, so there is a cumulative 25% probability of my living to 87. At 87, the expectancy is 4 years, so that means there's a cumulative 12.5% probability of my living to 91, and at 91, the expectancy is 3 years, so I figure there's only about a 10% chance of my living to 92. Thus in this hypothetical instance if I spend to expend everything in 27 years, there's only a 10% probability of my running out of money, if I'm an average bloke.
Another big mistake is to assume that you will actually achieve a positive return on investments. I the long term, that is a safe assumption, no doubt but it is risky at age 65 and becomes more risky with each passing year. It is far more conservative and realistic to plan on keeping pace with inflation.
Great article for retirees. Election results determine much of our future financial situations. Who would have predicted we would be in a long, long war and terrible recession and just now returning to more normal times.
1
The idea that $1,000,000 is equivalent to $30,000 withdrawals over 30 years with nothing left presents an interesting wealth concept. If a 60 year old has $2,000,000, you could call him/her wealthy, but would you call the same person who got a $60,000/yr pension wealthy? Maybe people with $60,000/yr pensions are the new rich. Which employment sections would they be more likely to have worked for? Government? Maybe we should encourage our children to educate themselves for that more lucrative path.
11
A terribly oversimplified rule of thumb may not protect retirees, despite the appeal of such a number. There is no magic rate to make dollars last for what is needed. Yet, looking at the problem in terms of an annuitization issue is an improvement over the current practice of most investors and planners.
In the January/February issue of the Financial Analysts Journal two authors, Waring and Siegal wrote about just such a plan and titled it, "The Only Spending Rule Article You'll Ever Need." They outlined that each year, one should spend (at most) the amount that a freshly purchased annuity—with a purchase price equal to the then-current portfolio value and priced at current interest rates and number of years of required cash flows remaining—would pay out in that year. Investors who behave in this way will experience consumption that fluctuates with asset values, but they can never run out of money. In other words, investors will not over consume as they can with a fixed rate (i.e. 4% Rule) spending rule because the virtual annuity is repriced every year.
This approach of thinking in terms of a virtual annuity protects against unknowable risks, including varying investment returns and a long life. And, it does not require the investor to take on more risk. For these reasons, it is a better practice than the current Rule. While I am not yet at retirement age, I fully intend to use this approach.
In the January/February issue of the Financial Analysts Journal two authors, Waring and Siegal wrote about just such a plan and titled it, "The Only Spending Rule Article You'll Ever Need." They outlined that each year, one should spend (at most) the amount that a freshly purchased annuity—with a purchase price equal to the then-current portfolio value and priced at current interest rates and number of years of required cash flows remaining—would pay out in that year. Investors who behave in this way will experience consumption that fluctuates with asset values, but they can never run out of money. In other words, investors will not over consume as they can with a fixed rate (i.e. 4% Rule) spending rule because the virtual annuity is repriced every year.
This approach of thinking in terms of a virtual annuity protects against unknowable risks, including varying investment returns and a long life. And, it does not require the investor to take on more risk. For these reasons, it is a better practice than the current Rule. While I am not yet at retirement age, I fully intend to use this approach.
3
This article overlooks the crucial effect of IRS minimum distribution requirements on the many people whose retirement assets are held mainly in tax-deferred 401(k)-type accounts or IRAs. At age 73, for singles and spouses of similar ages, the required annual withdrawal already exceeds 4% of tax-deferred assets so held. And it goes up from there, reaching 5.3% at age 80, 8.8% at age 90, and so on. In order to follow anything like the 4% rule, such long-lived retirees must reinvest an ever-increasing portion of their mandatory withdrawals, while paying increasing taxes on the withdrawn amounts -- an important reason to stay mentally sharp in old age, if one can.
11
Just because you have to withdraw it, doesn't mean you have to spend it. You can withdraw from a tax deferred investment - 401k/ira and invest it in a non-tax deferred investment.
1
I am 61 and have know for awhile that I will never be able to fully stop working. So I changed my career and am now a full time teacher with a pension and benefits. I also have a 401k account from my years in the private sector. I expect to continue working full time until I am 70 so as to max out Social Security then teach one or two classes a semester for additional income and to keep my mind sharp.
I agree with a prior comment that for most of us retirement is not being wealthy, it's just not working and most people can't afford to do that.
I agree with a prior comment that for most of us retirement is not being wealthy, it's just not working and most people can't afford to do that.
14
Keep it simple. I plan to allow myself to spend 4% per year - with no adjustments for inflation. If investments increase in value, the amount I can spend the next year increases as well - 4% of a bigger investment pool. If investment values decrease - I have to decrease spending the next year. The original suggestion 4% with adjustments for inflation is more complicated - you need to track inflation every year - so you probably need to pay a financial advisor and that is a fee I don't need to pay. Financial advisors don't have magic balls that see the future - there is no way to perfectly plan you money to run out the day you die - so yes plan to underspend - that's ok, but don't try to be too precise.
3
I retired early eight years ago. If this article and its rules of thumb were the only guidance available, I probably would still be working. I would never trust my financial security to these rickety guidelines based on historical performance of financial assets.
It's really too bad that the reporter failed even to mention the existence -- for about 15 years! -- of sophisticated software that calculates how much one can spend per year over a lifetime. The user inputs key assumptions about longevity, rates of return, inflation, changing standards of living over time, desired estate, replacement of cars, change of home, etc. etc. The package I've used for nine years is called ESPlanner (about $150, with a basic version free online). It was developed by Boston Univ. economist and retirement planning expert Lawrence Kotlikoff.
I have no financial interest in Kotlikoff's product, but year in and year out, I have found ESPlanner to be an essential tool for addressing the knotty calculations this article struggles to grapple with. If you're comfortable with financial matters, you can run it yourself, and you'll develop a deep understanding of the multiple choices and variables that are driving your retirement lifestyle. Otherwise, find one of the many financial planners who have integrated ESPlanner into their practice.
It's really too bad that the reporter failed even to mention the existence -- for about 15 years! -- of sophisticated software that calculates how much one can spend per year over a lifetime. The user inputs key assumptions about longevity, rates of return, inflation, changing standards of living over time, desired estate, replacement of cars, change of home, etc. etc. The package I've used for nine years is called ESPlanner (about $150, with a basic version free online). It was developed by Boston Univ. economist and retirement planning expert Lawrence Kotlikoff.
I have no financial interest in Kotlikoff's product, but year in and year out, I have found ESPlanner to be an essential tool for addressing the knotty calculations this article struggles to grapple with. If you're comfortable with financial matters, you can run it yourself, and you'll develop a deep understanding of the multiple choices and variables that are driving your retirement lifestyle. Otherwise, find one of the many financial planners who have integrated ESPlanner into their practice.
40
That sounds great. I am sure my assumption about inflation and rates of return are perfect. That is much easier to predict than something like replacement of cars.
1
Good suggestion. I wish I had focused on this 20 years ago but you know the old saying: "Time flies when you are having fun."
Fidelity has a fine product as well. No charge. Retirement Income Planner.
As was the case we 401K changed to require RMDs, you can not trust that the ruling class will not alter the rules on any form of retirement income or on Social Security where employee and employer funds are directly deposited into the US General Fund.
4
If you are over 50 and don't have at least half of that $1 million, you will just have to plan on living on Social Security, so you better find out how much that will be and plan accordingly. It's probably too late for you to do much about it. It may even be too late for your kids because if you didn't plan and save from an early age, they never learned to do it either. It's not too late for your grandchildren though, so start helping learn your lesson now.
3
I prefer the RMD rule. This well-researched strategy is that you use the IRS's rule of Required Minimum Distributions (RMD) for your age, by reviewing the value of your holdings at end of each year and then adjusting withdrawals using the RMD for your age. See article by Sun & Webb - "Can Retirees Base Wealth Withdrawals on the IRS' RMD?" published Oct 2012 by the Center for Retirement Research at Boston College. This is how I do it.
Americans on the whole have never been great savers, and the Baby Boom generation now retiring have been worse than most. We spend much more than our parents did on ourselves, and even more on our children - not for necessities, but for luxuries. How many of my peers right out of school bought way more house than they needed, and then struggled with the mortgages for decades. Baby Boomers are big on short-term gratification, and not so hot on long-term planning.
My own situation shows that a modest lifestyle and careful long-term investing make all the difference. I'm a career civil servant married to a unionized elevator operator. I saved and invested from my first paycheck - when my colleagues were all out buying cars and co-ops, I was depositing that money into an IRA.
I didn't buy a car until I was 35 - I only buy used cars and I keep them for an average of more than 10 years. We lived in a one-bedroom apartment until we were in our 40s. We take nice vacations (or we go camping), but we stay in modest hotels - we didn't spend $100 on a night in a hotel until we were in our 50s. I own no expensive jewelry, watches, etc.
It's true that I've been lucky. Neither my spouse nor I ever lost a job, for instance, or even took a demotion - although part of that owes to discipline and hard work. Frugality and smart investing will enable me to retire when my spouse is 62 and I am 61, and here's the payoff: when we retire, we will actually get a big raise.
My own situation shows that a modest lifestyle and careful long-term investing make all the difference. I'm a career civil servant married to a unionized elevator operator. I saved and invested from my first paycheck - when my colleagues were all out buying cars and co-ops, I was depositing that money into an IRA.
I didn't buy a car until I was 35 - I only buy used cars and I keep them for an average of more than 10 years. We lived in a one-bedroom apartment until we were in our 40s. We take nice vacations (or we go camping), but we stay in modest hotels - we didn't spend $100 on a night in a hotel until we were in our 50s. I own no expensive jewelry, watches, etc.
It's true that I've been lucky. Neither my spouse nor I ever lost a job, for instance, or even took a demotion - although part of that owes to discipline and hard work. Frugality and smart investing will enable me to retire when my spouse is 62 and I am 61, and here's the payoff: when we retire, we will actually get a big raise.
14
You are indeed very lucky that you had civil service and unionized jobs and never lost them. This payoff doesn't apply to many people.
2
Glad to hear that you recognize how much of your 'frugality' was also supplemented by 'luck'. Most Boomers graduated from college (many of us first-in-the-family to attend, much less graduate) into the economic Disaster of the '70s...remember those 22% interest rates for housing? And 8%+ education loans that needed to be paid off in a near-depression employment environment? Then our kids expected us to pay for their education...Boomers have had it TOUGH, except those who were fortunate enough to be born to wealthy parents/trust funds. We were promised much, and got the debt of Vietnam instead. I'm sick and tired of hearing the next generation (for which we sacrificed our retirement, so they would have excellent public schools and no student loan debt) bash the Boomers.
What about the effect of the RMD -- required minimum distribution -- which the IRS mandates I take each year from my IRAs? Isn't that also pegged at around 4 per cent? I have often wondered whether the RMD is bassically designed to bankrupt me in 30 years so I don't leave any inheritance for my children.
6
Obviously, if you don't need to spend the RMD each year you can reinvest it or give it to your children immediately [when likely they need it more now than later}.
6
No, the money in your IRA is also tax deferred. MRD is paying taxes on it. Tax deferred is not tax free. If you filed for SS before 70, and have to take a MRD, suspend SS payments for some time to burn through your MRD infusion. After, restart SS payments. Over time that will bring you to the same place as deferring SS until 70.
1
Don't spend all you are forced to withdraw and reinvest it. Send your kids to work and spend your money on you.
I'm 79. Part of my solution has been to continue working [I'm a freelance editor], not only for the financial benefits, but also to keep my mind sharp. Second is that almost every investment "advisor" I have ever used has somehow magically managed to lose me money, so now I have all my money in an online investment account. I'm fortunate in having some market savvy, and I've done quite well. I know I have enough money to get me from here to eternity, so the key question for me is how can I enjoy life now but still leave a decent inheritance for my children. It is, as ever it was, a balancing act.
9
setting aside the savings crisis, this low interest rate environment is one of the greatest wealth transfer schemes ever perpetuated
17
A worthy goal in retirement is to enjoy it and not have to worry about what the market is doing from day to day or week to week or for that matter from year to year. A first priority for the typical 70th-80th percentile affluent person is to enter retirement de-leveraged, without mortgage, car payments, tuition payments, etc. As a reality check, we should also remember to distinguish between being retired and being wealthy enough not to work. The first will happen to almost all of us, and we must try to do it within our means, as best we can. The second can happen at any time of life, to a small number of people. Since most retirement planning focuses on high-net-worth, we have begun to conflate retirement with being independently wealthy. The 4% rule is mainly a heuristic for people in the latter category; it distracts from the reality that planning for retirement in the post-pension era means taking responsibility, facing limitations, managing scarcity and making irrevocable choices... so that you can finally relax.
13
This approach also assumes the investor is not prone to panic during periods like 2008-2009 - selling stocks at the low and missing the recovery. Unfortunately history has shown the average investor is prone to do just that according to Dalbar research. Error on the side of conservatism. Hoping that the state will take care of you if you are broke in your old age is a stretch.
3
My own plan for avoiding running out of money in retirement is to purchase a wheelchair today while I'm still healthy. It's not necessarily for mobility in a few years--although that could be a fringe benefit--but primarily so that when the money does run out my family can drive me to the 14,265' summit of Mt. Evans (highest paved road in North America), set me in my wheelchair, and give me one last kiss as they let go of the handles. I call it the Tea Party Push --TPP for short.
18
Having too much left at the end is not a problem for me, because I'd like to leave as much as possible to my children, to counter an alarming decrease in the standard of living for even those with advanced education and skills. The next generation is the one I worry about.
That being said, what has happened to retirees such as my parents and my husband's parents over the past decade has been cruel and unnecessary. Our government has artificially constrained interest rates for good reason, but should follow Britain's lead and guarantee a reasonable rate of return on a modest amount of money invested by the elderly, to ensure that that group does not suffer disproportionately.
That being said, what has happened to retirees such as my parents and my husband's parents over the past decade has been cruel and unnecessary. Our government has artificially constrained interest rates for good reason, but should follow Britain's lead and guarantee a reasonable rate of return on a modest amount of money invested by the elderly, to ensure that that group does not suffer disproportionately.
31
A message to Professor Krugman: your love of low interest rates has a price to it, as you can see. Low interest rates justify your argument that the federal government can borrow unlimited money to 1) subsidize the unemployed, or 2) pay for government programs to employ the unemployed. But, the people who pay the ultimate price are those who did the right thing, and worked and saved for their retirement years. Would be nice if you acknowledged that occasionally.
58
Low interest rates also indicate stability and, when accompanied by low inflation, are not necessarily bad. I invest in a mix of stocks paying about 4% dividends and index funds and think things are going fairly well.
2
Professor Krugman does not "like" low interest rates, he says that the low interest rates signal the fact that the economy is not overheating and needs stimulation. He also believes that government spending, under today's conditions will not cause the catastrophe which conservatives fulminate about endlessly which is, government spending crowding out private investment and causing runaway inflation. He wants the government to act in order to stimulate the economy toward fuller employment, which will create demand and increase your returns on savings.
Your household budget is not analogous to the federal budget situation. One other thing I should mention is that people on unemployment and who need government programs do the right thing too, you know. What makes any savers situation morally superior to a person without the saver's opportunities. I just don't buy it.
Your household budget is not analogous to the federal budget situation. One other thing I should mention is that people on unemployment and who need government programs do the right thing too, you know. What makes any savers situation morally superior to a person without the saver's opportunities. I just don't buy it.
4
The government doesn't need low interest rates for 2). When more people are working, it will collect more in taxes.
And in any case, it can just print the money.
And in any case, it can just print the money.
1
Nobody knows when they die. If one dies the day after retirement, one need not save anything. But if one lives for 30, 40, or more years, one needs to save a LOT. But we do know very well how long people live on the average. We can distribute this risk to have a sound retirement plan for a pool of people. Time to resuscitate pension plans that we can pay into. Vote accordingly! And recognize the forces that want to take away what little exists.
49
There are plenty of annuities available that will do this, But, you should make sure you keep the government and its financial manipulation out of the markets.
I agree, that for most Americans, retirement issues are not having enough assets to retire. I am surprised that anyone who does not have retirement savings would even be interested in this subject. Then again, Joe the plumber taught us that you can blatantly focus on problems you don't have and not address the ones you do have.
Go save first. If you cannot, looking at what you could withdraw if you had retirement savings is a morbid exercise.
I've been poor, it is painful - and does not improve by thinking about problems you don't have.
Go save first. If you cannot, looking at what you could withdraw if you had retirement savings is a morbid exercise.
I've been poor, it is painful - and does not improve by thinking about problems you don't have.
18
So true. For millions of hard working people in low paying jobs, the only source of retirement income will be social security.
3
Excellent point.
Here's my plan, use retirement savings to defer filing for Social Security until 70. From 62 on, each deferred year increases your Social Security payment by roughly 8 percent. Remember too, prior to retirement were the working years of accumulation. Post retirement are the years of distribution. Do not expect to receive as much in retirement as you earned while working, especially at those higher salary/wage years. Your goal is to not live beyond your means.
Who has $1,000,000 in savings? What is critical is for all those in retirement and within, say, 20 years of retirement to make it abundantly clear to their elected officials, be they republican or democrat, Social Security cuts are an absolute non starter. What has to make up the gap? You do. Remove the upper cap on Social Security withholdings. Increase, if only the employee portion, the percent withholding for Social Security and Medicare. Ensure this money goes directly to the Social Security trust fund, not aircraft carriers or fighter jets nobody wants. Congress has for decades been spending that money earmarked for Social Security to balance budgets and give to the Pentagon. This, too, has to stop.
The future solvency of Social Security and Medicare resides, predominately, with you, the voter. It is imperative Congress not bankrupt seniors and those planning on one day becoming seniors.
Who has $1,000,000 in savings? What is critical is for all those in retirement and within, say, 20 years of retirement to make it abundantly clear to their elected officials, be they republican or democrat, Social Security cuts are an absolute non starter. What has to make up the gap? You do. Remove the upper cap on Social Security withholdings. Increase, if only the employee portion, the percent withholding for Social Security and Medicare. Ensure this money goes directly to the Social Security trust fund, not aircraft carriers or fighter jets nobody wants. Congress has for decades been spending that money earmarked for Social Security to balance budgets and give to the Pentagon. This, too, has to stop.
The future solvency of Social Security and Medicare resides, predominately, with you, the voter. It is imperative Congress not bankrupt seniors and those planning on one day becoming seniors.
188
Addendum - My plan is really to defer filing for SS as long as economically possible. I may not make it to 70, perhaps 68. The point there is, SS is, as much as anything can be counted on, a 'guaranteed' amount. Again, the extent to which it is guaranteed is the extent to which people with a vested interest in it's health vote. People who don't vote (even in non-presidential years) don't get to complain about the results.
15
I think withdraw from Social Secuirty as early as you can. If you look at the monthly benefit pre-70, it is smaller, yes, but you are deferring money in the hope of living twice as long afterwards. A bird in the hand really is worth two in the bush. You can start early, still work, not wait. Nobody makes you spend it. The amount I've collected, I've have to had lived until eighty or eighty-five to collect as an increased benefit, and my parents died at eighty-ish, so I'd rather bank it now.
2
Mary, I'm with you - in an unstable political environment, where SS is seen widely as an 'entitlement' (in the pejorative sense) and not the insurance program it really is, I think it's best to get grandfathered in. My guess, not having actually done the math, is that it ends up being the same money - a smaller amount for a longer period of time vs. a larger amount for a shorter period of time. And remember, never bet against a Sicilian when death is on the line.
2
If you are a normal retiree, you're not rich and can't afford to make even one mistake. You should also realize there is a popular philosophy out there that is inimical to your financial well being at our stage in life. They may look like you, but they will consciously or unconsiously be your financial ruination if you give them much power for any length of time as they have proved in the past. We seniors literally can't afford them.
10
I agree with you about the possibility of dire mistakes.
If things go wrong in the early phase of a long retirement, your financial assets might compound from a much lower base than you anticipated. That throws everything off. There might be no way to make up lost ground without unacceptable risk (ie, heavy investment in volatile stock market).
If things go wrong in the early phase of a long retirement, your financial assets might compound from a much lower base than you anticipated. That throws everything off. There might be no way to make up lost ground without unacceptable risk (ie, heavy investment in volatile stock market).
I retired 15 years ago with a modest pension and full medical coverage. I took SS at age 62 and invested the benefits from SS. All of my investments are in IRAs. When I turned 70 I took the RMD from my IRA, which was about 4.5%. Almost all of my investments are in stocks, primarily AAPL. My annual dividends are in excess of my combined SS and pension. Even as I take my RMD as cash and do not reinvest, my net worth increases at an average of 30% per year. The past year it was 45%. I am able to give contributions to charities from my IRA tax free, but other withdrawals from my IRA are subject to 35% tax rate. There is no way that I can spend enough to be destitute. I didn't really start investing until my 50's, but I did invest the maximum amount into my IRA, and it has paid off. My wife and I always fly business class and stay at 5 star hotels. Life is sweet.
8
Ok, thanks Bernie...
2
Congratulations on doing so well.
whoop dee doo!
2
The first two years of my retirement I used the 4 percent method that used up a large part of the cash savings that I had. In search for a better interest earning product I ended up putting 50% of my 401k money in single life only annuity. That gives me a 7% cash rate flow every year almost the same amount as the 4 percent method. This method assures me that together with my social security a decent income for the rest of my life. Of course with this system, I pay more taxes compared
to stock gains. The other 50% of my 401k I placed in 10-year deferred annuity, earning 3.6% annually. Instead of buying life insurance, this is money that I can leave my relatives. Some of the cash I have are in a 5-year deferred annuity earning
3.6 % annually and the rest at B of A earning peanuts. I am a pretty conservative guy and I am sure this method is not for everyone.
to stock gains. The other 50% of my 401k I placed in 10-year deferred annuity, earning 3.6% annually. Instead of buying life insurance, this is money that I can leave my relatives. Some of the cash I have are in a 5-year deferred annuity earning
3.6 % annually and the rest at B of A earning peanuts. I am a pretty conservative guy and I am sure this method is not for everyone.
2
Why then does the government require investors to withdraw at least 4% each year starting at age 70.5? Doesn't that add to the risk of running out of money in later years? Should that % be re-evaluated and allowed to go lower?
5
Larry, and others, the RMD ensures money that was accumulated tax free eventually is taxed. Roth accounts, those after tax retirement accounts have no RMD. Why taxed? That's so we can have roads and hospitals clean up after natural disasters and a defense dept and pay senators and congresspersons to do nothing.
24
Check out the Schwab RMD calculator, link below. It all depends on the growth rate of the assets in your account. People think the RMD is an evil government clawback, but it's not. It's simply a way of ensuring, or trying to ensure, that 401k and IRA tax deferral goes to create retirement income and not legacies. It's a kind of non-guaranteed life annuity. Ban the RMD and you ban the tax deferral that precedes it. The Australian way of taxing contributions to retirement accounts but not taxing withdrawals might be better... much better in my opinion because Americans don't necessarily save the tax refund that annual tax deferral often gives them. The retirement industry will never let that happen... so I suggest learning to love the RMD.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/un...
http://www.schwab.com/public/schwab/investing/retirement_and_planning/un...
4
You are so right!
Just once, could the NYT run a retirement article for those us who will have a far more realistic $400,000 portfolio or so? I'm saving 15% of my income, but $1 million? Never going to happen.
Not all of us work on Wall Street.
How about some advice for the 99 percent?
Not all of us work on Wall Street.
How about some advice for the 99 percent?
208
These rules can be applied to any size portfolio. So an initial withdrawal rate of 4 percent on a $500k portfolio would generate $20,000, $400k produces $16k, etc.
32
If you consider deferring filing for SS pays 8% per year of deferral and maybe your savings make 4% per year taking more than 4% out of savings to gain 8% is a reasonable trade off. No all of us will be physically and/or cognitively able to work until we are 70. I think raising the retirement age is counterproductive. Allowing people to retire early means there will be more jobs available for the unemployed and younger workers and more opportunity for those younger workers to advance. The main thesis is people have to assume more financial responsibility for their retirement while they are working, drop the SS income cap and raise, at least, employee contributions. The more you contribute into the system the more you get out of it during retirement.
5
I totally agree with Tara. One might not be able to live on $16,000/year as that is a little over $1100/month after taxes but that added to SS at, for the sake of argument, $3,000/month (for 2 people) comes out to $4,100/month. That is doable. It's more doable in the southeast and southwest. Or, take greater than 4% out and defer SS gaining 8% for every year deferred. If you defer for 3 years that $3,000/month turns into about $3,700/month or about $4,700/month as you drew down the $400,000 to live on for 3 yrs. That drawdown to replace SS would be $108,000 of the $400,000. that would cost you about $100/month in interest on your nest egg but you'd gain $700/month in the process.
2
The best advice to younger retirees is NOT to stick to any formula based plan, but to withdraw as little as possible and wait for the monetary policies that instituted the " historically low interest rates" to play out.
Interest rates are not god given but are man made by Central Banks. Right now we have competitive devaluation with the Federal Reserve in the US, the European Central Bank, and the Bank of Japan all operating policies to increase the money supply. The result has been negative real interest rates on government bonds, the classic safe investment for retirees.
When that policy comes to a halt, and it must, rational planning for ones retirement can return.
Interest rates are not god given but are man made by Central Banks. Right now we have competitive devaluation with the Federal Reserve in the US, the European Central Bank, and the Bank of Japan all operating policies to increase the money supply. The result has been negative real interest rates on government bonds, the classic safe investment for retirees.
When that policy comes to a halt, and it must, rational planning for ones retirement can return.
5
"wait for the monetary policies that instituted the " historically low interest rates" to play out."
Not in your lifetime old sport. If the interest rates go up--which they were supposed to do when unemployment reached 6%--the government won't be able to pay off the interest on the money it so happily printed up and sold to Japan (no. 1) and China (2) now in the form of government bonds. The world has us by the short and curlies and so the FED can't raise the rates. So much for smart people. How they have not seen that happening? They didn't care, because the 1% are still making money hand over fist while the rest of us are drowning.
But you know what they say: the meek( or the poor) shall inherit the earth , or whatever is left of it.
Not in your lifetime old sport. If the interest rates go up--which they were supposed to do when unemployment reached 6%--the government won't be able to pay off the interest on the money it so happily printed up and sold to Japan (no. 1) and China (2) now in the form of government bonds. The world has us by the short and curlies and so the FED can't raise the rates. So much for smart people. How they have not seen that happening? They didn't care, because the 1% are still making money hand over fist while the rest of us are drowning.
But you know what they say: the meek( or the poor) shall inherit the earth , or whatever is left of it.
How many people retire on a million dollars? make everyone making over 250,000 dollars pay into Social Security in a graduated status per dollar.
33
that won't happen either because the 1% don't like taxes and they see that as a tax.--not a savings account for the average guy, because they are simply put--above the crowd.
1
Our solution is much easier. We know our expenses, we know how much we get from social security and one small pension, and we withdraw only enough to make up the difference and kept our expense low regardless of the amount of our savings. It is not 4% and further we do not withdraw more when our equity investments have a good year (e.g. 2009 to present) automatically building a cushion for the future. As to interest rates, not very many look at historical data so stop whining. Between 1880 and 1960, the 10 year note interest was rarely above 4%. Only from 1960-2005 has it been above 4%. 4% is pretty much average since the 1700's.
10
Totally agree Tom, that's the right way to do it. The advantage of what I said earlier is by letting SS 'appreciate' 8%/year of deferral, that, plus a small pension means the nest egg is drawn down a few hundred/month, nowhere near approaching the 4%/yr. In this scenario that nest egg could withstand a somewhat higher risk, thus achieving 7%-10% which would nicely fund a European, Hawaiian, or Alaskan vacations ever couple of years while you are still young enough to tolerate the travel.
Tom, you mean the 1970s, right? Interest rates from the 1700s? I don't think so.
At age 68 and still working, having just had my annual financial checkup with my financial advisor, I recognize that even with a million in the 403's and the IRA's, I would have to downsize my life significantly to live on my 4% withdrawal and Social Security. "I Don't Wanna!"
I like my house (high property taxes); I like the freedom to travel; I like not having to worry excessively about my grocery bill. I like to help my kids. Guess what? I'm not retiring.
I like my house (high property taxes); I like the freedom to travel; I like not having to worry excessively about my grocery bill. I like to help my kids. Guess what? I'm not retiring.
13
May I also guess that you don't work with your hands or your back?
53
May I also suggest you don't work with your brains either. As much as we'd all like to think otherwise, a 75 year old is not as 'sharp' or physically fit as a 35 year old.
If you planned correctly you could still do all those things and cap your property taxes.
If you planned correctly you could still do all those things and cap your property taxes.
1
Do you even have any idea what the fees in your 403b plan are? Financial illiteracy is nothing to be proud of.
2
I came up with 3-4% independently when I retired in 2003 and split the difference at 3.5%. Our portfolio started at 50-50 bonds and stock and has grown through the last 12 years leaving me confident it will last at least another 20 years allowing us to leave a small legacy to our son.
2
I think a mistake people make and, to be sure, it is a personal choice, is putting their heirs in front of the line. Yes, it's nice to help the next generation but living in poverty in order to do it isn't a wise trade-off. Your best legacy to your children isn't a check, it is instilling the wisdom to be productive, generous, loving, and a good citizen. If you left them that, you did well as a parent. Money is optional.
7
We've run through all sorts of variations on the calculation. The answer is that if we stay healthy and live frugally, we'll be OK. If one or both of us need long-term care, we'll be out of luck. Should we shell out thousands of dollars per year for long-term care insurance? The sad truth is that we don't trust insurance companies to hold up their end of the bargain.
http://www.nytimes.com/2013/06/08/your-money/fine-print-and-red-tape-in-...
http://www.nytimes.com/2013/06/08/your-money/fine-print-and-red-tape-in-...
50
Skilled nursing care in a nursing home is covered by Medicare and, when that runs out, Medicaid. For those who are able to live alone (ambulatory, not overly senile), there are subsidized senior apartment buildings where your rent is capped at 1/3 of your income and there are limits (but not tiny ones) on the savings etc. that you can hold. For people who are need care but not skilled nursing care, around here (near Pittsburgh) there are personal care homes that generally accept the amount of your Social Security benefit for your food, housing, care, etc. Plus, everyone should be able to count on their children to help, right? I've been through this with my parents, and hope soon to retire, maybe two or three years from now, and go through it myself. The hardest part will be, if it happens that I can't stay in my own home because of the physical demands of it. But I know lots of senior citizens, and none of them are sleeping in urine soaked beds or begging on street corners. Just regular people. My Dad had it hardest because of Alzheimer's, and he couldn't stay at home, but you just do what you have to do with what's available. My Mom never had to leave her home. We managed without long term care insurance; I think it's not essential at all.
This is one of the issues we're grappling with right now. Looks like will be fine in retirement except for that pesky long-term care problem. And we're childless, so there's no safety net there (not that anyone really has that). But, wow, it's expensive (insurance--and long term care as well), and what if you don't need it (none of our parents did). We're considering a hybrid insurance plan--one of those "live quit or die" things. Don't know if that would be enough, but at that point, I guess we just go to Medicaid beds, lined up with all the other indigent victims of the "silver tsunami" and hope we're too out of it to mind. If I can just get a niece or nephew to keep my audio books updated.
By the way, it was Roz Chast's book "Can't we talk about something more PLEASANT?" that got me to start thinking about this more seriously.
By the way, it was Roz Chast's book "Can't we talk about something more PLEASANT?" that got me to start thinking about this more seriously.
My comment hasn't been published (yet?), but why does everyone assume everyone has children? This is not the case. And even if you do, don't assume they are equipped to take care of you should something go really wrong. Just because you don't know anyone sleeping in a urine soaked bed, doesn't mean that doesn't exist. And I don't really care about now anyway--I care about 20 or more years in the future when there will be more super seniors than current nursing home facilities can handle.
2
If you want to retire, you need a steady source of income and a way of paying for health care and housing. That is why Social Security, Medicare and long term care insurance are essential government functions for most retirees. We don't have a LTC program unless you are impoverished for five years or more and then we stick you into Medicaid.
All of these programs are being privatized by the current Republican Congress which means that they will cost more and offer less in the future. Add this to the woefully inadequate retirement savings and you will have a new generation of seniors in wheelchairs rolling up and down the streets at car stops with signs begging for money. I don't think the guns, God and anti-gay voters had that in mind when they handed over the Congress to conservative interests.
All of these programs are being privatized by the current Republican Congress which means that they will cost more and offer less in the future. Add this to the woefully inadequate retirement savings and you will have a new generation of seniors in wheelchairs rolling up and down the streets at car stops with signs begging for money. I don't think the guns, God and anti-gay voters had that in mind when they handed over the Congress to conservative interests.
141
"and you will have a new generation of seniors in wheelchairs rolling up and down the streets at car stops with signs begging for money."
If you came to my town, you would see this NOW.
If you came to my town, you would see this NOW.
The average working household has virtually no retirement savings.
When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income - far below what they will need to maintain their standard of living in retirement.
http://www.nirsonline.org/index.php?option=com_content&task=view&...
4% of zero retirement savings is zero and means surviving on social security, cat food and poverty for most retired Americans.
When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income - far below what they will need to maintain their standard of living in retirement.
http://www.nirsonline.org/index.php?option=com_content&task=view&...
4% of zero retirement savings is zero and means surviving on social security, cat food and poverty for most retired Americans.
52
finally, this is what the TImes should have been writing about, rather than articles on 4% withdrawals on million $ retirement accounts. after all Times, we are not all media moguls are we?
1
If people control themselves enough to set aside 10 cents of every dollar they earn from their teens onward, they need not end up in the situation you describe. Even at VERY low incomes, tucking away that dime is feasible. But god forbid that anyone forego the Wii, the Olive Garden, the tattoo, the three kids by age 25, the Disney claptrap, etc. to save that measly dime on the dollar.
As one who's almost always earned a moderate amount and gritted my teeth for a lot of deferred gratification, in order to end up with a decent nest egg, I don't have much sympathy for the cat food gourmets.
As one who's almost always earned a moderate amount and gritted my teeth for a lot of deferred gratification, in order to end up with a decent nest egg, I don't have much sympathy for the cat food gourmets.
3
Not knowing how long one might live, any rational method will try to save something for the possibility of living longer than expected. The practical question is whether to use a method that tends to be more or less generous in the reserve or surplus it tends to save. The "inflated 4%" rule, and variations of it, tend to leave a larger surplus. Other methods, including those ones update your life expectancy, allow you to spend more but have less left at the end. Historical data on several such options is available here: http://bit.ly/1H0F2J2
3
"Not knowing how long one might live" about 76 years for men, a little longer for women ON AVERAGE. read the obits--you will get a pretty good idea, especially for all those who have wealth and power.
When I was in the army, and we took a break, the sarge would say "smoke'em if you got'em" sage advice.
Now he would say
"spend'em (dollars) if you got'em" cause life is short and there ain't no guarantees.
When I was in the army, and we took a break, the sarge would say "smoke'em if you got'em" sage advice.
Now he would say
"spend'em (dollars) if you got'em" cause life is short and there ain't no guarantees.
'Id say that this whole issue is quite complex and difficult for the average person who isn't financially savvy to figure out. My parents generation has social security and pensions as well as retirement accounts. My generation, younger boomers/Gen X, won't have pensions for the most part and will be highly dependent on savings. Therein lies the rub as while some have had well paying jobs AND socked money away, others either couldn't or wouldn't do so.
I'm personally low-risk tolerant when it comes to investments so even though the low interest rates are severely impacting my ability to save for retirement, I'm too risk-adverse to handle the market. Between my low anticipated SS payment sand meager retirement savings, I'll be living in poverty. I suspect I'll have lots of company.
I would fully anticipate though that given the numbers of Millennials and their often overt hostility to Boomers, they will have little sympathy for us and our money woes. One only has to read the comments in NYT articles to hear that many, if not most Millennials believe that Boomers have spent freely and sucked it all up leaving little for them. So I doubt that as voters, when they are in the majority, they will want to provide assistance to broke Boomers. So we should assume there will be little in the way of government bailouts coming our way. I'm personally saving every bit possible right now, in a futile attempt to make up for lost ground due to single parenthood and low paying jobs.
I'm personally low-risk tolerant when it comes to investments so even though the low interest rates are severely impacting my ability to save for retirement, I'm too risk-adverse to handle the market. Between my low anticipated SS payment sand meager retirement savings, I'll be living in poverty. I suspect I'll have lots of company.
I would fully anticipate though that given the numbers of Millennials and their often overt hostility to Boomers, they will have little sympathy for us and our money woes. One only has to read the comments in NYT articles to hear that many, if not most Millennials believe that Boomers have spent freely and sucked it all up leaving little for them. So I doubt that as voters, when they are in the majority, they will want to provide assistance to broke Boomers. So we should assume there will be little in the way of government bailouts coming our way. I'm personally saving every bit possible right now, in a futile attempt to make up for lost ground due to single parenthood and low paying jobs.
17
@greenie: low cost index funds from one of the investment companies are the best bet because they are not actively managed. Annuities are taxed and the seller gets a yearly commission. LTC has not been proven to work when needed because of it never covers what you think it might and doesn't amount to what you thought it would. The payroll cap should be taken off social security and social security should be in a dedicated fund.
The boomers are the parents and grandparents of the millennials. I've worked with people in their 40's and early 50's who say they don't expect to see SS.
1) with that attitude they won't
2) there is no reason under the sun why they shouldn't expect to see it. If they expect to see it for free, they are dreaming. Remove the contribution income cap and raise the social security, medicare deductions, and protect the SS trust fund from greedy congresspeople. Your vote most definitely counts. If you don't vote, the Koch brothers and Sheldon Adelson will vote for you.
1) with that attitude they won't
2) there is no reason under the sun why they shouldn't expect to see it. If they expect to see it for free, they are dreaming. Remove the contribution income cap and raise the social security, medicare deductions, and protect the SS trust fund from greedy congresspeople. Your vote most definitely counts. If you don't vote, the Koch brothers and Sheldon Adelson will vote for you.
1
In the 80's the Social Security tax was increased for the specific purpose (so it was posited) to provide for the future Boomer draw on Social Security. This is seldom (if ever) mentioned... nor the misuse of the Social Security funds contributed...nor the inequitable proportionate cap.
2
No one can know what retirement can bring but one thing I do know is the financial advisers have been positing outrageous assumptions for years and taking outrageous fees for them. There is no safe place to put you money and there is no guarantee of income. Banks don't need your deposits because they get free money from the fed to manipulate stocks and commodities and buy other banks so they get even bigger and more dangerous.
Unless and until the government starts working for the humans instead of the banks Corproations and the billionaires, retirement will continue to be a crap shoot.
By the way the GOP wants to make Medicare a voucher system soo.....
Unless and until the government starts working for the humans instead of the banks Corproations and the billionaires, retirement will continue to be a crap shoot.
By the way the GOP wants to make Medicare a voucher system soo.....
62
4% is not a bad benchmark but like an Interstate speed limit it doesn't mean you drive at 65 mph (yes I know we all do 70) in all conditions.
4
This seems to be a confusing topic even for the experts--Michael Kitces argues for 4%, Wade Pfau argues for 2.85%. Bill Bengen says it's critical to get it right and says "see a financial adviser." How does one determine whether the financial adviser knows what he or she is doing given that the recognized experts are so far apart? All of this makes a stronger case for un-fancy, low-cost immediate annuities to add some guaranteed lifetime income to Social Security. And it also makes the case for getting the most out of Social Security--delaying to 70 for many, and coordinated strategies for couples.
8
low-cost immediate annuities?
With underlying interest rates of 2% to 3%, along with insurance company profits, there is no such thing as a low cost immediate annuity.
With underlying interest rates of 2% to 3%, along with insurance company profits, there is no such thing as a low cost immediate annuity.
4
Cost is relative, Mookie. Compared to the gambles the Feds permit to be called "fiduciary," Mr. Tomlin's advice is very wise.
Few people outside of our more affluent communities earn enough to salt away this kind of retirement--even those with professional degrees would have a hard time in northern New England. If you are going to publish this, why don't you publish the minimum savings per year necessary to set up such a retirement account? Take into consideration that the market has lost over 20% in some years of Republican administration and not recovered for several years thereafter. Several years is a long time to go without food, transportation, heat or insurance. Tell us which of those we should omit from our indulgences while we wait for the market to recover. We need Social Security, and we should be willing to go to war with the Republican Party to preserve it.
73
Truly. These kinds or articles are useless. Shame on the NYT for perpetuating the $1,000,000 basis as a rule rather than pie-in-the-sky starting threshold for the arithmetic.
12
Speaking of war, lets be thankful to the Democrats who sent me my draft notice for Vietnam in 1965. Due to Agent Orange, I now have free VA health care, including long term care (which may not be too long in my case) as well as $3068.90, tax free, sent to me each month. Unless the government stops taxing and borrowing, I will never run out of money!
2
How much you need to save depends on your average rate of return. To get to $1 million dollars at 65 (if you start saving at 25):
around $300 per month with an annual return of 8%
around $400 per month with an annual return of 7%
around $500 per month with an annual return of 6%
If you are fortunate enough to work for a company with a contribution of say 6%, these savings rates are quite doable.
Trouble comes if you don't get help from your employer, or if you start saving late, or if you tap into your savings for something other than retirement, or if you just don't save at all.
around $300 per month with an annual return of 8%
around $400 per month with an annual return of 7%
around $500 per month with an annual return of 6%
If you are fortunate enough to work for a company with a contribution of say 6%, these savings rates are quite doable.
Trouble comes if you don't get help from your employer, or if you start saving late, or if you tap into your savings for something other than retirement, or if you just don't save at all.
1
I don't trust any of this. Yes, I'm currently in retirement, and have been fo 10 years. What scares me is the time when I can no longer live on my own and have to enter a nursing home. As a result, I'm still saving, and hoping that I don't have a long time requiring assisted care or nursing home care.
13
"when I can no longer live on my own and have to enter a nursing home."
Here is what I am going to when I hit that spot in life--I'm going to talk a very long walk in a very hard and cold snow storm.
Here is what I am going to when I hit that spot in life--I'm going to talk a very long walk in a very hard and cold snow storm.
1
Retirees who accept only very low cd or savings account rates have the idea that these accounts are very safe but that is not really correct. If there is runaway inflation these accounts will be losing in terms of real dollars. Unwillingness to accept the relatively small risks of bonds or bond funds may be hurting their long term finances. The world is full of risk. It may not be a great idea to try to completely avoid it.
9
There was an article a few days ago but hedgefund money--that managers are literally laughing all the to the bank, but the investors took a real drubbing. Thanks, I'll stick to .000000000025% from my current bank.
I might even get into the aluminum can and bottle recycling business--I see that it can earn millions if one doesn't mind travel between arizona and calif.
I might even get into the aluminum can and bottle recycling business--I see that it can earn millions if one doesn't mind travel between arizona and calif.
Retirement planning boils down to two issues: (a) expected case (e.g., average life span) and (b) other outcomes (e.g., shorter and longer life spans). The 4% rule, as described in the article, addresses a potential 30 year retirement (e.g., 65 to 95), which is near the far end of the curve for expected life spans. The expected case, based on average life spans, is closer to 15 years (e.g., 65 to 80).
This is where the shift from defined benefit pensions to 401(K)s becomes interesting. On an expected case basis, 401(Ks) when done right (start young, invest frequently, get a good company match) are a good replacement for defined pensions. However, retirement planners recommend planning for a much longer retirement (worst case from an investment perspective, best case from a longevity perspective), which makes defined pensions more attractive because they automatically increase in value as your life expectancy increases. This is the wedge between how liabilities are accounted for by companies and governments (on an expected case basis) and how they are viewed by recipients (risk adverse retirees prefer the defined benefit pension).
People with 401(k)s can replicate the defined benefit pension by purchasing an annuity, but as this article suggests, the outcome is highly dependent on the interest environment at the time. The best planning can be undone by relatively low real (above inflation) interest rates at the time of retirement.
This is where the shift from defined benefit pensions to 401(K)s becomes interesting. On an expected case basis, 401(Ks) when done right (start young, invest frequently, get a good company match) are a good replacement for defined pensions. However, retirement planners recommend planning for a much longer retirement (worst case from an investment perspective, best case from a longevity perspective), which makes defined pensions more attractive because they automatically increase in value as your life expectancy increases. This is the wedge between how liabilities are accounted for by companies and governments (on an expected case basis) and how they are viewed by recipients (risk adverse retirees prefer the defined benefit pension).
People with 401(k)s can replicate the defined benefit pension by purchasing an annuity, but as this article suggests, the outcome is highly dependent on the interest environment at the time. The best planning can be undone by relatively low real (above inflation) interest rates at the time of retirement.
2
Who the H has $1million in extra income over a lifetime?
13
The readers imagined by the Times
5
You have heard of compound interest, right?
Saving $1000 per month, with an average 5% return over 30 years yields a final balance of $840,000. Not quite a million, but much greater than the $360,000 in "extra income" invested.
Saving $1000 per month, with an average 5% return over 30 years yields a final balance of $840,000. Not quite a million, but much greater than the $360,000 in "extra income" invested.
1
you are forgetting about investment returns which help create the million.
1
The 4% withdrawal rate is a useful guideline as the author notes. Investors should note however that when financial advisers manage their money for them, the actual withdrawal can be higher and subsequently put them at risk.
If a financial manager charges a client 1% to 2% of the assets under management, then the client is actually withdrawing not 4%, but 5% to 6% of their assets annually. This rate of withdrawal is virtually certain to drain the assets before the ~30 year period unless the adviser's portfolio delivers substantially better returns than the market.
Numerous studies, beginning with Random Walk, have demonstrated that the market outperforms better than 70% of the fund managers in any given year and all but the Buffets of the world over 20 year time frames. So having a financial adviser who charges a % of funds under management is probably going to lead to more risk to the average investor during retirement ... unless the investor has zero discipline.
One other point that should also serve as a wake-up call. When you pay an adviser 1% or 2% of your assets and you withdraw 4%, you are basically paying that adviser 25% or 50% of what you are paying yourself.
If a financial manager charges a client 1% to 2% of the assets under management, then the client is actually withdrawing not 4%, but 5% to 6% of their assets annually. This rate of withdrawal is virtually certain to drain the assets before the ~30 year period unless the adviser's portfolio delivers substantially better returns than the market.
Numerous studies, beginning with Random Walk, have demonstrated that the market outperforms better than 70% of the fund managers in any given year and all but the Buffets of the world over 20 year time frames. So having a financial adviser who charges a % of funds under management is probably going to lead to more risk to the average investor during retirement ... unless the investor has zero discipline.
One other point that should also serve as a wake-up call. When you pay an adviser 1% or 2% of your assets and you withdraw 4%, you are basically paying that adviser 25% or 50% of what you are paying yourself.
15
One thing that irks me is that articles of this type, which appear with increasing frequency, often don't mention the required minimum distributions mandated by the IRS. I was glad to see that Angelino commented on this. If the bulk of your 'portfolio', AKA retirement savinigs, is in a 401k or traditional IRA, then beginning somewhere between age 70 and 71, you are required to withdraw a certain amount annually -- I think it begins at around 3.85% and increases from there, but I'm not sure of this. Presumably a financial advisor has it all at her fingertips, but I don't understand why the people who write these articles seem to think it doesn't need mentioning. You don't just "decide", independent of tax considerations, how much you think it is safe to withdraw.
13
Just because you have to withdraw the money doesn't mean you have to spend it. You can still spend 4% and save the rest.
1
Just because you are required to withdraw the money, doesn't mean you have to spend it. You could save the difference in a taxable account.
1
The mandatory withdrawal is based on your remaining life expectancy, so if based on actuarial tables you are expected to live another 25 years you have to take out 1/25 or 4%. Your remaining life expectancy decreases every year resulting in having to take out an increasing amount.
But the amount upon which that withdrawal is calculated is set at the end of the previous year. So if you have to take out 4% and the portfolio increases by 5% during the year, you can wind up with more in the portfolio after the distribution.
But the amount upon which that withdrawal is calculated is set at the end of the previous year. So if you have to take out 4% and the portfolio increases by 5% during the year, you can wind up with more in the portfolio after the distribution.
I would think the four percent rule applies to certain investments only.
I have investment properties paid in full. Even budgeting for upkeep, renovations, and taxes I could take much more than the four percent of rent, maintaining my full equity.
I have investment properties paid in full. Even budgeting for upkeep, renovations, and taxes I could take much more than the four percent of rent, maintaining my full equity.
1
@ Larry
The writer here is really talking about individuals with the classic equity/bond investment mix. In your case you're really employed in running a RE business to which regular P&L rules apply and yes if you're good at it as I'm sure you are it can be much more rewarding than passive investing.
The writer here is really talking about individuals with the classic equity/bond investment mix. In your case you're really employed in running a RE business to which regular P&L rules apply and yes if you're good at it as I'm sure you are it can be much more rewarding than passive investing.
3
The retirement age now is 66 not 65--where else did he go wrong? Ah...saving $1,000,000 is a nonsensical concept for most Americans.
8
This is why the state pension system of western and Northern European democracies are for most people the better way to go.
31
A useful article, but please note that full retirement age under Social Security is now 66, not 65.
5
For most people, their biggest asset is Social Security. To maximize that, keep working until 70. The maximum benefit at that age for a husband and wife combined is about $58K.
If you can't live on that tax free income you have a spending problem.
If you can't live on that tax free income you have a spending problem.
1
SS income is not tax-free, unless the income falls below a very low threshold.
15
you also need a lifetime of maximum earning which doesn't happen. the average wage in the usa is something like 26K
The old 'social security' was children, grandchildren, aunts, uncles, relatives, friends....
You had informal obligations to them, they had informal obligations to you...
But now, in the name of 'freedom', we've all been forced into the water to swim with the sharks...
Indeed, these are great times to be a shark...
Isn't 'modernity' great???
You had informal obligations to them, they had informal obligations to you...
But now, in the name of 'freedom', we've all been forced into the water to swim with the sharks...
Indeed, these are great times to be a shark...
Isn't 'modernity' great???
10
American are just plain stupid, financially that is. Without being able to lock in a return on their investment portfolio there is no way to lock in the withdrawal rate. Simple math, beyond the comprehension of the most Americans.
5
You sound like a lovely human being.
3
Sit around doing nothing for 30 years? Are you joking? My step-father was born in 1932, he is still running his news and tobacco shop every day of the week.
6
Good for him that he doesn't have go dig ditches or weld structural steel in all weather conditions.
1
The problem with many articles on retirement financing is that they assume the average retiree has a million dollar plus nest egg.
10
One million is an easy number for illustration, not an average. You can scale the number up or down to fit your individual circumstances.
1
4% rule is too simplistic a model. That doesn't account for the tax burden, the cost of healthcare and other emergency situations when the person no longer has earned income and at the mercy of prevailing economic forces and governmental programs. That is why a lot of people are reluctant to retire without the safety net of not just the salary but also the associated benefits when employers increasingly shift the burden to the government programs
1
We've managed to amass a decent retirement portfolio by living below our means and it is a habit I doubt will change much in our retirement. The worrisome things include health and COLA variations that are less than predictable.
I appreciate the changes my parents saw in their lifetimes much more now. We don't have children, so should something happen to either of us, we may not have the support our parents had. Places and details change more rapidly now, so for the better, some less so.
In some ways, retirement has to be looked at as a great new adventure. It is one where the end game is definitive.
I appreciate the changes my parents saw in their lifetimes much more now. We don't have children, so should something happen to either of us, we may not have the support our parents had. Places and details change more rapidly now, so for the better, some less so.
In some ways, retirement has to be looked at as a great new adventure. It is one where the end game is definitive.
2
Of course, running out of money at 95 is not something most of us will ever do. The demographics are such that a woman/man in reasonably good health at age 65 has 20 years (not 30) left. I do know that we have to plan for 'just in case,' but it seems we should also think about the quality of life along the way.
Not mentioned, but important, is lifestyle. How much one 'needs' for a safe and comfortable retirement is partly a matter of habits and expectations. In a world of ever expanding electronic gizmos and paid services, it might be worthwhile for the younger adults and middle aged adults to adjust their thinking about what is necessity and what is luxury.
Not mentioned, but important, is lifestyle. How much one 'needs' for a safe and comfortable retirement is partly a matter of habits and expectations. In a world of ever expanding electronic gizmos and paid services, it might be worthwhile for the younger adults and middle aged adults to adjust their thinking about what is necessity and what is luxury.
10
Play with the Excel format retirement portfolio bucket model that can be downloaded from the website below. You have to make a couple of changes because it was created by an Indian guy who used lakhs (100,000 multiple).
Creates normally distributed randomized returns for up to 5 "buckets" based on the long term returns and volatility you input. It also has a spending model, other income streams and inflation variables. You decide year by year how to allocate funds to support spending.
May not exactly replicate the cyclical market but gives you an idea how to dynamically manage a portfolio to support spending, protect principle and harvest gains from more volatile asset classes. Way better than other Monte Carlo models I have tried.
Make sure to download the latest "debugged" version.
http://freefincal.com/the-retirement-bucket-strategy-simulator/
Creates normally distributed randomized returns for up to 5 "buckets" based on the long term returns and volatility you input. It also has a spending model, other income streams and inflation variables. You decide year by year how to allocate funds to support spending.
May not exactly replicate the cyclical market but gives you an idea how to dynamically manage a portfolio to support spending, protect principle and harvest gains from more volatile asset classes. Way better than other Monte Carlo models I have tried.
Make sure to download the latest "debugged" version.
http://freefincal.com/the-retirement-bucket-strategy-simulator/
2
One of the best strategies is to move out of New York State.
24
And, don't live in Vermont, where they tax pensions, social security and money withdrawn from IRA's. Taxes are exorbitant; no breaks for the elderly. Weather cold; not good for arthritis. And they want you to pay for schools for kids who leave to find jobs elsewhere. Nobody goes to VT for the quality of life, anymore, because you cannot afford it and you cannot go outside for some of the year.
4
For many, if you withdraw anything in the earlier years, you will be screwed. For the average underprepared retiree, 4% will not work if you plan to live more than ten years (possibly less than ten).
1
If your portfolio earns a 4% annual return, and you take out 4% a year, you will always have the initial value of your portfolio. This is why I do not understand this rule: Why is it any more complicated than that?
12
If you start with 1M, you're saying just take out 40K each year... but eventually inflation will eat up the purchasing power of 40K and you'll need to withdraw more. If you want to preserve your capital, your returns must be better than your withdraw rate so you can increase your withdraw amount each year by the rate of inflation.
I am actually pursuing this strategy in my early retirement years. In fact, my returns so far have been significantly higher than my spending rate so I'm still increasing my net worth even after retiring.
I am actually pursuing this strategy in my early retirement years. In fact, my returns so far have been significantly higher than my spending rate so I'm still increasing my net worth even after retiring.
Hi Bruce,
The complication is that your portfolio won't earn 4% every year - what if it earned 0% last year, or -15%, or +30%? The variation in the returns can be a big influence on your chances of success.
Also, many retirees will find 4% to be less than they would like to spend.
The complication is that your portfolio won't earn 4% every year - what if it earned 0% last year, or -15%, or +30%? The variation in the returns can be a big influence on your chances of success.
Also, many retirees will find 4% to be less than they would like to spend.
2
This is exactly my question. Does the 4% rule assume that you are already spending whatever returns the portfolio is generating in interest and dividends?
The 4% rule is irrelevant if you can't even save 4% of your existing income during your working years.
31
What a dreadful situation we've created for those nearing retirement. If you've managed to save money but are not wealthy enough to lose any of it in another market collapse, there is no sensible place to put those savings. In the past good quality corporate bonds were a great way to earn income. Or CDs. But there really is no reasonably safe place to park your money for a modest income. This isn't a good way to run an economy.
52
Todd
I'm still not sure who is running things, but it would seem to have little importance.
If I'm not mistaken, those who purchased Apple stock before 1999 are receiving an annual dividend that is greater than the total amount they had invested. So, a single $10,000 purchase of Apple stock 17 or more years ago will be returning $10,000 to the investor during 2015.
Returning to who is running things, the above appears to be true whether the purchase was made in 1985 (Reagan) or 1998 (Clinton), or even in 2002 (Bush) only 13 years ago. Some lucky stock buyers might have done all three. Evidently, a little faith goes a long way.
I'm still not sure who is running things, but it would seem to have little importance.
If I'm not mistaken, those who purchased Apple stock before 1999 are receiving an annual dividend that is greater than the total amount they had invested. So, a single $10,000 purchase of Apple stock 17 or more years ago will be returning $10,000 to the investor during 2015.
Returning to who is running things, the above appears to be true whether the purchase was made in 1985 (Reagan) or 1998 (Clinton), or even in 2002 (Bush) only 13 years ago. Some lucky stock buyers might have done all three. Evidently, a little faith goes a long way.
People shouldn't have to worry about retirement. Once, family helped; especially with a shared farm or property all could live on. Then, the employer or union helped, and employed financial staff to maintain a private pension system. Now, no one helps and for the first time in history we're all supposed to be our own personal financial managers. And do a good job, or pay the price.
It's not what the average human is good at, or supposed to be. It's not a core skill. "Private investment for retirement" is a sign of how debased, barbaric, and atomized our society has become. It won't stand, or we won't.
I'm spending the last few of my working years building on a defined-benefit pension out of civil service to supplement SS. Those pensions are no guarantee, you say? Better than the ones you have.
It's not what the average human is good at, or supposed to be. It's not a core skill. "Private investment for retirement" is a sign of how debased, barbaric, and atomized our society has become. It won't stand, or we won't.
I'm spending the last few of my working years building on a defined-benefit pension out of civil service to supplement SS. Those pensions are no guarantee, you say? Better than the ones you have.
45
The inevitable consequence of corporate capitalism will be class war. American capitalism sees civilization as the Serengeti, with every citizen a predator.
As offensive as it is that this government/culture/polity believes we all can and should be able to be our own personal financial managers in an age of endless options and in the face of potential catastrophe, it is even more offensive that the same government/culture/polity believes we all can and should be able to become competent nurses in our own homes at the drop of a hat. Catheter insertion and withdrawl, intravenous insertion and withdrawl, injections, administration of medication, wound care, bathing/dressing/mobility assistance--just some of the tasks routinely expected of family members these days. Spending time worrying about asset and income management is a luxury compared to the heartbreaking stress that this sort of stuff causes.
I'm completely confused. I thought that in a 401k or 403b or some tax-deferred retirement account like that, one had to withdraw a rquired amount each year. My plan (TIAA-CREF) calculates this required minimum distribution (RMD) based on the hope that I will live to 95 (I am presently 73.), an it is essentially a linear regression. This is recalculated each year on my balance on december 31. To live well, I take a bit more out each year, but not much. Is it possible to have another formula? What gives?
7
Can we be realistic and talk about the majority of people who will start with substantially less than $1 million?
32
That's probably a topic for a different article.
Set up a spreadsheet for an annuity that will pay your so much a year until your expected death (good luck with that - I use life expectancy tables)
=IF(G23=0;" - ";PMT(G22-G17;G23;-G34;;G18)) where
G22 = estimated annual return rate on funds
G17 = estimated inflation rate
G23 = estimated number of years until death
G34 = starting principal
G18 = 1
PMT is a function that is included in most spreadsheet programs. such as PMT(Rate;NPER;PV;FV;Type)
Formula returns the periodic payment of annuity, based on regular payments and a fixed periodic interest rate.
I divide the resulting number by 12 and that is how much I withdraw each month.
Every six months I put in the current principal, my current rate of return on investments (I assume I will continue to get that rate), an inflation estimate, and my life expectancy based on how I feel that day and what the life expectancy tables tell me into the spread sheet and adjust my withdrawals accordingly.
My goal is to spend my last dollar on my last day. Beats paying a financial advisor or an insurance company to do the same thing for you.
=IF(G23=0;" - ";PMT(G22-G17;G23;-G34;;G18)) where
G22 = estimated annual return rate on funds
G17 = estimated inflation rate
G23 = estimated number of years until death
G34 = starting principal
G18 = 1
PMT is a function that is included in most spreadsheet programs. such as PMT(Rate;NPER;PV;FV;Type)
Formula returns the periodic payment of annuity, based on regular payments and a fixed periodic interest rate.
I divide the resulting number by 12 and that is how much I withdraw each month.
Every six months I put in the current principal, my current rate of return on investments (I assume I will continue to get that rate), an inflation estimate, and my life expectancy based on how I feel that day and what the life expectancy tables tell me into the spread sheet and adjust my withdrawals accordingly.
My goal is to spend my last dollar on my last day. Beats paying a financial advisor or an insurance company to do the same thing for you.
5
Any fool can make a spreadsheet. (Me, for example.). But the devil lurks in these three cells:
G22 = estimated annual return rate on funds
G17 = estimated inflation rate
G23 = estimated number of years until death
Please note the word "estimated," which is a fancy word for "guessed."
Get any those wrong - or, heaven forfend, all three - and all the number-crunching in the world won't help.
G22 = estimated annual return rate on funds
G17 = estimated inflation rate
G23 = estimated number of years until death
Please note the word "estimated," which is a fancy word for "guessed."
Get any those wrong - or, heaven forfend, all three - and all the number-crunching in the world won't help.
3
Life expectancy is the point where 50% of the people are still alive.
If you had 1,000 65 year olds with a 20 year life expectancy, there would still be 500 alive at age 85.
So planning your retirement funds to last through your life expectancy means that you will run out of money 50% of the time -- a terrible planning strategy.
At a minimum, add 5 years to your life expectancy if single, 10 years if married.
If you had 1,000 65 year olds with a 20 year life expectancy, there would still be 500 alive at age 85.
So planning your retirement funds to last through your life expectancy means that you will run out of money 50% of the time -- a terrible planning strategy.
At a minimum, add 5 years to your life expectancy if single, 10 years if married.
1
Your calculation does not consider a "Black Swan" event and the potential impact on your financial assets or your lifestyle. For example, even if fully insured, a person could have a family member (under insured adult child) suddenly in need of a large sum of cash for a medical expense. Consider another possibility, "What if the grid went down for two weeks or even a month?" Cash would be king, but only if you had it your hand and not in a "Morgan Stanley" account. Most do not consider these "rare" downsides, but they can be devastating in impact and retrospectively predictable.
I've always been lucky and I sure was this time. I worked my whole career under a union contract. Now that I'm retired I don't worry about 4% or outliving my money or anything like that. On the first of every month I get a nice pension check from the union that my employer paid into for thirty-plus years. So even though I wasn't a saver, adding that to my Social Security makes a nice income. If the U.S. is ever going to solve the inequality issue, a big part of it will be people being able to form a union. Everybody talks about the 1950's being great economically and that's when unions were strong. It's too bad that the Republicans have to insult unions with their constant references to "union bosses" as if there's something wrong with helping people make a good living. The Republicans have always against unions and even more so now. They want workers to be impoverished peons.
458
Yes, that's what the Republicans want, but so do the Democrats. They're both Big Business parties, the Demolicans and the Republicrats. The Demolicans are adept at co-opting and decapitating unions and at being the graveyard of progressive social movements. Working people do not have a party in this country.
We need a big increase in the grass-roots, bottom-up organizing for new, re-invigorated unions that are independent of the billionaires' parties. In general, we need an upsurge in labor, which is basically everybody who lives off wages.
We need a big increase in the grass-roots, bottom-up organizing for new, re-invigorated unions that are independent of the billionaires' parties. In general, we need an upsurge in labor, which is basically everybody who lives off wages.
1
"They want workers to be impoverished peons"..
That is a ridiculous assertion. The republicans represent, by and large, management. Management want the most productivity for the least cost.
As for what republicans want, they want what the people they perceive will be voting for them want. It took, what, a week to totally reject George W Bush's plan to privatize social security. Actually it was likely the republican's plan but, regardless, the republicans on Social Security quickly made it know that would never ever happen if their congressman wanted to keep his/her job.
That is a ridiculous assertion. The republicans represent, by and large, management. Management want the most productivity for the least cost.
As for what republicans want, they want what the people they perceive will be voting for them want. It took, what, a week to totally reject George W Bush's plan to privatize social security. Actually it was likely the republican's plan but, regardless, the republicans on Social Security quickly made it know that would never ever happen if their congressman wanted to keep his/her job.
The 1950s was a post-war economy -- meaning all of Europe had to be rebuilt!! and Ike put in the interstate highway system which led to the creation of suburbs. By the 1960s American jobs started moving overseas-- shoes, cars-- the first wave of "buy American." By the '80's steel mills were gone... but we had great small computers -- the envy of every country in the world.
I hate these simplistic analyses --- and as someone pointed out to me the other day -- where does our real innovation lay -- why weapons and warfare of course .. Think of the planes/ missiles being built that the armed forces seem to not want -- or so I believe I heard....
With a way overpriced stock market and decreasing median income what is really happening here? (I remember when rent was supposed to be 1/4 of income -- now we're up to 1/3. Good thing food is still cheap; medical and dental stuff seems to rise way above inflation just like higher education.
I hate these simplistic analyses --- and as someone pointed out to me the other day -- where does our real innovation lay -- why weapons and warfare of course .. Think of the planes/ missiles being built that the armed forces seem to not want -- or so I believe I heard....
With a way overpriced stock market and decreasing median income what is really happening here? (I remember when rent was supposed to be 1/4 of income -- now we're up to 1/3. Good thing food is still cheap; medical and dental stuff seems to rise way above inflation just like higher education.
We need to return to a demand-side economy if the pie is to increase enough to pay for anyone's retirement (excluding the top 1%). Demand-side really means capitalism.
When the wealthy hold all the wealth the return on the wealth is at its lowest point and the wealth will just fade away. Retirement requires good investment which the wealthy don't seem to have talent to accomplish.
4% is just a bad rumor for our current direction. Putting cash in a mattress would be better than watching the market deteriorate and you end up spending 4% of nothing.
Your retirement savings are paying for yachts and large houses, leaving you nothing to leave your children.
Good luck.
When the wealthy hold all the wealth the return on the wealth is at its lowest point and the wealth will just fade away. Retirement requires good investment which the wealthy don't seem to have talent to accomplish.
4% is just a bad rumor for our current direction. Putting cash in a mattress would be better than watching the market deteriorate and you end up spending 4% of nothing.
Your retirement savings are paying for yachts and large houses, leaving you nothing to leave your children.
Good luck.
12
You're saying "good luck" to the rest of us, I suppose. So you aren't building a retirement account that you intend to live off?
If you are an engineer, you really need to return to your empirical leanings:
The S&P is up over 90% in the past 5 years
It is up over 81% in the past decade.
That is surely higher than inflation - which is essentially zero.
Believing that someone else is going to pay for your retirement or fund your lifestyle is the mug's game.
The S&P is up over 90% in the past 5 years
It is up over 81% in the past decade.
That is surely higher than inflation - which is essentially zero.
Believing that someone else is going to pay for your retirement or fund your lifestyle is the mug's game.
Charitable foundations are required to pay out 5% per year, in addition to fees and expenses, yet, I don't hear of them running out of money. In my opinion, 4% is conservative. However, when money is poorly managed, it really doesn't matter, as the funds will tend to run out rather quickly.
2
Hi Andy,
Very large and sophisticated endowments such as those run by Yale and Harvard suffered terribly during the Global Financial Crisis and their universities were forced to slash operational budgets and capital spending as a result. Harvard even issued debt to help,keep the endowment functioning.
Also, these endowments continue to raise funds over time, whereas retirees will have very limited additional income sources once they have left the paid work force.
Very large and sophisticated endowments such as those run by Yale and Harvard suffered terribly during the Global Financial Crisis and their universities were forced to slash operational budgets and capital spending as a result. Harvard even issued debt to help,keep the endowment functioning.
Also, these endowments continue to raise funds over time, whereas retirees will have very limited additional income sources once they have left the paid work force.
1
That's because charitable foundations have contributions made to the trust each year which obviously is not the case for retirees,
1
"Charitable foundations are required to pay out 5% per year, in addition to fees and expenses, yet, I don't hear of them running out of money."
Two words: survivor bias. And here are two more: Cooper Union.
http://www.nytimes.com/2013/05/11/business/how-cooper-unions-endowment-f...
Nonprofits can and do spend down their endowments. In fact, that's a focus of New York State's attorney right now - to make sure they don't.
http://www.nytimes.com/2015/04/10/business/cooper-union-inquiry-puts-non...
Two words: survivor bias. And here are two more: Cooper Union.
http://www.nytimes.com/2013/05/11/business/how-cooper-unions-endowment-f...
Nonprofits can and do spend down their endowments. In fact, that's a focus of New York State's attorney right now - to make sure they don't.
http://www.nytimes.com/2015/04/10/business/cooper-union-inquiry-puts-non...
I don't think most 65-y.o.'s couple should have a "portfolio" of a cool million. They should have one or more annuities, issued by low-cost, or better, non-profit companies (DYODD) that are the most highly rated. Many of us face a longevity risk that is formidable--living into our 90's or, gasp, beyond and running out of money. At least annuitize enough of your pot that you cover your essential expenses. To have some inflation protection, buy a deferred annuity that kicks in after 10 or 15 years. The danger is that we could have another bust when everything tanks--stocks, bonds, interest rates, gold, fools' gold, real estate, but that the recovery is deferred a decade or more. Simple demographics suggest sooner rather than later there will be more sellers than buyers, especially with more seniors retiring and needing income. Kaboom, goes the market, and your annual withdrawal of 4% or whatever could be drawing on only 40, 50, or 60% of what it once was. You can buy bells and whistles with an annuity--joint annuity, return of principal less disbursements to your estate should both of you die, etc. And don't forget, states insure against insurance companies' bankruptcy (again, DYODD). Brokers don't like annuities, especially DIY ones, because they are buy and forget and brokers want to churn til you die. But why do you want to try to game the market in your golden years and worry about your principal and percentage? Don't you have better things to do in retirement?
11
What if the insurance carrier goes bust? It nearly happened with one of the biggest, AIG.
I could see taking the risk and putting a small percent of one's portfolio into a deferred annuity that kicks in after 80 years of age. To hand over anything more seems way too risky to me.
I could see taking the risk and putting a small percent of one's portfolio into a deferred annuity that kicks in after 80 years of age. To hand over anything more seems way too risky to me.
4
Annuities, particularly deferred ones, can help insure against running out of money; however, only if the life insurance company issuing the annuity survives. Best to spread assets among 2-4 companies to help mitigate this risk (and make sure the insurance company owns no captive re-insurers - a cancer on the industry that will create future tears for our country). The problem with current annuities is the yields are low because of government-sponsored financial repression. Although I think the 4% rule will likely work for most people without great longevity genes and good health habits, most retirees will not have enough assets to make 4% amount to much more than a couple of lattes per day.
2
Please name some "non profit" insurance companies where you can buy annuities. There are none.
2
Unfortunately the IRS has copied his number and forces account holders to withdraw four percent of their 401k investment, or cash account, and that is a total nonsense. When interest rates are high, you may not need any, when they are fixed to help the big banks as throughout the Obama presidency they have been you need ten even fifteen percent. Lucky this man did not have a chance to design an aircraft otherwise it would have crashed in sunny weather and possibly stay aloft when the high humidity persisted.
A thought.
While the IRS may force you to withdraw funds, which is intended to generate taxes on money not previously taxed, they don't actually force you to spend it.
So while the RMD may require distribution, a retiree could reinvest the funds in other instruments.
While the IRS may force you to withdraw funds, which is intended to generate taxes on money not previously taxed, they don't actually force you to spend it.
So while the RMD may require distribution, a retiree could reinvest the funds in other instruments.
3
Lucky you don't have to insult the man in person. Whatever did people like you do for kicks before the Internet?
And no, it's not "a total nonsense" for the IRS to insist that funds saved in a 401(k) be returned to the taxable income stream in a predictable fashion. Those funds aren't tax-free, only tax-deferred.
Nor is it required that a retiree must spend the the entire distribution in the form of purchases. Saving and investing aren't just for working-age people, are they?
And no, it's not "a total nonsense" for the IRS to insist that funds saved in a 401(k) be returned to the taxable income stream in a predictable fashion. Those funds aren't tax-free, only tax-deferred.
Nor is it required that a retiree must spend the the entire distribution in the form of purchases. Saving and investing aren't just for working-age people, are they?
1
Actually, no. The IRS requires Required Minimum Distributions (RMDs) from a 401(k) based on your actuarial longevity. This might be less than 4%, or it might be more, but it's different for every person. Cash accounts are not included in this, nor are Roth IRAs. Only 401(k)s are subject to RMDs.
And check your calendar: the bank bailouts took place during the last year of the Bush presidency. That was in 2008.
And check your calendar: the bank bailouts took place during the last year of the Bush presidency. That was in 2008.
4
I think there is a logical problem here. Without getting fancy, the lucky couple who retire at age 65 with $1,000,000 in stocks and bonds do not have to do anything to have the money last for 30 years. If they sell their bonds and stocks, stick the money in a mattress (so to speak), and simply withdraw $33,333 a year ($1 million divided by 30), it will last 30 years . This is higher than the three alternative mentioned strategies shown in the article. If they invest it in a very conservative portfolio that simply keeps up with inflation, then that withdrawn money will also keep up with inflation. So, if the aim is simply to have the money last 30 years, they don't have to do anything other than take their annual amount. For a couple who retire quite wealthy, there is not a problem in outliving their assets.
However, this is not a realistic solution for most Americans, the vast majority of whom will not have $1 million in assets when they retire. I think I read that the average American couple has about $50,000 in savings (IRA or otherwise). Retiring with that small amount is not going to provide adequate income to supplement Social Security no matter what withdrawal strategy is followed. It's not a strategy problem; it's an asset problem.
However, this is not a realistic solution for most Americans, the vast majority of whom will not have $1 million in assets when they retire. I think I read that the average American couple has about $50,000 in savings (IRA or otherwise). Retiring with that small amount is not going to provide adequate income to supplement Social Security no matter what withdrawal strategy is followed. It's not a strategy problem; it's an asset problem.
341
The mattress retirement method does not work because it does not take into account inflation. $33K will cover living expenses in year 1 but by year 30, it will not be enough as its purchasing power would be significantly diluted.
8
Ahem.
If you sell $1 million in stocks and bonds amassed over a working life, you will owe tax on the capital gain.
Let's say half that amount is long-term capital gain, and let's say the tax rate is 20%. Now you'll have $900,000 to stuff in the mattress, which divided by 30 is $30,000 even per year.
And then there's inflation. The models mentioned in the article account for it. Does this one?
If you sell $1 million in stocks and bonds amassed over a working life, you will owe tax on the capital gain.
Let's say half that amount is long-term capital gain, and let's say the tax rate is 20%. Now you'll have $900,000 to stuff in the mattress, which divided by 30 is $30,000 even per year.
And then there's inflation. The models mentioned in the article account for it. Does this one?
5
Which is why we need to expand Social Security and treat the Republican Party as amoral predatory traitors.
11
Why aren't people think about the other side of the equation, i.e., the lifestyle? Rather than making adjustments to the withdrawals why can't we make adjustments to the way we live? Namely, to make the life simpler. We retired a year ago when I was 62 and my wife was 59. Was making a nice six figure salary teaching two days a week for just thirty weeks. What we get now is just about 20 percent of what we used to get a month. Life is good and very simple. We still travel, spend cold winters in the tropics where cost of living is low and contrary to what you maybe thinking, we don't do that with a million in nest eggs.
Oh, by the way, we decided to tap into social security early because with all the nice numbers about the life expectancy, there is always that 18-wheeler or the drunk driver heading your way.
Life is too short and too precious to be a slave to a financial planner's formula!
Oh, by the way, we decided to tap into social security early because with all the nice numbers about the life expectancy, there is always that 18-wheeler or the drunk driver heading your way.
Life is too short and too precious to be a slave to a financial planner's formula!
39
And since there's no way to verify any of those claims, why not make them big?
Exactly! Your lifestyle is a choice, not an idol to be worshiped. Sort your expenses into three streams: absolute necessities such as taxes and food; pleasant luxuries such as travel, paid entertainment, and charity and tips; and emergencies. Design your pension to fund necessities, your Social Security to fund pleasant luxuries, and your portfolio to fund emergencies, and you'll always be in charge and solvent.
Most of the people I know in academia don't make six-figure salaries, and grant- funded research incomes don't provide pensions.
1
A very interesting historical test of a similar scenario was recently posted by financial planner Paul Merriman. He studied someone who retired in 1970 with a $1M portfolio, needing to withdraw $50,000 (5%) per year to make ends meet. He studied the actual period of time from 1970 to 2013, which included 3 major bear markets (1974-75, 2000-2002, and 2007-2009). This period also included some very high inflation early on. The upshot was that a portfolio invested i 60% bonds and 40% stocks held up for the 43 years with room to spare, despite a very rough beginning and some choppy waters.
Here's a link to the article: http://www.marketwatch.com/story/how-to-make-your-nest-egg-last-over-40-...
Here's a link to the article: http://www.marketwatch.com/story/how-to-make-your-nest-egg-last-over-40-...
6
Hi Ken,
Perhaps the success of this portfolio was somewhat due to the fantastic returns achieved over m ost of this 43 year period? If only current retirees could be so lucky, we would not have a retirement "crisis" in this country.
Perhaps the success of this portfolio was somewhat due to the fantastic returns achieved over m ost of this 43 year period? If only current retirees could be so lucky, we would not have a retirement "crisis" in this country.
The 4% rule is based on past practice of almost universal retirement at 65. Many currently do not retire until much later. Retiring at 75, instead of 65, for example, means planning for approximately 20 years of withdrawal, instead of 30. Substantially higher rates of withdrawal are then reasonable, to say nothing of benefiting from ten more years of asset accumulation to withdraw from.
12
I hear a lot about leaving money for the children but I am not sure if “leaving” is the best strategy. If we are looking at a long retirement, it may be better to give money to children now because if we wait to the end, at that point our children may reach their retirement age or be around that. I believe it is much more important to give them the resources at the start then at the end because the start determines the whole life of our children and grandchildren.
Furthermore, in the long haul, many of us even if still alive, may lose the understanding of what money is and what it is for so it will not matter if one has $100 000 in savings or in debt. Actually, the latter case will be even better because it means we lived our lives to the fullest and who cares about the debt at that moment.
Furthermore, in the long haul, many of us even if still alive, may lose the understanding of what money is and what it is for so it will not matter if one has $100 000 in savings or in debt. Actually, the latter case will be even better because it means we lived our lives to the fullest and who cares about the debt at that moment.
21
but that can have the unintended consequence of making them not want to do anything with their lives.
4
Or, it could encourage them to risk a little more, aim a little higher, try a little harder. Letting people suffer on the off-chance that it might be good for them seems sadistic. Instead, use your judgment, and use your money to help them learn to use theirs.
2
so, you want other taxpayers to fund your assisted living, nursing home care, medical bills?
1
Why not remove some of the risk by rolling over a portion into an annuity? It seems weird for everyone to separately need to save for the longest possible lifespan, when annuities allow some sharing of actuarial "risks"
16
The issuing company could go under...I know some states back that up, but not completely...
Instead of saving for retirement, we save for investment opportunities and will never stop until we are both dead. Retirement planning by young people is for losers. Look to invest, build and grow rather than clipping your wings and settling down for a life of idleness.
8
Just about the time hard working "Baby Boomers" finally make it to retirement after playing by the rules for forty five years you would think there would be some decent investments without gambling in the market. Interest rates at record lows for the last seven years and no change in sight. One would almost think this whole thing was planned by the 1%.
98
Some retirees thought they would have a decent company pension in retirement to supplement their social security. Then those pensions were wiped out or drastically reduced due to unchecked underfunding by corporate executives. Now we've learned that local and state governments have also underfunded their pension plans.
1
No one has to "gamble" on the market. When you purchase something like a mutual fund of domestic companies, you own small pieces of General Electric, Apple, Google, Intel, IBM, Coca-Cola, and hundreds of other companies. All of these companies are professionally managed and if they do well, you do well too. Of course there is an element of risk - some companies may do poorly and lose value. But refusing to invest any money at all because of this risk is basically making a cynical bet against the overall success of all of these companies. There is no need to be so pessimistic - higher returns await those who are willing to take some risk.
1
No way to win. ..., the poor stay poor; the rich stay rich. Just think about how well off you would be if you made the interest that the bank makes.
A question for me is whether even the best annuities are actually better or worse in terms of both risk and return than a very well diversified portfolio of index funds. With even the best annuity, one must wager that a single insurance company will not default at some point in one's life. With a well-chosen group of index funds (and an appropriate amount of bonds for shorter term needs), one need only wager that capitalism and functional markets as a whole will not fail during one's lifetime. Over a thirty year term, I like the latter bet.
But then, considerations such as those, as others have noted, are way beyond the concerns of most folks. They will arrive at retirement age burdened by some combination of bad luck and bad decision-making, or maybe most of all, non-existent education when it comes to financial matters. And they will have to find work of some sort until they can't stand up, and then they'll be living primarily off various forms of government aid.
Amazingly, most of the people I've known who fall in those categories vote for people who would like to privatize Social Security and reduce all forms of government assisted health care. Sheep don't know when they're on their way to the slaughterhouse, I guess.
But then, considerations such as those, as others have noted, are way beyond the concerns of most folks. They will arrive at retirement age burdened by some combination of bad luck and bad decision-making, or maybe most of all, non-existent education when it comes to financial matters. And they will have to find work of some sort until they can't stand up, and then they'll be living primarily off various forms of government aid.
Amazingly, most of the people I've known who fall in those categories vote for people who would like to privatize Social Security and reduce all forms of government assisted health care. Sheep don't know when they're on their way to the slaughterhouse, I guess.
197
So people should not vote for what is RIGHT -- morally correct, proper and good for the whole nation -- but instead only vote for "what gives me the most government freebies".
2
Privatizing Social security and reducing government assisted health care would not be good for the whole nation -- and would not be morally correct. We want our taxes to provide health care for all our citizens -- as it is in every industrialized nation on earth.
6
Isn't that what the one-percenters like the Koch Brothers do? Vote with their money (by financing politicians) for what makes them the most money (e.g. government hand-outs). Welfare for the rich and free-enterprise for everyone else!
10
What a shame that there are few employers anymore who offer a guaranteed pension to their employees. That, Social Security, an IRA and a lot of equity in ones home, are cause for a comfortable retirement, not rich, but comfortable.
17
The 4% problem is something only a small portion of American will need to worry about. For the great majority, the real issue is stretching social security to the end of the month. I'd love to see more writing on that. It might scare enough people into doing better with their savings.
235
I really don't worry about what other people are doing. I worked hard, saved, invested, and lived frugally so I could retire in comfort. If others failed to have done this, what can I do about it? Vote for people who will confiscate what I have worked so hard and so long for and give it to those 'less fortunate'? People should be responsible for their own lives. If they have made a lifetime of bad choices, excuse me for saying that they should live with those choices without them dragging me down to their self-induced economic state. If you feel differently you give them your retirement money.
2
I completely agree, but I'd love to see more writing not to scare people into doing better with their savings, but to have a more realistic article that applies to much more than a few of us 'average joes' who don't ever get to have a a million dollar portfolio.
If you are risk averse, as my parents are and have been, then these last 6 years you are making close to 1 percent on your money if you are lucky.
So the only way to survive is spend your savings. Which they have been. Now aged mid seventies there is a chance they will hopefully live another 10 years. But on what? They have spent down their savings by about half a million to live a middle class lifestyle in California. But what if this low rate environment keeps up. Social security? Food stamps? Come and live in our garage?
They have property tax to pay on their downsized house, they bought 7 years ago, very high medical expenses and insurance which runs 1800 a month.
How is this for the American Dream? Work really hard. Be fiscally prudent. Retire with a million in the bank and 7 years later have spent half of it?
I am sure that Janet Yellen and Ben Bernanke dont face this problem.
So the only way to survive is spend your savings. Which they have been. Now aged mid seventies there is a chance they will hopefully live another 10 years. But on what? They have spent down their savings by about half a million to live a middle class lifestyle in California. But what if this low rate environment keeps up. Social security? Food stamps? Come and live in our garage?
They have property tax to pay on their downsized house, they bought 7 years ago, very high medical expenses and insurance which runs 1800 a month.
How is this for the American Dream? Work really hard. Be fiscally prudent. Retire with a million in the bank and 7 years later have spent half of it?
I am sure that Janet Yellen and Ben Bernanke dont face this problem.
118
Tell them to move. Almost anywhere else in the country (excepting the East Coast), they can live for a fraction as much money and still have a very good life. California prices are impoverishing them. That is very foolish.
(Note: there is no real problem if they spend every cent, excepting you will not get a fat inheritance.)
(Note: there is no real problem if they spend every cent, excepting you will not get a fat inheritance.)
9
I always wanted to retire in Montana, but I had no idea how much cheaper it was.
6
How did they spend half a million dollars in 7 years? Medical and insurance is $22K per year according to your figures. If their house is worth $1M, at 1% they're paying $10K in property tax per year. That still leaves an excess of $30K per year that they spent, over $2,500 per month. They can lease a Honda Accord for $300 per month or less. They're old enough for Medicare. Where are they spending all that money?
5
A generation ago most Americans retired with a pension provided by their company. They never needed to know the difference between a stock and a bond, only how to deposit their monthly pension check.
The shift from a pension system to a self-directed make your own decisions 401k system is something nobody really talks about; but it will have an enormously negative impact on this country in the years to come.
The shift from a pension system to a self-directed make your own decisions 401k system is something nobody really talks about; but it will have an enormously negative impact on this country in the years to come.
341
@ Lucian Roosevelt (good name, by the way): Amen! Not only that, but bank interest rates which used to be pretty decent are now in the toilet; the direct result has been to drive savers into the more risky stock market, whether we wanted it or not. If I had a suspicious mind, I might think that Wall Street engineered low interest rates so it could make pots more profit from other people's money.
32
People who worked for big companies did have defined-benefit pension plans, but are you sure they were the majority? And do you remember why the ERISA laws were passed? Many of those pension plans were drastically under-funded, and they simply disappeared when the companies went under. The same happened with promises of lifetime health care.
401k plans are harder to manage, but at least the money will be there.
401k plans are harder to manage, but at least the money will be there.
4
Not necessarily. 401ks are still tied to the stock/bond markets so SOME money MIGHT be there, but because 401ks are not backed by the FDIC, there are still NO guarantees.
1
There is another uncertainty for those with 7 or 8-figure nest eggs to manage: Many populist politicians are looking to punish the people who worked hard and saved diligently, or invested wisely, in the name of "fairness".
In the offing are even more draconian means testing of Medicare than we have now, and additional taxes on Social Security income for higher-income retirees. Also possible: Taxation of Roth withdrawals, even though that money was already taxed.
But never mind. We're the generation that was "born to be wild". We can handle this! But given that Steppenwolfalso said, "We can climb so high I never wanna die", perhaps a 30-year payout is insufficient.
In the offing are even more draconian means testing of Medicare than we have now, and additional taxes on Social Security income for higher-income retirees. Also possible: Taxation of Roth withdrawals, even though that money was already taxed.
But never mind. We're the generation that was "born to be wild". We can handle this! But given that Steppenwolfalso said, "We can climb so high I never wanna die", perhaps a 30-year payout is insufficient.
15
Dumping spare change into an IRA is not ‘saving’. it is investing. Nobody - NOBODY - prepares adequately for retirement by ‘ saving.’ Diligently or otherwise.
Another one of the great talking head scams perpetrated on America’s fools.
Another one of the great talking head scams perpetrated on America’s fools.
6
Cry me a river! What a hardship to manage an 8 figure retirement. Imagine if your capital gains are taxed as high as the chump working as a greeter at WM - mon dieu!
Reality is many of those on the bottom work just as hard as on the top. With a helluva lot more stress. But those many on the bottom just happen to have tinted skins, didn't have Trust Funds, nor parents with 6-7-8 figure incomes to help smooth the way to "success".
I am one of those immigrants who "made it" and do have to "worry" about an 8 figure retirement, but I'd never, EVER, have the audacity to complain about the taxes I pay vs the benefits this country has given me.
Reality is many of those on the bottom work just as hard as on the top. With a helluva lot more stress. But those many on the bottom just happen to have tinted skins, didn't have Trust Funds, nor parents with 6-7-8 figure incomes to help smooth the way to "success".
I am one of those immigrants who "made it" and do have to "worry" about an 8 figure retirement, but I'd never, EVER, have the audacity to complain about the taxes I pay vs the benefits this country has given me.
66
Thank you. The selfish greed of America's nouveau riche will probably instigate a class war that will destroy the country, but not if enough people think as you do.
Monte Carlo and other complex financial modelling (especially if it involves unlikely-to-repeat historical data) are mainly marketing tools of the financial industry, and are entirely unnecessary here.
Simply maintain a flexible 3-4% withdrawal rate (that is, 3-4% of your nest egg value at retirement, adjusted each year for inflation), taking a bit less when returns are low, and a bit more when the stock market roars ahead. A 60/40 or 50/50 stock/bond split is fine.
At age 75-80, if still in good health, fixed immediate annuities can guarantee lifetime income at high withdrawal rate equivalents.
To make all this work, however, you’ll need to keep your investment fees in the 0.1% range. That means using mainly Vanguard Total Market Index funds (CDs for your bond allocation are fine too), and spending as little as possible on “advice” from the “professionals”. A 6 or 7 figure, 1-4 fund Vanguard portfolio should take less than an hour per year to manage. I know mine does.
Robert Bradley
Author, Investing In Four Hours
Simply maintain a flexible 3-4% withdrawal rate (that is, 3-4% of your nest egg value at retirement, adjusted each year for inflation), taking a bit less when returns are low, and a bit more when the stock market roars ahead. A 60/40 or 50/50 stock/bond split is fine.
At age 75-80, if still in good health, fixed immediate annuities can guarantee lifetime income at high withdrawal rate equivalents.
To make all this work, however, you’ll need to keep your investment fees in the 0.1% range. That means using mainly Vanguard Total Market Index funds (CDs for your bond allocation are fine too), and spending as little as possible on “advice” from the “professionals”. A 6 or 7 figure, 1-4 fund Vanguard portfolio should take less than an hour per year to manage. I know mine does.
Robert Bradley
Author, Investing In Four Hours
61
The problem I discovered with using the "monte-carlo models" in 401k calculators is that they don't specify how money is taken out of the portfolio of assets. The link to [Guyton, 2004] in this column does explain (page 2) how his model does it, and it is worth reading.
It should be integrated into your strategy for rebalancing your portfolio. It's not just a question of optimizing return. You do have to sell something, and there can be substantial tax consequences. Vanguard's white paper on their VCMM simulation model points out you can expect a 48% variation in the rate at which you can withdraw money, year to year.
I would find it hard to put my 401K on "autopilot" looking at that variability.
It should be integrated into your strategy for rebalancing your portfolio. It's not just a question of optimizing return. You do have to sell something, and there can be substantial tax consequences. Vanguard's white paper on their VCMM simulation model points out you can expect a 48% variation in the rate at which you can withdraw money, year to year.
I would find it hard to put my 401K on "autopilot" looking at that variability.
Actually - modern portfolio theory says that your 60/40 split is a fool's game.
That is the trouble with rules of thumb - we learn them 25 years ago and never re-visit them
The current thinking is low beta - dividend players with an international allocation.
That is the trouble with rules of thumb - we learn them 25 years ago and never re-visit them
The current thinking is low beta - dividend players with an international allocation.
And what is with not touching those savings in times when the pension is adequate for a nice lifestyle? We go day to day, not really skimping but not pigging out either, and our savings are pretty much what they were 7 years ago when we retired. RMDs have been put back into after tax CD's and we still have reserves if an expensive emergency crops up.
5
Wow! You know people who have pensions?
The model proposed by Prof Laurence Kotlikoff at Boston University takes into account that spending is not uniform in retirement. His models do "smoothing" of withdrawls over short periods of time, and calculate the impact on long term asset preservation.
The models use a technique known as "dynamic programming" (used in engineering) in addition to monte-carlo simulation of market returns to update the spending plan every year.
Early in retirement you may still have a mortgage so your spending may decline in later years. In later years medical costs will increase. It helps to see into the financial future as much as you can.
The models use a technique known as "dynamic programming" (used in engineering) in addition to monte-carlo simulation of market returns to update the spending plan every year.
Early in retirement you may still have a mortgage so your spending may decline in later years. In later years medical costs will increase. It helps to see into the financial future as much as you can.
31
ESPlanner is Kotlikoff's software. I highly recommend it after nine years of use. Far superior to the rules of thumb discussed in the article.
Pay off the bloody mortgage as quick as you can. Just do it. Don't buy another pair of cute shoes, consider eating out your biggest luxury, cancel the stupid gym membership, and ask yourselves can you get by on one car?
1
Thank you. I need to look at this.
As a person who has been retired for over 25 years I have some experience.
Get a good person (not a friend) to handle your financials.
Discuss with this person what you want, if they do not do as you have asked them, get a new one.
It they are not (at least) tracking the market in returns, get a new one.
Aare you a person who wants to live in what you consider a comfortable (but not better than when you were working) lifestyle (investing any left over), or do you wish to spend every dollar you can and hope you will still have money to last the rest of your life?
For those of you who have IRA's where you have required minimum distributions there is no rule which says you have to spend the entire distribution, when possible move some of it into another account which (hopefully) will generate more income.
If you follow the above you may surprise yourself, and not worry about the 4 or 4. or 5 percent rule.
Get a good person (not a friend) to handle your financials.
Discuss with this person what you want, if they do not do as you have asked them, get a new one.
It they are not (at least) tracking the market in returns, get a new one.
Aare you a person who wants to live in what you consider a comfortable (but not better than when you were working) lifestyle (investing any left over), or do you wish to spend every dollar you can and hope you will still have money to last the rest of your life?
For those of you who have IRA's where you have required minimum distributions there is no rule which says you have to spend the entire distribution, when possible move some of it into another account which (hopefully) will generate more income.
If you follow the above you may surprise yourself, and not worry about the 4 or 4. or 5 percent rule.
19
Turns out another really simple strategy works really well: find your longevity at the Social Security calculator for life expectance. Add six. Divide your portfolios value by that number. The result is what you can afford to spend. Historically, it works: http://bit.ly/1H0F2J2
7
Thanks for this link to your website. It's very informative and helpful.
1
I wonder how many couples who've managed to save $1m by age 65 will be willing to live on around $30k per year?
150
I think it means $30.000 not including pensions and Social Security.
4
Assuming they worked regularly to achieve that savings, they also have nontrivial Social Security income.
Since Social Security is assured no matter how the economy moves, it also permits one to be a bit riskier with the personal investments.
Since Social Security is assured no matter how the economy moves, it also permits one to be a bit riskier with the personal investments.
8
"Social Security is assured no matter how the economy moves"
For now it is. Not for long, if the privatizers have their way - virtually all Republicans aided and abetted by assorted centrist Democrats, and the Third Way and No Labels crowd. Their stance is based on the lie that it will go broke unless there are drastic cuts. We never hear a rebuttal in the media. Well, here's one:
Social Security Works!: Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All
by Nancy Altman & Eric Kingson
The New Press (January 21, 2015)
And there's also Bernie Sanders' candidacy to force the issue into the media.
For now it is. Not for long, if the privatizers have their way - virtually all Republicans aided and abetted by assorted centrist Democrats, and the Third Way and No Labels crowd. Their stance is based on the lie that it will go broke unless there are drastic cuts. We never hear a rebuttal in the media. Well, here's one:
Social Security Works!: Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All
by Nancy Altman & Eric Kingson
The New Press (January 21, 2015)
And there's also Bernie Sanders' candidacy to force the issue into the media.
38
I think so much depends on stability in housing and the amount of health coverage you have. Having no mortgage, owning their cars and having no other loan/credit debt made it so much easier for my parents to plan and spend consistently. It also helped that my mother took care of my father as opposed to hiring a full time nurse after his heart attack.
9
It is amazing there has been no mention of the simplest way of creating reliable investment income in retirement: Purchasing a fixed annuity with inflation step up, for the life of the retiree and 75% for the surviving spouse. In effect, you are purchasing more social security. Not for all of the retirement nest egg, but for a significant portion, maybe one third, depending on the particular case. This approach reduces anxiety and leaves less to the risks of any of the 4% (plus or minus) withdrawal strategies.
14
my general impression is that the annuity benefits most those who are selling it for a percentage.
36
Many people want to leave their estate to their children, so annuities are not an option.
4
Annuities aren't for all of your savings, but surely they are a part of the overall package? Maybe a third of the retirement savings, to ensure there is always something to supplement social security?
The best thing anyone can do to prepare for retirement is to learn how to live on less. Chronic overspending has the average American in mountains of debt, mostly on stuff marketers have convinced us will make us happy. If you get out of that cycle in your 30's and 40's, you can learn to live on less, save more and retire earlier than you think (and be happier in the process.) Ask yourself what you really need.
543
Agreed, but it is ridiculous to blame marketers for poor financial choices, just as it is for poor eating habits, as marketers have been around from the beginning of time.
1
I entirely agree. I retired in my early fifties with a paid off mortgage and a pension that was 40% of my final year salary. I have spent the ensuing fifteen years enjoying the same standard of living I had before retirement, plus extensive foreign travel - budget level, I don't stay in the hotels the NYT reviews!
The first few years I supplemented my pension with some part-time contract work. The next few years I lived solely on my (non-COLAed) pension. Then I supplemented it with a half to one percent draw from my portfolio (would not have been needed if I had stopped traveling) aside from the year I renovated my house, when it was 3%. I'm now drawing SS on my ex-husband's account, and will switch to mine at 70, at which point I could replace my pension, if necessary, with a less than 3% draw on my investments.
This would not have been possible if I had been spending all my salary, never mind if I had gone into debt. I am always annoyed with the oft-repeated retirement "advice" that you need 80% of your income to retire. No! What you need is 100% of your expenditure. (Of course, I would have been in trouble if inflation had taken off - I would have had to take SS earlier and stop traveling.)
The first few years I supplemented my pension with some part-time contract work. The next few years I lived solely on my (non-COLAed) pension. Then I supplemented it with a half to one percent draw from my portfolio (would not have been needed if I had stopped traveling) aside from the year I renovated my house, when it was 3%. I'm now drawing SS on my ex-husband's account, and will switch to mine at 70, at which point I could replace my pension, if necessary, with a less than 3% draw on my investments.
This would not have been possible if I had been spending all my salary, never mind if I had gone into debt. I am always annoyed with the oft-repeated retirement "advice" that you need 80% of your income to retire. No! What you need is 100% of your expenditure. (Of course, I would have been in trouble if inflation had taken off - I would have had to take SS earlier and stop traveling.)
Budgeting is wise advice, but none of us can predict what medical costs we might incur. Plenty of expensive things crop up for many older folks, regardless of insurance.
The most frugal retiree hit with significant healthcare bills will struggle.
Meanwhile, my mom's late-in-life beau walked two miles to work, into his 80s. His old Army uniform fit, and he had all his teeth, organs, and joints. Never hospitalized.
Go figure - or guess. We'd all like to stay fit and vital but...hard to budget for the unknown.
The most frugal retiree hit with significant healthcare bills will struggle.
Meanwhile, my mom's late-in-life beau walked two miles to work, into his 80s. His old Army uniform fit, and he had all his teeth, organs, and joints. Never hospitalized.
Go figure - or guess. We'd all like to stay fit and vital but...hard to budget for the unknown.
This is fine unless Medicare and Social Insecurity drastically change due to wealth evaluation per individual.
11
But what about taxes? For me, like most going into retirement (I suspect), nearly all my assets are in pre-tax accounts. If I withdraw 4% of pre-tax assets, that's (very) roughly 3% I actually get to spend. I never see this discussed. What I *need* ultimately is money in my pocket. What fraction of my PRE-TAX funds can I withdraw sustainably?
36
DRS,
Inflation or returns from bonds or the stock market care nothing about the tax rate. Therefor the 4% rule applies to before tax withdrawals. What you have left after taxes is what you live on.
Inflation or returns from bonds or the stock market care nothing about the tax rate. Therefor the 4% rule applies to before tax withdrawals. What you have left after taxes is what you live on.
2
'Assumptions: A 65-year-old couple begins with a $1 million portfolio ...'
Ah, I guess I am not in your crowd. No wonder you run ads for $5000 watches.
Ah, I guess I am not in your crowd. No wonder you run ads for $5000 watches.
375
Even though the example is based on $1 million, the same results can be extrapolated to much smaller portfolios.
40
Well certainly, but that wasn't really his point was it?
2
If you think the watch ads are bad, check out the "What you get for..." articles in the Real Estate section.
25
Today you can hire Vanguard to assist you forever for 0.30% of your invested assets there.
One fly in the ointment always left out of these articles is taxes. Taxes are the greatest risk to your retirement income.
My father in his retirement paid a bundle last year because his Morgan Stanley broker did a lot of trades, causing short term capital gains taxes.
He did save over $10,000 in tax by moving out of New York state.
It is easy to grow your wealth with mutual funds but it takes time.
Vanguard has a fund that is designed to pay out 4% without depleting the principal.
Full disclosure: I'm a millionaire who started in 1982 with $5,000 and I have just kept adding to it gradually.
One fly in the ointment always left out of these articles is taxes. Taxes are the greatest risk to your retirement income.
My father in his retirement paid a bundle last year because his Morgan Stanley broker did a lot of trades, causing short term capital gains taxes.
He did save over $10,000 in tax by moving out of New York state.
It is easy to grow your wealth with mutual funds but it takes time.
Vanguard has a fund that is designed to pay out 4% without depleting the principal.
Full disclosure: I'm a millionaire who started in 1982 with $5,000 and I have just kept adding to it gradually.
19
A million or two isn't what it used to be -- especially in San Francisco ;-).
I doubt that all that many older folks with a million or two in assets in California feel especially secure -- unless they also have a pension and good affordable health insurance. A million out here does _not_ guarantee peace of mind, or anything else.
I doubt that all that many older folks with a million or two in assets in California feel especially secure -- unless they also have a pension and good affordable health insurance. A million out here does _not_ guarantee peace of mind, or anything else.
3
"Vanguard has a fund that is designed to pay out 4% without depleting the principal."
Vanguard merged three of their managed payout funds into one because managed payout funds DON'T WORK.
Do you really believe that, in an article talking about how a 4% spend down, including principal, might be too aggressive that Vanguard has a solution allowing the same 4% spend down without touching principal?
Vanguard merged three of their managed payout funds into one because managed payout funds DON'T WORK.
Do you really believe that, in an article talking about how a 4% spend down, including principal, might be too aggressive that Vanguard has a solution allowing the same 4% spend down without touching principal?
5
Yes but retired people often don NEED to live in high cost markets. Doing so is a luxury.
1
I know the 4% rule -- from Jane Austen. In her novels, people valued inheritances according to the amount they could live on if they withdrew capital at this rate. 4 or 5 percent was the general estimate. From Pride and Prejudice, when Mr Bennet found that his disreputable new son-in-law has asked for 100 pounds a year during Mr Bennet's life and 1000 pounds inheritance from Mrs Bennet's estate: "no man in his senses would marry Lydia on so slight a temptation as one hundred a year during my life, and fifty after I am gone.''
Based on my reading of Austen, I've always assumed that I should have enough to retire on to live on 4 or 5 percent of capital. Good to know this was confirmed a couple decades ago... even if it's being questioned again now.
Based on my reading of Austen, I've always assumed that I should have enough to retire on to live on 4 or 5 percent of capital. Good to know this was confirmed a couple decades ago... even if it's being questioned again now.
159
I am granting you an honorary NYtimes pick selection. This is great - at once humorous and enlightening!
26
I bought longevity insurance. That way, if I live long, a new substantial income stream kicks in old age (85). I can spend money based on living to 85, and then if I live longer, it won't matter that I depleted my nest egg. Another thing I did was to put one third of the nest egg into guaranteed annual withdrawal plans. These funds are invested in the stock and bond markets, but with an insurance rider that guarantees a certain lifetime annual income from them for my wife and myself even if the balance goes to zero, provided I withdraw only the permitted amount annually (around 4- 10% depending on the details of the plan -- I have several with diverse terms). The guaranteed amount goes up if the portfolio goes up to a new high water mark but does not go down if the portfolio goes down. The other two thirds is invested more conventionally, but with a high proportion of REIT preferred stocks, which pay 5 to 7 percent dividends. Another thing we are doing is deferring social security to age 70 in to maximize it. If I die early, I will regret having done this from the after life. If I live long, I will appreciate having done this from this life. So I think it's a good strategy. Social security is a unique asset. Where else do you get a risk-free, inflation adjusted, lifetime income? I want to enjoy life and not be worried about the market. That's why I chose these alternate strategies.
51
Longevity insurance can be a good alternative for some people. In case anyone is wondering what that is, here are some other articles on the topic:
http://nyti.ms/1EVYtzb
http://nyti.ms/1P6Xtjt
http://nyti.ms/1EVYtzb
http://nyti.ms/1P6Xtjt
16
In light of the most recent financial crisis anyone basing their financial well-being on annuities or guaranteed withdrawal plans had better hope the firms behind these funds are "too big to fail". If not, it may be cat food on stale crackers for the last decades of life.
3
Jim, if you die early you will not regret it from the after life (wink wink), your wife will still benefit. For the sake of marital bliss, make sure your wife knows you did it all for her ;) All kidding aside, this post was very helpful; I was not aware REITs could or would distribute healthy dividends over time. Granted this is a "non professional" post but certainly helpful. Thanks.
3
People who knock this rule seem to find it insulting that a general rule can be applied to such a complicated landscape. Many retirees are looking for a rule of thumb. Savvy investors know there is alway the potential for a fat tailed event that will blow all rules to smithereens. A formula that worked for over eight decades has some merit. There's an old expression "An accountant is someone who would rather be exactly wrong than generally right." The people that knock the 4% rule seem to proud of how exactly wrong they can be.
12
One problem not mentioned in the article is skyrocketing old age costs. Not necessarily medical care as such . . . just the incredible price of assisted living facilities, which in the Bay Area can approach $10,000 per month.
149
Unless you are VERY wealthy, going into Assisted Living will very quickly consume your entire estate -- your savings, the cash value of your home, everything. It's worse if you need a home health aide ($500 A DAY!) or a nursing home ($10K to $15K A MONTH).
Many people do not realize this, and usually enter AL during a health emergency -- before thinking the total cost through. It is worse today in an environment where interest rates are 1% (instead of a historic 3%-7% or more). After inflation, you are losing money just living. Assisted Living homes accelerate this to the max.
Frankly, I think many people would do just as well if they went on a luxury cruise every single week -- the cost would be about the same as a decent Assisted Living home.
Many people do not realize this, and usually enter AL during a health emergency -- before thinking the total cost through. It is worse today in an environment where interest rates are 1% (instead of a historic 3%-7% or more). After inflation, you are losing money just living. Assisted Living homes accelerate this to the max.
Frankly, I think many people would do just as well if they went on a luxury cruise every single week -- the cost would be about the same as a decent Assisted Living home.
12
Same in the NY metro area for anywhere you'd actually want to live. Most don't realize that assisted living and (non Medicaid) nursing home stays are 100% out of pocket expenses. Long Term Care insurance is a completely separate animal and most don't have it. This stuff will bleed you dry if you're unprepared.
4
Good lord. My mother's nursing home care in NYC was $13,000 a month for a shared room in the late 90's. (Hey, I'm in Fairfax too!) Luckily, at that time, AARP provided really good insurance. Those days are long gone.
No one seems to factor in the required minimum distribution--a major factor for many investors.
27
You have to take the required minimum distribution, but you don't have to spend it all (assuming it exceeds the amount you need to live on). However, you do have to factor the taxes on the RMD into your budget.
6
The RMD becomes taxable income for the year it's disbursed, but you're not required to spend all of it. Any excess can be prudently invested.
4
The so-called 4 percent rule is not that different from the IRS Required Minimum Distribution (RMD) that increases from 3.65% per year of qualified retirement savings at age 70 to 5.35% at age 80.
I could never understand the logic behind the advice for allocating of the bond fraction of the portfolio (in %) equal to the retiree's age (in years), it sounds black magic.
Perhaps the old adage of the assets more or less equally split between bonds, equities, real estate, and cash, including gold, still holds. The big problems arise when the price or income decline in one of the asset classes lasts longer than one can take. Then ... ???
I could never understand the logic behind the advice for allocating of the bond fraction of the portfolio (in %) equal to the retiree's age (in years), it sounds black magic.
Perhaps the old adage of the assets more or less equally split between bonds, equities, real estate, and cash, including gold, still holds. The big problems arise when the price or income decline in one of the asset classes lasts longer than one can take. Then ... ???
3
Instead of trying to make sure the nest egg does not run out in 30 years, a more sensible goal is probably to have a regular income stream for the rest of one's life. That is what annuities are for. Even though the total dollar amounts paid out by the insurance companies that offer annuities may not be as much as a smart invester would probably be able to earn in interest, the trade off in terms of security (where a definite amount of money is guarangeed every month for the rest of one's life) seems to be worth it.
pay out "expected" interest earnings on annuities are usually below the interest earnings that a smart investor
pay out "expected" interest earnings on annuities are usually below the interest earnings that a smart investor
12
Only problem is trusting an insurance company. I give you my money now and trust that you'll still be here and solvent in thirty years - yeah, right. That's a long time to trust that even an AAA firm won't go bankrupt, or find some way around paying you. I know that annuities are insured, but I don't put anything past these people. I'm not a lawyer. I don't know what loopholes might exist in these setups.
29
Agree. Don't trust insurance companies and don't buy their products.
3
This article in the Times made me completely rethink insurance companies and whether I can trust them to be around to pay off a claim or an annuity: http://www.nytimes.com/2015/04/12/business/dealbook/insurers-bypass-rule...
4
It's highly unlikely one withdrawal rule would work appropriately throughout a retirement of 30 years, given the vagaries of the markets. The rules propounded in this article seem to be basic guidelines at best. A good supplemental approach might be to hire a qualified fee-for-services financial advisor and meet with that person at least once each year to review your withdrawal strategy to determine if it is working - and how the future looks from the vantage point of that particular time and situation. Then adjust accordingly, or leave it the same, depending on your and your advisor's best judgments.
7
As an 65 year old retiree, and only reasonably comfortable, I think that slicing and dicing financial numbers is a waste of time. There are many more uncertainties in life than the ups and downs of the markets or what the rate of inflation will be.
Even though I’m in good physical condition I’m more concerned about health issues than I am about financial issues. Health is the big if, particularly if Bible quoting politicians won’t let me die when I’m ready.
I think global warming and drought is a bigger concern than my bank account. And the 4% rule won’t matter if there’s anarchy in the streets because of income inequality.
I think that in the next 20 or 30 years our government could be altogether dysfunctional, brought on by the influence and corruption of the rich and the religious.
Our world is changing fast and how much money we have in the bank is the least of our problems.
Even though I’m in good physical condition I’m more concerned about health issues than I am about financial issues. Health is the big if, particularly if Bible quoting politicians won’t let me die when I’m ready.
I think global warming and drought is a bigger concern than my bank account. And the 4% rule won’t matter if there’s anarchy in the streets because of income inequality.
I think that in the next 20 or 30 years our government could be altogether dysfunctional, brought on by the influence and corruption of the rich and the religious.
Our world is changing fast and how much money we have in the bank is the least of our problems.
602
Amen.
5
'...how much money we have in the bank is the least of our problems...'
Only a person with money in the bank could think that.
Only a person with money in the bank could think that.
14
I don't feel like I have a lot of money in the bank but I can see the reasoning behind your comment and I appreciate that.
6
How would a inflation adjusted immediate annuity compare to these strategies if a person was not concerned with leaving money to heirs?
13
It appears that the annuity you mentioned beats all these withdrawal strategies.
4
If you don't care about the principal, you could invest a chunk in a preferred stock ETF and earn around 5.8%. Add in some high dividend stock funds (Schwab has a really good low cost one), and MLP fund and you will get about what an annuity would pay. Whatever the market value is when you expire can be left to charities. You don't have to give it to an insurance company.
Also, many charities have products similar to annuities where you donate money and they pay you for the remained of your life and the get the remainder.
Also, many charities have products similar to annuities where you donate money and they pay you for the remained of your life and the get the remainder.
1
I worry about outliving what I have and having to sleep under a bridge when I'm 90. So I've found ways to cut back. I have to say that cat food can be really delicious and comes in lots of flavors. You can serve it hot with rice or cold all by itself. You can even deep fry it.
52
Do you eat food for cats or cats for food?
43
It's worse than you think. Our nation's infrastructure is crumbling due to lack of investment, so the bridge you're forced to sleep under when you're 90 could collapse on you.
248
You could move to NYS at that point and get, as Bloomberg used to complain, a bed in a shelter by just showing up (provided you haven't grown a tail and whiskers).
5
This doesn't take much account of Required Minimum Distributions. These start at about 3.5% at age 70 and rise to 5.3% by age 80. Yes, one can always save the excess (after paying taxes on it), but I think it confuses people. At the point RMDs become higher than the various formulas, even relatively sophisticated people tend to treat their RMD as spendable income.
Why have we created systems that require people to hire financial advisers or become experts themselves in order manage their lives, just at the time that this becomes more cognitively challenging for many? Why do I always have to worry that I am someone's income producing unit?
Why have we created systems that require people to hire financial advisers or become experts themselves in order manage their lives, just at the time that this becomes more cognitively challenging for many? Why do I always have to worry that I am someone's income producing unit?
288
I hate the idea of required minimum distributions. I do not need them, but soon here comes money that I have to pay tax on and put the rest into my post-tax investment account. At the very least, the government should allow me to use some of those dollars to increase my charitable contributions without paying taxes on that. While allowing the current deduction for donation of appreciated stock that is in place now. That encourages people in my position to donate more, while getting a little bit of tax relief. Only the tax collectors win with the current regulations.
1
You're not remembering that you already got your "little bit of tax relief" when you funded the retirement account from which you are now taking your required minimum distributions - not to mention any employer-match funds, on which you also deferred the taxes.
What irks me is having to pay taxes on RMDs at the ordinary income rate, when a lot of the appreciation within my retirement account is due to capital gains. But I remind myself that this is a problem lots of people wish they had, too.
What irks me is having to pay taxes on RMDs at the ordinary income rate, when a lot of the appreciation within my retirement account is due to capital gains. But I remind myself that this is a problem lots of people wish they had, too.
8
Yes. It's scary. I no longer feel like a citizen but more like a profit center.
3
The biggest threat to one's retirement portfolio is market crashes. And an unregulated market seems highly exposed to bubbles and crashes. And the private investor is prone to panic, selling when the market is at or near the bottom. I have friends who dumped their investments around January 2009, were afraid to get back into the market, and totally missed out on the reinflation of markets since March 2009. Their retirements are now permanently impaired. You need to have the guts to ride markets out, no matter how stomach turning that might be.
I gave up on individual stocks and investments. I am mostly invested now in SPDRs and index funds. Mutual fund managers have a hard time beating these index funds these days. So who needs them.
The article says nothing about Social Security. I am delaying applying for the benefit until age 70, and making withdrawals from my IRA as necessary to carry me through to that age.
I gave up on individual stocks and investments. I am mostly invested now in SPDRs and index funds. Mutual fund managers have a hard time beating these index funds these days. So who needs them.
The article says nothing about Social Security. I am delaying applying for the benefit until age 70, and making withdrawals from my IRA as necessary to carry me through to that age.
114
By the time you're withdrawing from your portfolio, if you are dependent on those withdrawals for living expenses you should have greatly reduced your exposure to the stock market.
4
'... Mutual fund managers have a hard time beating these index funds these days...'
Mutual fund managers have never beat the indexes over a period of time. I think the longest any manager beat the S & P 500 was eleven years. I have no idea why so many people buy individual stocks, as if they will be the ones who finally beat the market, and I have no idea why so many people sold in the crash, as the first rule is buy low, sell high.
My investments have been in Vanguard index funds for decades and during the market 'correction' I did exactly what the experts told us to do, which is hold tight and keep buying.
I told my adult children to do the same. I also told them not to look at their accounts until the market recovers, as it inevitably will. When you have a plan based on sound financial advice, why stress about something you have no control over?
And the person whose advice I took, way back when? Warren Buffett, who said that if you want to sleep well at night, invest in diversified index funds.
I took him at his word. Thanks Warren!
Mutual fund managers have never beat the indexes over a period of time. I think the longest any manager beat the S & P 500 was eleven years. I have no idea why so many people buy individual stocks, as if they will be the ones who finally beat the market, and I have no idea why so many people sold in the crash, as the first rule is buy low, sell high.
My investments have been in Vanguard index funds for decades and during the market 'correction' I did exactly what the experts told us to do, which is hold tight and keep buying.
I told my adult children to do the same. I also told them not to look at their accounts until the market recovers, as it inevitably will. When you have a plan based on sound financial advice, why stress about something you have no control over?
And the person whose advice I took, way back when? Warren Buffett, who said that if you want to sleep well at night, invest in diversified index funds.
I took him at his word. Thanks Warren!
24
Very few mutual fund managers can outperform index funds when the higher costs of managed funds is taken into account.
1
When it comes to pre- and post-retirement investments, retirement rules and financial security, the 800 pound gorilla is risk tolerance. Sure, you dial back investment risk as you approach retirement but it can never be set at or near zero. Investment firms offer a probability that your retirement fund will get you a to a specific age but we are a living longer. What if we don't die soon enough?
I suggest that as part of financial planning, we should submit to a psychological eval to determine how well we can deal with life's uncertainties. But maybe you already know that...
I suggest that as part of financial planning, we should submit to a psychological eval to determine how well we can deal with life's uncertainties. But maybe you already know that...
5
Good job that most Americans have about 1 million tucked away for retirement. Oh, wait...maybe its more like 30K.
Oh dear.
Oh dear.
229
Of course this applies to fewer people than it used to, but a good pension with a COLA is worth a million dollars. I'd trade all my retirement accounts for a decent pension in a heartbeat.
8
Agreed. Running this with realistic average savings figures would have been much more informative.
5
And what about taxes: my required quarterly tax payments for 2016 actually EXCEED my minimum required distribution...on which I was actually depending for day-to-day income. There is something perplexing about a system in which all my IRA "savings" are only there to pay off federal and state/local taxes. I'd really appreciate any wisdomon this conundrum.
4
Paying income taxes mean you have income. Instead of complaining, you should feel fortunate. As for property taxes, move someplace cheaper.
70
You've either miscalculated your estimated taxes, or you have other sources of income that you're not mentioning.
22
Get a new accountant.....
1
As someone with graduate level training in advanced statistical methods and experience trading markets dating back to 1982, I weep for the average person who is trying to manage their life savings for retirement purposes. Most people have no business whatsoever becoming involved in the financial markets, as they lack the necessary knowledge and skills.
Moreover, the risks are enormous.
Where should the average retiree put his or her money?
The bank, of course, but bank accounts yield near zero, something totally unprecedented in the history of finance, made possible only by the miracle of modern central banking, i.e., printing money.
Uncharted territory...
Good luck out there because you are going to need lots of it.
Here's what I expect to happen...
Millions will descend from the middle class into poverty.
Disagree?
Fine, you see it differently and that's what makes a market.
Moreover, the risks are enormous.
Where should the average retiree put his or her money?
The bank, of course, but bank accounts yield near zero, something totally unprecedented in the history of finance, made possible only by the miracle of modern central banking, i.e., printing money.
Uncharted territory...
Good luck out there because you are going to need lots of it.
Here's what I expect to happen...
Millions will descend from the middle class into poverty.
Disagree?
Fine, you see it differently and that's what makes a market.
292
It's all a crap shoot. No getting around that. No one knows how long they will live or what the markets will do. I guess it's possible to be overly conservative and in all but the most improbable scenario never run out of money. But then you'd better have someone you really like to leave what will probably be a huge untapped nest egg to.
65
I work in the field of retirement planning. As the article points out, Bill Bengen began working with spreadsheet models to see if he could come up with some basic strategies for retirement spending. Before Began began crunching the numbers, there was a great deal uncertainty and confusion about how to predict the life expectancy for investment portfolios that are being spent down. His model is helpful because it demonstrates the impact of market volatility on the growth/or decline of an investment portfolio when money is being withdrawn. The 4% solution provides a framework for thinking about the best ways to manage money in retirement.
However, I agree that the entire subject of financial security in retirement needs to be reexamined. Over the past thirty years wages for ordinary middle class people have stagnated. It has become more and more difficult to save large amounts of money to pay for a classic "retirement" at age 60 --65. As a society we need to begin thinking about solutions that don't depend on hiring experts to manage multi-million dollar investment portfolios because most people won't have them.
However, I agree that the entire subject of financial security in retirement needs to be reexamined. Over the past thirty years wages for ordinary middle class people have stagnated. It has become more and more difficult to save large amounts of money to pay for a classic "retirement" at age 60 --65. As a society we need to begin thinking about solutions that don't depend on hiring experts to manage multi-million dollar investment portfolios because most people won't have them.
274
I agree heartily! The move from pensions invested by professionals to self-directed retirement accounts has been a disaster. How is the average employee going to master the complexities of investing on their own? They have full-time jobs already. The claptrap about giving employees the freedom to manage their own money just disguises an agenda to free corporations from the chore and stealthily reduce their corporate contributions to peoples' retirement.
396
New research shows that Americans retiring in 2015 need to be far more conservative in their withdrawal rates during retirement. The historic 4% annual withdrawal rate is over two times the level that Americans can safely withdraw without expecting to outlive their assets. The real safe withdrawal rate, accounting for fees and today’s stock and bond market levels, is under 2% per year.
Because retirement income planning is still a relatively new field, views differ on sustainable withdrawal rates in retirement. William Bengen initiated the formal study in this area of “safe withdrawal rates” with an article he published in the Journal of Financial Planning in 1994. His research was a response to previous simplistic approaches that plugged fixed return assumptions into a spreadsheet—before, if a retiree assumed there would be a fixed return of 7% a year on retirement assets, then he or she could take 7% out safely without tapping into principal.
See more at FA Magazine.
Wade Dokken