OT - Money / Investing Thread (aka financial no stupid questions)

[847badgerfan]

I'm semi-retired and open for questions.

[MikeDeTiger]

I'm semi-retired and open for questions.

I just asked a bunch.

[MikeDeTiger]

The rough rule of thumb is that 4% (+ annual inflation) is safe. Meaning that if you have, say, $2M in invested assets, you can withdraw $80K in year 1, then $80K plus inflation every year thereafter, and you'll be safe for at least a 30 year retirement.

For most people, a 4% withdrawal rate actually ends up with them having significantly more by the end than what they started with--it only becomes a problem if you retire into a major recession, due to sequence of returns risk (SORR). 4% even protects you from that.

Well, you kind of stole my thunder while I was writing my post.  As you have time, feel free to comment or elaborate further, even though I know you're not nearing retirement all that soon.  

[betarhoalphadelta]

In the real world, StUhdeEz!!! show that method lasts on average ~30 years until the fund is depleted, and the effectiveness varies based on what the market does in the first few years after retirement, and the particular cycle of the market's highs/lows (when they occur, how sharp they are, etc.). 

You're reading the studies wrong. The studies don't show that the 4% method lasts on average ~30 years until the fund is depleted. The studies show that 4% is the safe withdrawal rate for a 30-year retirement in a worst-case scenario. Meaning that if you retire right into the worst possible historic recession (1968), at 4% your money will hold up for 30 years. 4% avoids failure, not just predicts when the funds will be depleted. 

The reality that I was trying to get across is that in most cases, you retire with as much or significantly more than you started with. Because the average historic (S&P 500) return is a little over 10%, not 7%... That 7% is the inflation-adjusted rate. So if you're withdrawing 4%+inflation, you should be WELL within the 7% inflation adjusted rate and continuously growing your nest egg, not depleting it. 

https://en.wikipedia.org/wiki/Retirement_spend-down#Withdrawal_rate

Note that these don't take external sources of income like Social Security into account. This gets really important for people who retire early, because they need to factor in that safe withdrawal rate during their "bridge" years, but often once they hit SS/Medicare age, they can reduce their withdrawal rate because SS substitutes income for what they were previously withdrawing, and Medicare reduces their health insurance costs if they had to be on an ACA plan during those bridge years. 

So if you're modeling a spend rate based on 4% before you have things like SS/Medicare kick in and then can reduce the withdrawal from investments, 4% is actually a lot safer than it looks. 
  

[847badgerfan]

I just asked a bunch.

I'm not big on the 4% thing - too choppy going on 6+ years now.

I go on what I see as trends and evaluate about once per quarter, with my advisor.

[MikeDeTiger]

You're reading the studies wrong. The studies don't show that the 4% method lasts on average ~30 years until the fund is depleted. The studies show that 4% is the safe withdrawal rate for a 30-year retirement in a worst-case scenario. Meaning that if you retire right into the worst possible historic recession (1968), at 4% your money will hold up for 30 years. 4% avoids failure, not just predicts when the funds will be depleted.

The reality that I was trying to get across is that in most cases, you retire with as much or significantly more than you started with. Because the average historic (S&P 500) return is a little over 10%, not 7%... That 7% is the inflation-adjusted rate. So if you're withdrawing 4%+inflation, you should be WELL within the 7% inflation adjusted rate and continuously growing your nest egg, not depleting it.

https://en.wikipedia.org/wiki/Retirement_spend-down#Withdrawal_rate

Note that these don't take external sources of income like Social Security into account. This gets really important for people who retire early, because they need to factor in that safe withdrawal rate during their "bridge" years, but often once they hit SS/Medicare age, they can reduce their withdrawal rate because SS substitutes income for what they were previously withdrawing, and Medicare reduces their health insurance costs if they had to be on an ACA plan during those bridge years.

So if you're modeling a spend rate based on 4% before you have things like SS/Medicare kick in and then can reduce the withdrawal from investments, 4% is actually a lot safer than it looks.
 

You're right, my wording there definitely means something different, and I worded it poorly.  I did mention later that modern evidence suggests 4% is safer than people think.  However, I still called 30 years the average, and in addition to poorly articulating the idea, that part was just wrong, so thanks for pointing it out.  

Not all indexed funds are tied to the S&P 500, and I'm just using 7% as an annual historic average, probably aggregated from all markets.  It seems to be the standard "safe" number from a variety of sources and projections tools.  Any particular fund may well beat that, but I like to do my forecasting by A) assuming the worst for assets, and B) assuming the worst for expenditures.  I figure there's less that can bite me on the ass in retirement if I plan that way.  

I realize it doesn't factor in other sources of income.  That's not really my goal with this round of questions.  I'm assuming from your response that you plan on leaving everything in the market when you retire?  

I'd probably call what I'm doing right now forecasting instead of modeling, which is a bit more complex and designed to account for the impact of different factors with a flexible mathematical framework.  But that's just semantics, and I'm only clarifying that because you're an engineer, I figure you like precision, and it's a slow morning at work 

[betarhoalphadelta]

Well, you kind of stole my thunder while I was writing my post.  As you have time, feel free to comment or elaborate further, even though I know you're not nearing retirement all that soon. 

My own personal plan is to retire like CD -- with time and budget to live a nice life and travel. Essentially I want to retire into a life as comfortable as I live right now--and perhaps more so since my wife and I would have the time to actually spend on travel that we simply can't do while working M-F 9-5 jobs, while the kids are still in the house (even if only half the weekends), etc. 

What that basically means is that I want to retire with enough money that the 4% withdrawal rate doesn't just cover housing/food/necessities... 4% will cover all manner of discretionary spending that can flex up or down based on how the market is doing. So if the desired budget calls for $20K+ of international travel annually but the economy / stock market takes a major dive, well, that's $20K that can be easily saved by just... not going. 

That also means that more risk can be taken, meaning leaving more percentage of the nest egg in equities than bonds or cash equivalents, hoping for a higher return. 

So I haven't figured it out yet... But assuming I hit my goals, I'm trying to build in enough buffer that I won't have to worry. 

The earliest I could possibly see myself retiring is in 5 years when my youngest goes to college. So I've got time to keep accumulating and I'll figure out the details later. 

[MikeDeTiger]

I'm not big on the 4% thing - too choppy going on 6+ years now.

I go on what I see as trends and evaluate about once per quarter, with my advisor.

By that, do you mean you periodically change how you allocate your savings between the market and stuffs like bonds/T-notes, or do you mean you periodically change how much you withdraw from an indexed fund?  Or a mixture of the two?  Or something else altogether?

[MikeDeTiger]

What that basically means is that I want to retire with enough money that the 4% withdrawal rate doesn't just cover housing/food/necessities... 4% will cover all manner of discretionary spending that can flex up or down based on how the market is doing. So if the desired budget calls for $20K+ of international travel annually but the economy / stock market takes a major dive, well, that's $20K that can be easily saved by just... not going.

That's going to be one of my upcoming questions, as far as the things people find they need or don't need in retirement.  In forecasting, I'm of course projecting expenditures, and I did that by looking at our current budget and crossing off anything that shouldn't be there in retirement, like the mortgage, and then using an inflation multiplier.  I figure that should tell me how much we need to maintain our current lifestyle.  I found very little to cross off, really.  Granted, I save monthly for things a lot more than most people do, but I don't see that going away in retirement.  I don't let irregular expenditures like new tires, home repairs, etc. jump up and bite me unexpectedly now, and I wouldn't want that in retirement either.  So I plan to keep contributing a monthly amount to prepare for those kinds of things when they inevitably come up.  

[847badgerfan]

By that, do you mean you periodically change how you allocate your savings between the market and stuffs like bonds/T-notes, or do you mean you periodically change how much you withdraw from an indexed fund?  Or a mixture of the two?  Or something else altogether?

A lot of both, although I have not changed with withdrawals this year - yet. I'm going to bring it down.

We stay away from bonds and such.

Most of our retirement money is in managed funds with Waddell and Reed. They are great fund managers based on my 20 years with them. So, every now again (~quarterly), my advisor and I will balance things out based on trends and outlook.

Never panic or make investment decisions based on emotion.

[betarhoalphadelta]

That's going to be one of my upcoming questions, as far as the things people find they need or don't need in retirement.  In forecasting, I'm of course projecting expenditures, and I did that by looking at our current budget and crossing off anything that shouldn't be there in retirement, like the mortgage, and then using an inflation multiplier.  I figure that should tell me how much we need to maintain our current lifestyle.  

This is one of the things I need to figure out over the next 5 years... 

I have no freakin' clue what our spend is today, or what I need to project it to be in retirement. I know how much we *make* on paper, but when I think about all the spend, I've never actually tracked it. All I know is that over the last 10 years as I've rebuilt my finances, the number in my taxable brokerage account (via ESPP and RSUs) was going up, so I knew I was earning more than I was spending--and everything else like 401k (which I was maxing) was growing but I didn't really pay attention to it. 

And I know it changes once I would no longer be employed... I.e. suddenly I'm no longer contributing to 401k or ESPP or IRA, my SS/Medicare tax disappears, I'll be [likely] in a lower tax bracket, all of which means that when I think about what shows up on my W-2 likely significantly overstates my spend. Especially since child support is already going down and will diminish again a year from now and be gone completely once my daughter graduates HS. But I'll need to add an ACA plan for insurance, and depending on whether I retire while my daughter is still in college or not, I'm sure that'll be additional spend that I don't have today or while working. 

So I need to figure out how to forecast my spend by the time she graduates HS to know whether I'll be ready or not. 

But as I said... That's 5 years out. Right now I'm focusing on the accumulation phase... If by then I know what my number is and I've overshot, well, that's a good problem to have. I suspect I might still have a few years to go at that point though...

[Cincydawg]

My investments have done MUCH better than I forecast, not because I'm a savant, I did hit a couple homers, but because the markets have gone up, rather steeply.  I keep an eye on allocations, this much to tech, this much to health care, this much to "stable" stocks, this much to "cash" or CDs.  With big tech run ups, I can get over weighted versus my notional target pretty easily.

Instead of selling outright, I usually write out of the money call options on a stock.  And it usually got called, but OK.

My wife wants to go to Marseille for a couple weeks in May.  Comfort seats are $1500, premium seats are $4000.  I'd like to spring for the latter, but it's obviously a $5 K difference, and I can't justify that.  

It is tough to figure how much to spend each year on "extras", knowing at some point we won't be able to do this stuff much.  I'm still playing baseball in January, which is pricey, and in a local league (which is not), we obviously travel and cruise quite a bit, we dine out fairly often, and splurge on Kroger sushi on Wednesdays.

[847badgerfan]

It's very complicated, in all honesty.

Need - Is it truly a need, or is it a want?
Want - Can be cross between a desire versus available spending. You can't do it if the money isn't there (unless you go to credit cards, which, well, yeah-no...). And if you can't get it, do you really want it? If so, why was it not prepared for?

Spend - that's all over the place in retirement. A few trips a year can be planned for. A major health event cannot be planned for - but it can be prepared for.

I hope everyone here is truly prepared for a major health event.

[Cincydawg]

Health, as you note, is the great unknowable.  Even something treatable like a broken hip really sets you back when you are ~80, maybe not $$$ but in ability to get around.

Our friend had prostate cancer, he had the proton therapy and is now "cured", he said the cost would have been hundreds of thousands except for Medicare.