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well depends when they retire. a couple like ourselves retiring at 62 stands a 50% chance of one of us going on to 87 and a 25% chance of seeing 95.
there is still alot of years from 87 to 95 one of us could hit.thats still pretty great odds of happening.
whether it does happen we live that long or not really does not matter. the more of a buffer you plan for the less angst you will feel from unexpected events.
having the water heater go, the roof, the car or a hurricane deductable can wipe out a big chunk of money thats needed to pay other bills when you cut things close to the bone.
all these studies are done and the numbers crunched that these calculators are based on to provide the biggest margin for the awe craps.
planning ofton includes figuring inflation adjusted returns forever.
will you still need so much inflation proofing at 85? more than likely no. but the plan forces you to develop that cushion so it can serve other purposes and protect against those unexpected big bills hammering your budget, it gives you margin for bad sequencing and returns. it covers you for spikes if high inflation pops up.
the buffers are used to protect you financially from the unknowns. it does not try to rule out uncertainty rather it plans for it.
you can have a plan that requires less in savings with little or no slack or you can have a plan that requires more savings and has more slack built in .
historically the average safe withdrawal that could have been taken has actually been around 6% for a diversified portfolio. thats a 50% increase in income from 4%....
but that 6% is based on having more normal outcomes during your retirement period. the 4% is based on the absolute worst combinations of returns ,sequences and inflation we have ever had.
its really so conservative that unless things were a whole lot worse then we ever had the last 146 years the only thing that will change is the amount of the money left over at the end. that income level is going to be not effected much if even at all and thats why its considered safe if your allocations get it into the 90% range..
of course those who retired in 2000 are living that 10% failure rate.
living in nyc i liken retirement planning to hurricane sandy.
for over 100 years a home constructed for the worst we had endured with everything thrown at us did just fine..
but now a new worst case scenerio came.
if you built based on the worst of the past at least out of the gate you were protected up to the worst we had so if you were constructed a little better and a little higher then just the past then you even survived the new worst scenerio.
thats what all these calculators and researchers attempt to do. they plan to put you at the retirement gate with a plan that withstood everything to date without your income failing. they then build in a cushion for something even worse and let you start out that way.
could something devastate you? sure it could but at least you started out protected with the odds on your side and you didnt start the journey from a position of possible weakness and under funded.
as they say all these calculators are wrong. but some are still useful.
Last edited by mathjak107; 12-05-2012 at 01:49 PM..
No one in my family has ever retired except for mom and certainly no one has ever had a pension.
My step-grandfather worked until he passed away and loved spending every minute at the shop he started.. even if it was just sweeping the sidewalks on a Saturday.
Same for the Dairy Farmer other side of the family... no one really ever retires on a small family dairy farm.
My father was in his 70's battling cancer and would become really annoyed when his dialysis or chemo would be scheduled mid-day... he had a business to run and would have showed up at the Docs at 6 am if they would be open...
At first, the Nurses couldn't understand... after a while they said it was what kept him going... people depending on him and keeping the business open.
Last edited by Ultrarunner; 12-05-2012 at 05:37 PM..
show us that 6% inflation adjusted annuity for a couple at 62 or even 65. even a single at 65 i bet only exists in your head. they are in the 3% range
again i dont care if you only want 50% of your income , you still need a certain amount of money to do it. whether you do it with an annuity or on your own who cares.
you still need enough dough saved to get that income and that income withdrawl rate from savings will still depend on all the parameters above and then some..
did you know those that retired in 1921 could have taken an 11% withdrawal rate and not run out of money over their 30 years of retirement .
did you know those that retired in 1966 could have only taken 3.50 % over their 30 years and survived. 20 years of crappy returns and then getting hit with double digit inflation hurt retirees big time.
while the 1966 group had their income stand up fairly well at 3.5% the fact is unlike other retiree periods where there was even more money left at the end of the 30 years then they started with, the 1966 group was pretty much broke at the end of 30 years at just 3.5% and had a hard time going longer.
the reason is the yearly returns, the sequence of those returns ,inflation , interest rates and the valuation level of equities when they retired.
according to dr wade pfau those that retired in 2000 and have at least a 50% allocation to equities are on track for only a 1.8% withdrawal rate if things dont change over the next 2 years.
85% of that withdrawal rate you could take is formed in the first 15 years and so far with negative interest rates, low interest rates and a poor stock market for those who pulled the plug in 2000 it does not look like a pretty picture for them.
if they saved what they thought was enough enough to draw a 4% inflation adjusted amount and get 50% of their working income they may have to cut that income way way down to below what they projected.
they may have needed almost double the savings to safely draw that level of income they wanted.
remember no one follows these rules like a robot . everyone adjusts dynamically to whats going on around them and whats in their life.
projecting 85% of your working income may leave enough slack to cut back withdrawals if things are not going well. cutting your projection to 50% your working income and only saving an amount to give you that may leave you with no slack for cutting back or unexpected big financial bills..
there are no set rules, everyone has to do what they belive fits them. there are risky ways of calculating cutting things to the bone with no slack and there are overly conservative ways that leave to much on the table if we dont have scenerios as bad as some of the past.
the choice of whats for you is your own choice.
the important thing is to understand just where that the choice you make falls out and how much slack is in that plan.
you CAN NOT take one of those simple how long will my money last calculators and use them. they dont take the biggest factor into consideration.
that is the sequence of the gains and losses coming in. whether you are in equities or your in fixed income you will have years of negative real returns and they put a spin on the outcome those simple calculators can't deal with.
the difference that makes in the outcome is mind blowing.
i prefer firecalc and the fidelity income planner but im sure there are other good ones out there as well.
hartford if you dont understand the concept i cant help that but you really should at least understand the numbers you throw out.
on another note maybe you dont think 20-30 years of unknown inflation is not something that needs addressing but im sure many feel very different about it.
The dividend rate on stocks in 1966 was about 5.5%
I don't think you included that in your calculation. If your life expectancy is 18 years at age 65 you could take more than 3.5%
How did you come up with that calculation?
Just calculate the annuity with mortality and a 5.5% interest rate.
Best one I've seen thus far is the aft-casting calculator developed by Jim Otar - retirementoptimizer.com Read his book, very lengthy "Unveiling the Retirement Myth" and expensive ($60). It will be the best $60 you ever paid. Another good calculator is TRowePrice Retirement Income Calculator. I've used Firecalc and others mentioned, they work, but I would not rely on them vs. your own stress-testing. Create a spending budget - outflow vs. expected inflow. Can you make it, if not, you may have to work longer, obtain public assistance if available, rely on relatives if available.
im familiar with otars work. he differs slightly in his calculator is more complex in work up but i think its also simpler to use than some of the others.
otars work seems to devote alot more time into the failures that happened . i like his annuity use calculator that tries to see if annuitizing some income would be beneficial to a situation that the calculator feels is in danger of failing.
like i said all these calculators assume certain things about people that may really not hold true in the real world under actual use. therefore none of them are correct.
but many are useful enough to at least give you a safe idea of whats possible if you play by the rules..
fall below 50% equities and the failure rate jumps way higher. but many retirees would rather cut spending and withdrawals then go to higher equity allocations.
to go more conservative you may need way more in savings if cutting expenses and drawing less isnt possible because these are already cut close to the bone.
more and more new research is showing a flexible plan that holds stocks when valuations are low and sheds stocks when valuations are high seems to be the best idea.
shiller has done extensive research in this area and indications are he may be the most accurate of all.
many thinkers like dr pfau , michael kitces and bill bernstein already recognize the importance of incorporating shillers work on valuations into these financial calculators and rules of thumb.
Last edited by mathjak107; 12-06-2012 at 03:48 AM..
the dividend rate was high because share prices were down and total return sucked for 20 years.
i have a little more time to go into the problem retirees had in the 1960's when dividends were 5%.
the 20 year bear market that culminated in 1982 marked a turning point for stock dividends. For more than 100 years the market's dividend yield had averaged nearly 5%.
by 1982 it was down to 1/2 that and still dropping until 2000 when they clocked in at 1% .
with stock prices in the toilet retirees had been selling more and more shares at depressed prices trying to make up for the shortfall in dividend loss as they struggled to maintain their income. while share prices and dividends were getting hammered the other enemy , inflation was getting higher and higher and taking the 4% withdrawals and compounding them into 10% withdrawal rates for these same retirees.
it was one of the worst combinations in history becoming the perfect storm over a 30 year period ...
that killed the goose laying those golden eggs and eventually those retirees had near nothing left at 4% inflation adjusted withdrawals.
Last edited by mathjak107; 12-06-2012 at 04:08 AM..
Mathjak is talking sense. While you may not be putting money into your 401K after you retire, you will still be paying taxes and those may be higher than expected. Also, medical costs may be much higher than anticipated. Expect Social Security and Medicare to play smaller roles. It is not uncommon for medications alone to cost $300-400 a month. Statistically, it is now estimated that, for a 65 year old married couple, there is a 50% probability that at least one spouse will live to age 90, and a 25% probability that at least one spouse will live to age 95.
On average, Medicare beneficiaries aged 65-74 spend $2920 a year in out-of-pocket expenses.
Those aged 75-84 spend $3,815, a year.
And, those 85 and above spend $4,615 a year – an average of 30 percent of their income.
Furthermore, health spending as a share of after-tax income will rise dramatically. In 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:
24 percent of income in 2010.
29 percent in 2020.
35 percent in 2030.
You can plan for the best case scenario or worst case scenario. You pick! Ask the 75 year old Walmart greeter which one he chose.
Mathjak is talking sense. While you may not be putting money into your 401K after you retire, you will still be paying taxes and those may be higher than expected. Also, medical costs may be much higher than anticipated. Expect Social Security and Medicare to play smaller roles. It is not uncommon for medications alone to cost $300-400 a month. Statistically, it is now estimated that, for a 65 year old married couple, there is a 50% probability that at least one spouse will live to age 90, and a 25% probability that at least one spouse will live to age 95.
On average, Medicare beneficiaries aged 65-74 spend $2920 a year in out-of-pocket expenses.
Those aged 75-84 spend $3,815, a year.
And, those 85 and above spend $4,615 a year – an average of 30 percent of their income.
Furthermore, health spending as a share of after-tax income will rise dramatically. In 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:
24 percent of income in 2010.
29 percent in 2020.
35 percent in 2030.
You can plan for the best case scenario or worst case scenario. You pick! Ask the 75 year old Walmart greeter which one he chose.
You are quoting "flawed" research - the spending averages you quote above are based on a percentage of the annual Social Security income received, not total income incorporating savings/pension/rental income. The average Social Security monthly check today is $15,000 annually - 30% of that is roughly $4,615. Surprise, surprise. The retiree only needs enough income to spend and survive, they no longer need to save a dime, because they won't be taking it with them and that goes for myself and you as well. BTW, what year was that research from - we are now in the year 2012 heading into 2013 - why are you quoting the year 2010?
im familiar with otars work. he differs slightly in his calculator is more complex in work up but i think its also simpler to use than some of the others.
otars work seems to devote alot more time into the failures that happened . i like his annuity use calculator that tries to see if annuitizing some income would be beneficial to a situation that the calculator feels is in danger of failing.
like i said all these calculators assume certain things about people that may really not hold true in the real world under actual use. therefore none of them are correct.
but many are useful enough to at least give you a safe idea of whats possible if you play by the rules..
fall below 50% equities and the failure rate jumps way higher. but many retirees would rather cut spending and withdrawals then go to higher equity allocations.
to go more conservative you may need way more in savings if cutting expenses and drawing less isnt possible because these are already cut close to the bone.
more and more new research is showing a flexible plan that holds stocks when valuations are low and sheds stocks when valuations are high seems to be the best idea.
shiller has done extensive research in this area and indications are he may be the most accurate of all.
many thinkers like dr pfau , michael kitces and bill bernstein already recognize the importance of incorporating shillers work on valuations into these financial calculators and rules of thumb.
Bernstein recommends an income "floor" in the form of Social Security, pension, annuity and/or ladder of fixed income.
Pfau recommends various savings rates to reach a reasonable floor.
I've read Kitces, it's okay.
The best form of retirement planning is based on one's expected inflows and outflows. Save, invest and most of all, relax because life is too damn short to get your blood pressure all riled up on this, there's enough day to day stuff for that.
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