Sustainable Withdrawal Rates

[yielder]

Doesn't volatility also give you a greater likelihood of buying high?

Yep, because of the upward upward bias of the market.

[Bylo Selhi]

Doesn't volatility also give you a greater likelihood of buying high?

Yep, because of the upward upward bias of the market.

In which case it (the greater likelihood of selling high) is a benefit during withdrawal, eh?

[DanH]

Let's put this in the context of options. We know that the more volatile the stock, the higher the premium on the option on that stock. It is my impression - and please correct me if I'm wrong - that option premiums are the same on puts and calls, all else being equal.

IF that's the case, at least in theory, high volatility puts you at equal risk of buying high or low and selling high or low. But the consequences during withdrawals are potentially much more devastating - hence the greater risk during withdrawals.

Agree? Disagree?

[kcowan]

I don't pretend to know but I suspect that the key factor is the cycle time. If I am drawing out my SWR all at once (once a year) then the volatility becomes a crapshoot. But if I have some flexibility from a cash buffer then I can wait out the downward swings in a classic market timing ploy and then put in a series of limit sell orders on the way up to replenish.

And as Bylo has pointed out, even if my sell orders are evenly-spaced, say once a month, the overall tendency for an upward trend will float my average selling price upward.

BTW although we presently have a large cash buffer, we do this in normal times when we are regularly reinvesting, i.e. we stay fully invested even though we are drawing down money to live on. Over the last 5 years since retirement, we always seem to be able to pick an individual stock (out of 25) that offers a good time to sell when we need it.

Of course the last 5 years are not typical, which is why we are now sitting on a rather large stash of cash looking for value. Our only buys in the last 6 months have been CKI and LLL. One value and one growth.

[Shakespeare]

even if my sell orders are evenly-spaced, say once a month, the overall tendency for an upward trend will float my average selling price upward.

The difficulty is that if the sale is for a constant number of dollars, rather than a constant number of units, you sell more units at low prices and the portfolio depletes faster.

[Bylo Selhi]

Make It to the End With Money to Spare [WSJ, 04Nov07]

Retirement presents all kinds of pitfalls, including rotten markets, rapid inflation and living longer than expected. To cope with these risks, you have three key tools: interest-paying investments, stocks and products that generate guaranteed lifetime income. What's the best way to use these tools? Here are four strategies...

[WishingWealth]

The G&M had a list of financial blog leading to: http://canadianfinancialdiy.blogspot.com/

leading to:

http://www.qwema.ca/pdf_research/2007JULY_RRQ.pdf
( 12 p pdf)

A Gentle Introduction to the
Calculus of Sustainable Income:
What Is Your Retirement RisQuotient?
by Moshe A. Milevsky, PhD
Abstract: A little over a year ago, on January 1, 2006,
the first American baby boomer turned 60. These birthdays
are expected to continue at the rate of one per 7-
10 seconds over the next 20 years. In anticipation of this
demographic wave the financial services industry is
bracing for the retirement income revolution, and one
of the critical issues is how to build a portfolio that will
provide a sustainable income flow over the uncertain
length and cost of the human lifecycle. Indeed, a number
of recent articles have gained notoriety by advocating
spending rates in the 4-6% vicinity as being sustainable
for portfolios that contain 70-90% equity exposure.
But prudent risk management involves more
than just controlled consumption, and this article
deliberately avoids advocating a particular spending
rate. Instead it provides an overview of the analytic
relationship or calculus among the three key risk variables
that determine income sustainability. These are
brought together by linking investment characteristics,
spending rates, and longevity risk, to provide
what is coined the Retirement RisQuotient.1 And,
while statistical formulas will never capture the complex
nuances of retirement reality, there are a variety
of intuitive insights that can be gleaned from this
summary number. Moreover, this calculus illustrates
how products with longevity insurance (e.g., life annuities)
and downside protection (e.g., embedded put
options) can increase the sustainability by reducing
the Retirement RisQuotient.

WW

[CROCKD]

A new viewpoint on Sustainable Withdrawal Rates

here

[Chuck]

I thought this was an interesting comment:

“The only problem is you run out of money? I don’t buy that,” he said. “For a lot of people who lock in on a 4 percent figure, it’s a formula for regret. They get 15 years in and look back at all of the things they didn’t do. And now their health is gone.”

[Shakespeare]

I thought this was an interesting comment:

“The only problem is you run out of money? I don’t buy that,” he said. “For a lot of people who lock in on a 4 percent figure, it’s a formula for regret. They get 15 years in and look back at all of the things they didn’t do. And now their health is gone.”

As long as you are managing only your own risk, you can't have it both ways, i.e. spending the maximum to die broke while still keeping a longevity reserve. To have it both ways you must pool the risk by either being in a pension plan or purchasing an annuity. The latter will cost you money.

It's up to the individual to choose how much of each type of risk he wishes to bear. Perhaps a reasonable approach is to calculate the minimum you need, purchase an annuity to supplement pension up to that point, and blow the rest.

[bones1]

As long as you are managing only your own risk, you can't have it both ways, i.e. spending the maximum to die broke while still keeping a longevity reserve. To have it both ways you must pool the risk by either being in a pension plan or purchasing an annuity. The latter will cost you money.

It's up to the individual to choose how much of each type of risk he wishes to bear. Perhaps a reasonable approach is to calculate the minimum you need, purchase an annuity to supplement pension up to that point, and blow the rest.

Above a certain age, income doesn't matter much. For example, a rich person in a nursing home will not receive any better care than a poor person in a nursing home.

So I'm not convinced an annuity is the best way to manage risk, because you'll end up having a lot of excess income in your latter years that you can't really use.

There's probably a peak in income requirements. Sometime after health issues become a big expense in your 60s, but before your health becomes so bad that you can't spend money on hobbies or travel in your 80s.

[Bylo Selhi]

“The only problem is you run out of money? I don’t buy that,” he said. “For a lot of people who lock in on a 4 percent figure, it’s a formula for regret.

What if you're one of the relatively fewer people who aren't part of that happy lot?

They get 15 years in and look back at all of the things they didn’t do. And now their health is gone.”

What if one option they now have is to get leading-edge medical treatment in Utopia South but going there will cost a small fortune?

What if they get 25 or even 35 years in and now need 24x7 nursing care?

As Shakes points out it's all about risk management. The less risk you take the higher the probability that you'll put a smile on your heirs' faces.

And as has been said up thread ad nauseam, the 4% SWR is only a starting point for thinking about how much you can spend in retirement. It's not some immutable law of science. It's also subject to adjustment as your age and portfolio experience go on.

"Ya spends your money and ya takes yer chances."

So I'm not convinced an annuity is the best way to manage risk, because you'll end up having a lot of excess income in your latter years that you can't really use.

Most annuities aren't indexed so inflation helps on that front.

Note too, that an annuity, like CPP/OAS, is hopefully only one component of a more diversified retirement nestegg. In the scenario that Shakes proposes, it covers the essentials. There's still a need for additional income to take care of everything else.

[BRIAN5000]

Above a certain age, income doesn't matter much. For example, a rich person in a nursing home will not receive any better care than a poor person in a nursing home.

A rich person or a rich persons advocate can BUY much better care or quality of life in a nursing home.

E.g. private 24 hr Nurse/friend/companion

Food can be brought in which can be way better then that offered.

Some wheel chairs cost $300 some $3500 which would you rather sit in for 8-12 hours a day.

You know how fast you get your second beer when the waitress finds out your a big tipper, same applies here.

Money gives you options, choice of care residence may be the most important option.

[Shakespeare]

Money gives you options, choice of care residence may be the most important option.

What about better-looking nurses?

[brucecohen]

There's probably a peak in income requirements. Sometime after health issues become a big expense in your 60s, but before your health becomes so bad that you can't spend money on hobbies or travel in your 80s.

That's the precise point made a few years ago in a fascinating article that Norbert, I believe, linked. It was from the Journal of Financial Planning and described what the author called, I believed, "realistic retirement planning." I have a hard copy somewhere and will hopefully be able to post a link later.

[BRIAN5000]

Money gives you options, choice of care residence may be the most important option.

What about better-looking nurses?

One that's there and treats you carefully as she's removing you from the toilet may be preferable. Nurse/Nurses aid to patient number.

[WishingWealth]

And now apparently the USians are tougher son of a gun than the Germans thought:

In Spiegel: http://www.spiegel.de/international/bus ... 85,00.html

Investing in Death
Betting on US Life Expectancy Proves Risky
Deutsche Bank and other financial institutions manage complex funds that buy up Americans' life insurance policies and pay their premiums in return for their payouts. But angry German investors are finding that Americans aren't dying as quickly as expected -- and that only the bankers are making a buck.

Gisbert Soballa has a rather dispassionate stance toward death. The 72-year-old retired cardiologist says that, to him, dying was always "something completely normal."

Given that, the doctor didn't pause when his adviser at Deutsche Bank suggested a peculiar deal with death. The "db Kompass Life" fund buys up life insurance policies of Americans and assumes responsibility for paying their future premiums. When a policyholder dies, the entire payout from the policy goes to the fund. And since everybody dies, it would seem to be a fairly crisis-proof investment.
...

[My bold]
10 percenters at work yet again.
Summertime and the fleecing is easy.

WW

[Chuck]

And as has been said up thread ad nauseam, the 4% SWR is only a starting point for thinking about how much you can spend in retirement. It's not some immutable law of science. It's also subject to adjustment as your age and portfolio experience go on.

Agreed. I just liked the phrasing. There seems to be a bias towards fearing the worst going (primarily the old health care bugaboo) and I liked the quality of life angle phrased as a risk.

I suspect, at least among those who save enough for a comfortable retirement in the first place, there is more "regret" going on than unexpected medical crisis spending in their final few years. Just an opinion mind you, no supporting facts.

[bones1]

A rich person or a rich persons advocate can BUY much better care or quality of life in a nursing home.

E.g. private 24 hr Nurse/friend/companion

Okay, I overstated. Perhaps I shouldn't have said "rich", but rather "well-off". Yes, someone rich can afford 27-7 nursing care which may be a real benefit. However, someone well-off could not afford that. They may be able to afford part-time nursing care, but what's the point? All that will mean is that the regular nursing staff won't spend much time with you because you're already taken care of.

$0 income will get you a bed in a semi-private room in a nursing home with 3 hours of nursing care per day. $30,000 will get you a private room with the same care. $60,000 might buy you the private room and a private nurse for those 3 hours rather than the staff nurse.

For $60,000, is the money better spent when you're 90 or when you're 60?

I'm not judging or saying everyone should make the same choice. I'm just posing questions to think about when planning for retirement.

Food can be brought in which can be way better then that offered.

Not really practical, unless you have someone to come in regularly with the food and feed you. The normal nursing home food isn't all that bad.

Some wheel chairs cost $300 some $3500 which would you rather sit in for 8-12 hours a day.

Almost all the wheelchair costs are covered by OHIP (or some other government program for which I forget the name). Out of pocket costs for a wheelchair is only a few hundred dollars at most.

Money gives you options, choice of care residence may be the most important option.

Money is really only useful before you need to go into a nursing home. For about $5000 per month, you can stay in a "retirement home" and get about 1 hour of nursing care per day. That may stretch out the time before you need to go into a full care nursing home.

[BRIAN5000]

For $60,000, is the money better spent when you're 90 or when you're 60?

All I'm saying some money gives you choices, Mega Money gives you or most likely your advocate many more choices.

If you rely on the gov't to look after you, you get what they give you thats it.

If you don't have a strong advocate you'll be sitting in a corner with poo in your diaper, in a $300 wheel chair, with your head fallen to the side, bored to tears, if you still have any mind left.

[kcowan]

This discussion is rather depressing so I figure this story can't make it much worse. DWs Cousin and Hubby spent their adult lives working in Fort McMurray making megabucks. Finally liquidated and got a condo in Edmonton and a home in Phoenix, living the good life. Definitely 10%ers.

But living in the Fort comes with some tradeoffs. He died of pancreatic cancer two years ago and she died of blood clots on Sunday. She was 67.

So I guess I am a believer that we should live the "really" good life while we can.

BTW only one relative has had to undergo the horror of an LTC facility. Everyone else kicked off at home or in the hospital. (1 of 28 ) And even she had no discomfort because with advanced Altzheimers, every day was a new day!

[bones1]

If you don't have a strong advocate you'll be sitting in a corner with poo in your diaper, in a $300 wheel chair, with your head fallen to the side, bored to tears, if you still have any mind left.

Yes, but without a strong advocate, you will end up like that whether you are rich or poor.

Even money can't buy you an advocate. There was a story recently about some older man that was found on the floor of his apartment, in a pile of his own feces. His advocate took his $1M and blew it on himself over a period of a couple of years, while completely ignoring the person he was supposed to look after.

Having lots of money is certainly no worse than having no money. But, when you're old, it's far from the most important thing. It can't buy you much by the time you are in a nursing home.

All I'm saying, is don't sacrifice too much of the present, hoping to make your older years comfortable. You may look back and regret all the things you should have done when you were younger. When you're old, one of the few things you have to give happiness is your memories. Don't forget to make those good memories.

[BRIAN5000]

The general rule of thumb for sustainable withdrawal is roughly ?

60/40 Eq/Fi Non registered or registered 4 %?

If you have your $500,000 in open money or registered money how much of a difference? Is there any approximate withdrawal rate?

[brucecohen]

Here's a link to the paper I mentioned earlier. The concept is called Reality Retirement Planning. It's based on spending patterns among US retirees, using detailed govt data. In a nutshell, spending declines as you age* so using a set withdrawal rate like 4% requires one to accumulate more capital than is likely required and over time produces more income than is likely needed.

Years ago a friend of mine summed this up as the three stages of retirement: go-go, go slow, no go.

[couponstrip]

Wow, what a great thread, most of it before I knew about this forum. Lots of original thought and criticism. I read it from stem to stern. The best 2 hours I've ever spent on FWF. Highlights include Gummy's "sensible withdrawal plan" spreadsheet, Martingale's thoughts here (whatever happened to him?), and Norbert's Monte Carlo ferry musings. Shakespeare gets the nod for the most concise approach to retirement plannning I have ever seen:

Perhaps a reasonable approach is to calculate the minimum you need, purchase an annuity to supplement pension up to that point, and blow the rest.