Author Topic: A 2.3% withdrawal rate is "just too risky".  (Read 3603 times)

Cecil

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A 2.3% withdrawal rate is "just too risky".
« on: October 29, 2013, 10:24:46 PM »
http://business.financialpost.com/2013/09/06/a-life-of-no-work-couple-rushes-into-retirement-in-their-early-50s-but-can-they-afford-it/

I couldn't decide whether to put this in "Mustachianism around the web" or here, but I just had to mock the financial planner.

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Ontario residents ages 50 and 48...together they bring in just $20,000 per year...they built up financial assets of $817,159... Their present spending is $3,243 per month.

Their plan, already in process, is to quit their work and enjoy life.

“Our goal would be to use the next 20 to 25 years of healthy living to do what we want,” Victor says. “We just haven’t been able to figure out what that means, except we know it means as little work as possible and a warm climate.  We don’t plan to leave an inheritance to anyone.”

They spend under $40k, and with their $20k income that's a 2.3% SWR (4.8% if they stopped working completely).

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The problem, as the planner sees it, is that Victor and Suzy are burning up their capital. Their present spending ... requires they subsidize expenses out of their savings to the tune of $1,576 per month

Isn't burning up your capital in retirement the whole reason you saved that money to begin with?

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The risk of retiring early and depending on savings is enormous. Predictions of returns on savings are based on current economic conditions, but those assumptions can change. Interest rates could soar, equity returns could slump. The longer the period during which people do not earn income, the more they are at risk of having unforeseen events defeat the plans. Thus early retirement, as Victor and Suzy are doing it, puts them at substantial planning risk.

The financial planner's recommendation?

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Go back to work at least on a part-time basis, raise their pre-tax salary income to perhaps $30,000 per year and wait until their 60s before making a complete break with the drudgery of work.

My favorite parts?

The $447/month line item for "savings" in the proposed budget.

And the "Retirement Readiness" rating of two stars out of five.

mpbaker22

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Re: A 2.3% withdrawal rate is "just too risky".
« Reply #1 on: October 30, 2013, 09:01:51 AM »
Sounds like someone needs to fire their financial planner!
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“Eventually, they will want to be more active and activities cost money. What do they intend to do with all that free time for the rest of their lives?”


This is the only good point.  Further, it shows they are inept at finances and might actually fail to make it last.
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The 2% return after estimated 3% inflation is modest, yet the present allocation in their portfolio is 64% cash and fixed income. That will not support the 5% gross return they need at a minimum.

Jamesqf

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Re: A 2.3% withdrawal rate is "just too risky".
« Reply #2 on: October 30, 2013, 12:37:34 PM »
Sounds like someone needs to fire their financial planner!
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“Eventually, they will want to be more active and activities cost money. What do they intend to do with all that free time for the rest of their lives?”

I dunno about that financial planner.  Being active is going to cost a lot of money?  I hike, bike, cross-country ski, and do a lot of other active things, and probably don't spend more than a couple of thousand a year on it.  (As least if you leave out the cost of horse & dog food.)  As for free time, what's that?

blue mutant

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Re: A 2.3% withdrawal rate is "just too risky".
« Reply #3 on: December 14, 2013, 03:44:31 AM »
Same series in the financial post: http://business.financialpost.com/2013/12/13/a-third-of-assets-in-cash-could-be-put-to-better-use/. The couple has $1.7M in net worth and budgeted expenses of $9,000 per month and wants to retire on $120,000 per year. the only problem is that the budget of expenses showing a savings expense of over $4,000 as well as further savings for RESPs. Clearly the couple is moderately frugal and yet have no idea what they actually need for retirement. Also, a great deal of their assets are either cash or invested in Canadian mutual funds.