Author Topic: Article: Why Most Retirees Never Spend Down Their Portfolio  (Read 5155 times)


Tyson

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #1 on: July 11, 2016, 01:09:11 PM »
A challenge to the 4% rule:
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

Discuss.

But if inflation increases, wouldn't the assets invested in (namely the stock market) also increase to keep pace with/above inflation?  Isn't that why stocks are more useful over a 30 year time period than, say, bonds?

AlwaysLearningToSave

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #2 on: July 11, 2016, 01:29:29 PM »
I'm confused.  This seems to highlight the point of the 4% Rule, not challenge it. 

The point of the 4% rule (at least in my mind) is to be reasonably certain that you will not run out of money in your lifetime.  For an early retiree, the time horizon is long enough that there is not much difference between a portfolio designed to last the remainder of the retiree's lifetime and one that is designed to last in perpetuity.  Sure, in many (probably most) scenarios, someone in their later years could look back and think, "Damn, I could have spent more early on," but that sort of hindsight logic shouldn't be used to justify use of a riskier withdrawal rate from the beginning.  The higher the withdrawal rate, the more likely you are to miss in the other direction and run out of money.  Given that choice, I'd wager most people would think it is better to err on the side of having money leftover.  You can always give to your family, friends, or worthy social causes when you no longer have use for it. 

Jack

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #3 on: July 11, 2016, 01:47:28 PM »
I'm confused.  This seems to highlight the point of the 4% Rule, not challenge it. 

Exactly, the headline is tautological: of course "most" retirees don't spend down their portfolio; that's only supposed to happen in the worst-case scenario!

steveo

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #4 on: July 11, 2016, 04:30:50 PM »
I think the article has an underlying assumption that the goal is to spend down your portfolio which I assume means that you maximise your happiness.

I think it goes completely against the whole philosophy of FIRE or at least my version of it. I think spending the most money isn't the way to happiness. I'd more than happy to die with money left over. I expect to give leave a tonne of money to my kids and possibly to charity.

forummm

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #5 on: July 11, 2016, 04:50:33 PM »
I'm confused.  This seems to highlight the point of the 4% Rule, not challenge it. 

Exactly, the headline is tautological: of course "most" retirees don't spend down their portfolio; that's only supposed to happen in the worst-case scenario!

Yep. It's saying the 4% rule is really conservative and really safe.

Quote
The 4% retirement rule has quintupled wealth more often than depleting principal after 30 years!

People here occasionally argue that you can retire on something less conservative if you are willing to cut back and/or work after retirement if need be. I'm personally thinking about a 6% WR.

PhysicianOnFIRE

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #6 on: July 11, 2016, 06:31:07 PM »
If you plug your numbers into FIREcalc, the average ending balance using a 4% SWR is something above double what you started with. That's why the 4% rule is a Safe withdrawal rate, not the ideal withdrawal rate to be most likely to use it all up.

Metric Mouse

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #7 on: July 12, 2016, 01:20:48 AM »
I think the article has an underlying assumption that the goal is to spend down your portfolio which I assume means that you maximise your happiness.

I think it goes completely against the whole philosophy of FIRE or at least my version of it. I think spending the most money isn't the way to happiness. I'd more than happy to die with money left over. I expect to give leave a tonne of money to my kids and possibly to charity.

The point is not to spend the most money. The point is to not work longer than you have to. If you die with tonnes of money left over, you could have worked less; many people equate shorter working years to greater happiness.

steveo

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #8 on: July 12, 2016, 04:20:16 PM »
I think the article has an underlying assumption that the goal is to spend down your portfolio which I assume means that you maximise your happiness.

I think it goes completely against the whole philosophy of FIRE or at least my version of it. I think spending the most money isn't the way to happiness. I'd more than happy to die with money left over. I expect to give leave a tonne of money to my kids and possibly to charity.

The point is not to spend the most money. The point is to not work longer than you have to. If you die with tonnes of money left over, you could have worked less; many people equate shorter working years to greater happiness.

I agree with this under the assumption that you don't like work and the goal is to maximise your non-working time. I think the other factor that needs to be considered is how comfortable you are to take on a lower chance of success. Some people for instance might hate work (me) but not want to have a chance of going broke and wouldn't care if I ended up with left over money when I die.

I can't see myself getting to a 4% WR prior to retiring but I think 4% is really safe.

Cassie

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #9 on: July 12, 2016, 05:04:14 PM »
It also depends on whether someone has a pension or not. If you do you may be more willing to spend knowing that you will still have $ coming in.

k9

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #10 on: July 13, 2016, 09:40:38 AM »
Most failures under a fixed withdrawal rate regime happen during bear markets at the beginning of retirement. If such a thing happens, one might want to work part-time for a few years.

I mean, once one has a portfolio of 25 x annual expenses, he can say "hey, I can retire right now and live on 4% of the current value of that portfolio, each year. If the market plunges in the next few years, I'll get back to work, part-time, or maybe full-time if really needed, for a bunch of years. But, more probably, I'll be even richer in ten years than I am today, and then I'll know my financial needs will be fullfilled for the rest of my life, no matter what happens on the markets later".

FIPurpose

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #11 on: July 13, 2016, 10:23:41 AM »
I liked the article. Something that I think happens to many retirees is that they plan their budgets with their mortgage in mind as if it would be around forever. Though I'm sure many do eventually pay off their home lowering their spending requirements. Which is something that he doesn't mention. That retirees with Homes/Mortgages have an inflation hedge built into a large part of their budget, and they'll start collecting senior benefits that everyone receives but few plan for. For people who retire at 55 they'll find that social security will end up covering 30-50% of their spending needs and Medicare to greatly reduce their healthcare costs.

On a different subject. I think if my portfolio had risk of failing early on, I'd be more inclined to live in South America a few years to lower my spending than go back to work. But I don't have kids yet, so perhaps that's a lot easier to say now rather than later :P

tonysemail

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #12 on: July 13, 2016, 10:56:47 AM »
I'd more than happy to die with money left over. I expect to give leave a tonne of money to my kids and possibly to charity.

The point is not to spend the most money. The point is to not work longer than you have to. If you die with tonnes of money left over, you could have worked less; many people equate shorter working years to greater happiness.

I'm with steveo. 
my FIRE plan was accelerated by 5-6 years by a sizeable inheritance from the in-laws.
I plan to pay that forward to my kids.

Retire-Canada

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #13 on: July 13, 2016, 11:00:59 AM »
Most failures under a fixed withdrawal rate regime happen during bear markets at the beginning of retirement. If such a thing happens, one might want to work part-time for a few years.

Yes.

I'd rather accept the risk that I might have to work PT for a few months to a couple year at some point in FIRE than accept the certainty that I would have to work FT a few years longer to hit some arbitrarily low WR beyond 4% that I hope will prevent me from having to work PT during FIRE.

Metric Mouse

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #14 on: July 13, 2016, 01:22:08 PM »
Most failures under a fixed withdrawal rate regime happen during bear markets at the beginning of retirement. If such a thing happens, one might want to work part-time for a few years.

Yes.

I'd rather accept the risk that I might have to work PT for a few months to a couple year at some point in FIRE than accept the certainty that I would have to work FT a few years longer to hit some arbitrarily low WR beyond 4% that I hope will prevent me from having to work PT during FIRE.

I completely agree. The risk is worth it.

As an entirely inapproriate aside, what would you be your arbitrary 'number' or 'SWR' that you would accept?

k9

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Re: Article: Why Most Retirees Never Spend Down Their Portfolio
« Reply #15 on: July 13, 2016, 03:08:32 PM »
20 years of expenses, i.e 5%, seems reasonable to me. More (6%, or even 5.5%) sounds like a bet. It leaves little room for an improvement in the first decade, and even a late bear market might hurt.