Vanguard's annual financial plan update

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Dalelatham
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Joined: Fri Apr 25, 2014 3:44 pm

Vanguard's annual financial plan update

Post by Dalelatham »

We have recently retired at 60 and have substantial investments, social security, and a good pension to fund our retirement. All of our assets are in a 65/35 ratio of indexed stock/bond funds, all in Vanguard. We are in very good health and for planning purposes assume we will live to age 100. We want to spend down all of our assets before we die and want to spend as much as we reasonably can in our early (60-75) retirement years while we are healthy enough to enjoy it. We have excellent health insurance and longterm care insurance and assume our retirement spending will decrease after we reach 80. We are relying on Vanguards free annual financial plan checkup for Flagship clients and want to ensure we have at least an 86% chance of outliving our assets. (We assume that is enough probability only because Vanguard seems to think it is!) I have been told that Vanguards software assumes a constant rate of spending throughout retirement, thus underestimating the amount I can spend in early retirement.

Is Vanguards planning process and software as good as they appear to be to me, with the exception of their constant rate of spending assumption?

Should I consult with someone else to ensure we are spending as much as we can without creating undue risk?
mhalley
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Joined: Tue Nov 20, 2007 5:02 am

Re: Vanguard's annual financial plan update

Post by mhalley »

Vanguards plan is very good, but it certainly wouldn't hurt to check out other scenarios. I assume they are giving you the standard 4% SWR? I-orp has a "spend it while you still can" on their site you might run some scenarios there.
http://i-orp.com/
And of course the WIKI discusses several withdrawal methods: http://www.bogleheads.org/wiki/Withdrawal_methods
Mike
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Cyclesafe
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Re: Vanguard's annual financial plan update

Post by Cyclesafe »

Dalelatham,

My wife and I are in exactly the same situation as you are. Same age, 64/28/8, SS, horizon to 100 without legacy, yada yada. Even the part about getting the "free" evaluation from Vanguard.

I discovered Jim Otar's (see Boglehead book wiki) Unveiling The Retirement Myth, available for $6 PDF download at his site http://www.retirementoptimizer.com/, read it, disregarded the market timing stuff, and filed away the annuity stuff in case things go poorly. I focused on his concept of stress testing my planned allocation and planned withdrawal rates with "aftcasting", the idea of looking at the past to not predict the future, but to evaluate what would happen to my plan if the same rolling 40 (100-60) year event sequences (from 1900, depending on index chosen) happen in the future. He advocates planning for the unlucky case where 90% of the rolling event sequences actually give better results, that way, obviously, only 10% of the time would you end up worse than your plan. This 90% relates to Vanguard's 86%.

He has Excel-driven software that does all of this for you. I downloaded the free trial versions of all three levels of sophistication and settled on the middle one, the $80 single asset model, as it was more intuitive for me and my situation (as far as I know now) doesn't call for the more sophisticated annuity analysis that the multi asset model incorporates.

What I got for my money was the answer to your question. Based on the rationale thoroughly explained in his book, I know how much I can withdraw (before tax) this year and still have a 90% probability of having this same amount (adjusted for inflation) in year 99 (I die on day before my birthday in 2054). The fun part is that I can test different allocations, different expense ratios, different assumptions both about future equity and bond returns, different horizons, different withdrawal rates, different inflation rates, and a host of other less important factors. I can then advance my "current" age to see how much more I can withdraw in future years on the same basis as uncertainty is reduced as I get closer to personal expiration. What the software won't do is factor in magnitudes and sequences of catastrophes that haven't actually occurred since 1900 like unlimited nuclear war, asteroid strikes, the end of days predicted by the Mayan calendar, YK 2000, Grexit, etc, but of course does factor in the fear/expectation of these same sorts of things in the past.

Of course, the advantage of doing it yourself is that you will think you understand what is going on and not just rely upon one-off hand-waving generalities from well-meaning, but ultimately disinterested third parties.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
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CyberBob
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Re: Vanguard's annual financial plan update

Post by CyberBob »

An interesting read, if you haven't seen it already, is Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science, which talks about declining spending in retirement.
Sagenick48
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Joined: Sat Nov 02, 2013 8:22 am

Re: Vanguard's annual financial plan update

Post by Sagenick48 »

CyverBob. Thanks for the link. I have always wondered about this, as I have observed in older folks, their world
gets smaller and smaller as they age.
The market goes up, the market goes down.
derosa
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Joined: Wed Jul 24, 2013 5:18 pm

Re: Vanguard's annual financial plan update

Post by derosa »

Have used vg plan for many years. YOu get out of it as much as you want based on what you put into it. And thats true with all the tools. I find the info and the conversation helpful and reliable.

Next yesr work the system my friend - put in a big jump in expense - to the them tool that you Spend more than what you have planned for this year. At the next financial plan just double what you want to spend and see what comes up. That's what planning is all about.

From your description you will have money left over at the end.

You can always go to the firecalc or monte carlo simulations at flexible retirement planner or some of the simpler tools at dinkytown.

Just keep in mind that there are 50 ways to end up at about the same number and no guarantees with any of them.
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