Wade Pfau on depleting assets

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Wade Pfau on depleting assets

Postby Grasshopper » Fri Dec 07, 2012 10:22 am

On MarketWatch today, spending down your assets in retirement.

http://www.marketwatch.com/story/deplet ... home_kiosk
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Re: Wade Pfau on depleting assets

Postby joe8d » Fri Dec 07, 2012 11:16 pm

So remember, the 4% rule does not apply for everyone, or for anyone, really. The withdrawal rate can be higher because of the low probability of surviving 30-40 years into retirement and because one has more income available from sources outside their financial portfolio ( SS, Pension, Annuities ). How high the withdrawal rate can creep, though, depends on one's flexibility to deal with reduced spending later in life.


Excellent point and why I never understood the " running out of money " scenario.
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Re: Wade Pfau on depleting assets

Postby stlrick » Sat Dec 08, 2012 9:37 am

Pfau states that part of the logic for depleting assets is:

It doesn't make much sense to plan to spend the same amount at age 65 as at age 100, because the odds of living so long are low. To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.


In my view, the only thing true about this argument is that is proves that economists are not psychologists. Why is a person happy? It certainly is not because of what happened in the past. People are happy when the future looks bright. If I am 85 and laying in bed at night dealing with a declining standard of living because of the trips I took at 65, I will be unhappy. If I have lost my home in Hurricane Sandy, it will be of little consolation to me that last year I had a marvelous vacation on the French Riviera. Three days ago, I looked forward to going out to dinner at a restaurant that evening. Today, I do not remember what I ate. From what I can see, my parents at 90+ care just as much about having a nice day as I do in my mid-60's, and as my son does in his mid-30's.

A plan that does not maintain your standard of living (however priorities change with age) for your full lifetime is going to create anxiety and unhappiness even before your standard of living declines, because you will be able to see that it is going to happen.

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Re: Wade Pfau on depleting assets

Postby midareff » Sat Dec 08, 2012 10:04 am

It seems to me that the academics writing on withdrawal and asset depletion scenarios are not in fact, depleting their own assets. The picture may look vastly different when it is you that might be the under bridge dweller.
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Re: Wade Pfau on depleting assets

Postby Leesbro63 » Sat Dec 08, 2012 10:21 am

My guess is that most people astute and prudent enough to accumulate 25times+ what they spend at age 65 are gonna be miserable if they spend down 1/3 to 1/2 of their stash by 75. For the very reason stated here. "People are happy when the future is bright". Which is why I dislike a "Liability Matching Portfolio". True, it somewhat guarantees 30 years of spending, but it also guarantees 30 years of declining nest egg.
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Re: Wade Pfau on depleting assets

Postby midareff » Sat Dec 08, 2012 10:29 am

Leesbro63 wrote:My guess is that most people astute and prudent enough to accumulate 25times+ what they spend at age 65 are gonna be miserable if they spend down 1/3 to 1/2 of their stash by 75. For the very reason stated here. "People are happy when the future is bright". Which is why I dislike a "Liability Matching Portfolio". True, it somewhat guarantees 30 years of spending, but it also guarantees 30 years of declining nest egg.

Part of the issue is how vague and inconsistent returns are. If market returns were a perfect 5%, inflation 2% and your WR 3%, little changes in terms of real wealth over time. Unfortunaltely we live in a less than perfect world where just compensating for what we can control is difficult enough in the decumulation phase..
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Re: Wade Pfau on depleting assets

Postby JW Nearly Retired » Sat Dec 08, 2012 11:13 am

Some quotes from the article..........
To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.

When the lifetime is a fixed length, it becomes easier to plan for a constant spending amount over time. But when survival probabilities are involved, as no one knows how long he or she will live, the matter becomes more complicated. It is no longer optimal to plan to always spend the same amount. It is instead optimal to front-load spending and to enjoy a higher standard of living while one is still able to do so.

Spending more means "optimal" happiness now! Most USA retirement savers seem to be following this advice even before they start retirement. Not sure if this idea is going to get all that much traction on this forum.
Personally, contemplating even a smallish risk of cat food at 85 would detract from any wild spending fun event I could dream up now.
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Re: Wade Pfau on depleting assets

Postby stlrick » Sat Dec 08, 2012 12:27 pm

I need to make a second set of comments about why I think this is a really bad idea. I enjoy reading Pfau's work. He is making important contributions to retirement planning. But he is also a public intellectual, and his work is being read as general advice on retirement planning by the sophisticated and the unsophisticated public. I think "depleting assets" as a retirement spending model is a dangerous generalization.

Pfau's always writes, as he should be, with attention to circumstances, such as individual risk tolerance. But much of the pubic will read things like this and respond simplistically (witness "the 4% rule"). When used that way, it is a prescription for poverty in oldest age. Moreover, how is the algorithm implemented? The declining likelihood of survival holds with the example of 65 versus 100, but if I am 65, it also holds for 70 versus 75. Is the plan to have a constantly declining quality of life because of a constantly declining probability of survival, or should I pick an age, say 85, at which I shall henceforth only have enough for basic needs if I should be so misfortunate as to live that long?

If someone has any serious bequest motive, the whole thing is entirely dysfunctional, because if you live beyond what you anticipate, you put yourself in the position of needing to decide whether to continue spending on yourself or to fulfill your long-standing bequest plans. If someone has no bequest motive, maybe they should just annuitize everything and let inflation take care of implementing the declining quality of life.

As a part of a complex academic argument, this idea can be explored. As an article for the general public, I hope it will disappear.

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Re: Wade Pfau on depleting assets

Postby Rick Ferri » Sat Dec 08, 2012 1:27 pm

It doesn't make much sense to plan to spend the same amount at age 65 as at age 100, because the odds of living so long are low. To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.


How much we have available to spend early on depends heavily on how much we expect to leave our heirs when we're no longer around.

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Re: Wade Pfau on depleting assets

Postby Mel Lindauer » Sat Dec 08, 2012 1:36 pm

I agree with Rick that this is a very bad idea. Take for example, my Dad, who's 97 (Mom made it to 92). They lived (and Dad now lives) in an assisted living facility that costs about $7,000 per month. His quality of life is excellent because he and Mom saved enough to be able to afford this lifestyle in their later years. Had they spent down their assets as suggested in this column, they'd have been desitute at their advanced ages.
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Re: Wade Pfau on depleting assets

Postby Rick Ferri » Sat Dec 08, 2012 1:54 pm

Mel Lindauer wrote:Had [my parents] spent down their assets as suggested in this column, they'd have been destitute at their advanced ages.


No they wouldn’t, Mel, because they have a huge asset that's never counted. They have you! Parents of successful people do not eat dog food in their advanced ages. No one plans to tap this “taboo” equity later in life, but it does exist.

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Re: Wade Pfau on depleting assets

Postby Fallible » Sat Dec 08, 2012 1:57 pm

Rick Ferri wrote:
It doesn't make much sense to plan to spend the same amount at age 65 as at age 100, because the odds of living so long are low. To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.


How much we have available to spend early on depends heavily on how much we expect to leave our heirs when we're no longer around.

Rick Ferri


This is an important point that I think Pfau should've emphasized more (and also included those who want to leave money to charities). He just says "For those with sufficient pension income and little desire to leave an inheritance, it is even rational to plan for spending down all financial wealth by some advanced age." I think this could be dangerous advice and easily misunderstood, especially by those looking for an excuse to spend too much early on. He does, however, seem to at least suggest that one should "plan" for spending down, so hopefully such a plan would include changing it to reflect major changes in one's life.
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Re: Wade Pfau on depleting assets

Postby freebeer » Sat Dec 08, 2012 2:22 pm

stlrick wrote:Pfau states that part of the logic for depleting assets is:

It doesn't make much sense to plan to spend the same amount at age 65 as at age 100, because the odds of living so long are low. To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.


In my view, the only thing true about this argument is that is proves that economists are not psychologists. Why is a person happy? It certainly is not because of what happened in the past...

A plan that does not maintain your standard of living (however priorities change with age) for your full lifetime is going to create anxiety and unhappiness even before your standard of living declines, because you will be able to see that it is going to happen.

Rick


Rick, there may well be a "Bogleheads" psychological type for whom your statements are true - folks who are uncomfortable with even the small chance that they would have to reduce their spending in the far future. But actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means (other than when a bequest is in the picture which is a different motive).

Because there is no free lunch. To avoid the future risk one would have to over save, aka work more and consume less, in the present. You say happiness is not about the past but even less is it about the future, it's mainly about the now. And why would say working Saturdays, giving up half your weekend time with family and friends now in exchange for the guarantee of a maintained standard of living in the 1% chance that you will survive to age 93, be a good deal? Or even skipping that wonderful trip to Europe?
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Re: Wade Pfau on depleting assets

Postby DouglasDoug » Sat Dec 08, 2012 2:26 pm

Thanks for the link. Food for thought.
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Re: Wade Pfau on depleting assets

Postby 555 » Sat Dec 08, 2012 2:40 pm

It's ridiculous to treat your principal as untouchable.
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Re: Wade Pfau on depleting assets

Postby Mel Lindauer » Sat Dec 08, 2012 3:40 pm

freebeer wrote:
stlrick wrote:Pfau states that part of the logic for depleting assets is:

It doesn't make much sense to plan to spend the same amount at age 65 as at age 100, because the odds of living so long are low. To get the most enjoyment out of retirement, it is optimal to spend more earlier on, with the understanding that spending may have to be cut later in the event of a long life and poor portfolio performance.


In my view, the only thing true about this argument is that is proves that economists are not psychologists. Why is a person happy? It certainly is not because of what happened in the past...

A plan that does not maintain your standard of living (however priorities change with age) for your full lifetime is going to create anxiety and unhappiness even before your standard of living declines, because you will be able to see that it is going to happen.

Rick


Rick, there may well be a "Bogleheads" psychological type for whom your statements are true - folks who are uncomfortable with even the small chance that they would have to reduce their spending in the far future. But actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means (other than when a bequest is in the picture which is a different motive).


See my post above which shows that this statement simply isn't true (Dad's monthly cost is ~$7,000 just for his Assisted Living fee, and that doesn't include his other expenses). Money magazine recently stated that the average out-of-pocket medical expenses for the last five years of life of many seniors is ~$51,000. So while some types of expenses my decrease as we age, other expenses may well overwhelm those decreased expenses.
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Re: Wade Pfau on depleting assets

Postby gkaplan » Sat Dec 08, 2012 3:43 pm

We have two Ricks posting simultaneously in this thread. It's very confusing.
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Re: Wade Pfau on depleting assets

Postby Rick Ferri » Sat Dec 08, 2012 5:07 pm

gkaplan wrote:We have two Ricks posting simultaneously in this thread. It's very confusing.


I always sign my posts as "Rick Ferri"

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Re: Wade Pfau on depleting assets

Postby hicabob » Sat Dec 08, 2012 5:47 pm

... or of course the old "spend with abandon then annuitize if your portfolio can't keep up" method is quite interesting if enriching ones heirs is not super-high priority, as long as the annuitization happens while sufficient capital remains.
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Re: Wade Pfau on depleting assets

Postby gkaplan » Sat Dec 08, 2012 6:20 pm

Rick Ferri wrote:I always sign my posts as "Rick Ferri"


Yes, but posters are referring to "Rick" without differentiating between the two of you.
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Re: Wade Pfau on depleting assets

Postby stlrick » Sat Dec 08, 2012 6:24 pm

freebeer wrote:
Rick, there may well be a "Bogleheads" psychological type for whom your statements are true - folks who are uncomfortable with even the small chance that they would have to reduce their spending in the far future. But actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means (other than when a bequest is in the picture which is a different motive).

Because there is no free lunch. To avoid the future risk one would have to over save, aka work more and consume less, in the present. You say happiness is not about the past but even less is it about the future, it's mainly about the now. And why would say working Saturdays, giving up half your weekend time with family and friends now in exchange for the guarantee of a maintained standard of living in the 1% chance that you will survive to age 93, be a good deal? Or even skipping that wonderful trip to Europe?


Freebeer, I don't get your point. Are you spending everything you make now, or are you saving for retirement? If you are saving anything, then you could be spending more, so you are giving up happiness now for the future. Who said anything about whether you work in Saturdays to give up weekends with your family? If that is something that you do not want to sacrifice, then don't. Most of us practice some delayed gratification but no one said sacrifice everything - we save for retirement, we complete a college degree instead of getting a job at 16 (and sometimes even go on to medical or law school, or get a PhD), and in doing so, we seek a balance between now and the future. When you retire and begin decumulation, you also have to decide on your balance between now and the future. There is an argument for thinking that there will be decreased spending in the future based on patterns of spending in the 70's, 80's and 90's (although as others have pointed out, that requires a really big assumption about healthcare). But I disagree with Pfau that decreased spending in the future should be based on some probability optimization of lifespan. According to the Actuarial Life Tables at ssa.gov, a male age 65 has an expected age at death of 82. However, should you make it to 80, expected lifespan is to 88. If at 65, I start spending down money based on death at 82, it is going to be a sad and hard 8 years to be told at 80 that I need to revise my budget and plan to live to 88. We don't get to optimize a probability table when we live only one life.

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Re: Wade Pfau on depleting assets

Postby JW Nearly Retired » Sat Dec 08, 2012 6:27 pm

freebeer wrote:But actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means......

"almost no one saves enough to not have the risk of reduced means".... I can agree with this but how can it be an argument for front loading retiree spending?

We know a 90 year old widow where the couple retired with a million or more but it's all long gone, even the reverse mortgage has run dry, and she is now destitute and living in a rest home on medicaid.

They were definitely Pfau logic followers and it hasn't ended very well.
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Re: Wade Pfau on depleting assets

Postby JDCPAEsq » Sat Dec 08, 2012 7:02 pm

Mel Lindauer wrote:See my post above which shows that this statement simply isn't true (Dad's monthly cost is ~$7,000 just for his Assisted Living fee, and that doesn't include his other expenses). Money magazine recently stated that the average out-of-pocket medical expenses for the last five years of life of many seniors is ~$51,000. So while some types of expenses my decrease as we age, other expenses may well overwhelm those decreased expenses.

I share the same experience, Mel. My mother died at nearly 100 in a nursing facility. Her most expensive five years were her last five when her expenses ran nearly $150,000 a year, with the nursing facility alone running about $12,000 a month.
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Re: Wade Pfau on depleting assets

Postby freebeer » Sat Dec 08, 2012 9:40 pm

Mel Lindauer wrote:
freebeer wrote:... actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means (other than when a bequest is in the picture which is a different motive).


See my post above which shows that this statement simply isn't true (Dad's monthly cost is ~$7,000 just for his Assisted Living fee, and that doesn't include his other expenses). Money magazine recently stated that the average out-of-pocket medical expenses for the last five years of life of many seniors is ~$51,000. So while some types of expenses my decrease as we age, other expenses may well overwhelm those decreased expenses.


Dear Mel,

With respect, your post documenting one person's situation does not in any way show that my statement about the prevalent pattern "simply isn't true". I certainly agree that there is often a bump up in spending in the final stage of life but that doesn't contradict a general decline pattern of spending with age which has been well documented. See e.g. http://finance.yahoo.com/news/income-ne ... 00617.html . (I did overstate "almost everyone" - I could better have written "most people").
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Re: Wade Pfau on depleting assets

Postby freebeer » Sat Dec 08, 2012 9:51 pm

stlrick wrote:Freebeer, I don't get your point... we seek a balance between now and the future... But I disagree with Pfau that decreased spending in the future should be based on some probability optimization of lifespan. According to the Actuarial Life Tables at ssa.gov, a male age 65 has an expected age at death of 82. However, should you make it to 80, expected lifespan is to 88. If at 65, I start spending down money based on death at 82, it is going to be a sad and hard 8 years to be told at 80 that I need to revise my budget and plan to live to 88. We don't get to optimize a probability table when we live only one life.

Rick


My point is only that that balance between now and the future for most of us doesn't imply saving so much that we can spend the same $ until we are at a longevity that we only have a 1% chance of reaching and even less chance of enjoying. And at the end of the day there are worse things than to end up a healthy active 80 year old who needs to revise their budget downward and travel to less expensive destinations for the next 8 years. My Mom is 80 and is healthy and active but has very limited means. She drives a 15 year old car and lives (on her own) in a small place. And instead of a Broadway play tonight we're all going out to the high school production. But she considers herself lucky and blessed, not in a sad and hard situation. After all she has wealthy friends in the senior community here who are dying or getting very sick or losing their minds. And even if in the worst case she has to go into a Medicare facility someday she has many friends who've done likewise - she wouldn't be thrilled and we her kids would certainly helping her with a better situation - but it's all sort of "bonus time" at this point.
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Re: Wade Pfau on depleting assets

Postby Mel Lindauer » Sat Dec 08, 2012 10:36 pm

freebeer wrote:
Mel Lindauer wrote:
freebeer wrote:... actual behavior of the vast majority of people is consistent with the logic Pfau expresses: almost everyone spends less as they age, and almost no one saves enough to not have the risk of reduced means (other than when a bequest is in the picture which is a different motive).


See my post above which shows that this statement simply isn't true (Dad's monthly cost is ~$7,000 just for his Assisted Living fee, and that doesn't include his other expenses). Money magazine recently stated that the average out-of-pocket medical expenses for the last five years of life of many seniors is ~$51,000. So while some types of expenses my decrease as we age, other expenses may well overwhelm those decreased expenses.


Dear Mel,

With respect, your post documenting one person's situation does not in any way show that my statement about the prevalent pattern "simply isn't true". I certainly agree that there is often a bump up in spending in the final stage of life but that doesn't contradict a general decline pattern of spending with age which has been well documented. See e.g. http://finance.yahoo.com/news/income-ne ... 00617.html . (I did overstate "almost everyone" - I could better have written "most people").


I'm not just documenting one person's situation, freebeer. There are thousands of assisted living facilities and nursing homes in the US (and more being built every day because of the aging of America). They're filled with tens or even hundreds of thousands of folks just like my Dad, and they're all burning through their money at a much faster clip than they did when they were younger. And those who've spent down their assets as suggested by Wade will probably find that they simply can't get into a desirable facility.
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Re: Wade Pfau on depleting assets

Postby arcticpineapplecorp. » Sun Dec 09, 2012 12:51 am

Mel Lindauer wrote:I'm not just documenting one person's situation, freebeer. There are thousands of assisted living facilities and nursing homes in the US (and more being built every day because of the aging of America). They're filled with tens or even hundreds of thousands of folks just like my Dad, and they're all burning through their money at a much faster clip than they did when they were younger. And those who've spent down their assets as suggested by Wade will probably find that they simply can't get into a desirable facility.


How does one choose a desirable facility over a non-desirable facility? You could look at reviews, complaints etc. But I have found (I determine financial eligibility for Medicaid for LTC) in talking with families (just had one such conversation this past Friday) that you can find two completely different views (on desirability) between two families regarding the same nursing facility. (just like you can for any product on any website that posts reviews like amazon, tripadvisor, etc).

Now, if we are speaking of desirability vs. non desirability as a medicaid vs non medicaid facility (I know you didn't state that directly Mel, but I'm wondering if there might be an intimation there or an inference by others...I've tended to get this vibe on the board by others) then how do we take the following into account:

In the county where I live according to our Area Office of Aging website, there are 32 nursing facilities in the entire county and 31 accept medicaid. That means if you insist upon being in a non-medicaid facility, you have only one choice. Therefore, there is no practical difference in treatment between a facility that will accept you as private pay (if your resources exceed qualification for medicaid) and that same facility that accepts you if you qualify for medicaid. Maybe you get to have a private room as a non-medicaid patient...but otherwise, do you really think people on medicaid are treated differently at the same facility they're treating non-medicaid patients? I'm sure they get the same food, medicine, bedsheets, etc. Well, who knows...maybe the non-medicaid patients get the fine french linens, foie gras and name brand (non-generic) medicines. :happy
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Re: Wade Pfau on depleting assets

Postby terpfan122 » Sun Dec 09, 2012 11:46 am

Personally, I have been following Mr. Pfau's research since I discovered him from either this forum or another financial forum and I am greatfull for his contributions. As someone who saves more than we will likely need at the same time having the ability to live a comfortable life now, I recognize that I will likely tweak our balance of spending and saving and/or reducing the schedule at which I deplete our assets all our lives. Since we have another 20 years before we become financially independent and will likely work another 5-10 years beyond I expect I will continue to follow Mr. Pfau's data and the application of his conclusions over time. I will definitely spend more earlier in retirement through taveling and transitioning certain assets to our children (we do want to leave a huge inheritance to our children - we want to spend it with them during they years where they are saving and we are spending which may mean we pay for certain things so they can maximize their qualified savings vehicles until they can do it themselves). The 2 variables I will have to factor in are health/cost and whether I will be able to trust my children with handling money or have to pay someone else to it. Either way, we do not want to spend 7000$ a month at 97 years of age to live. But that is our personal choice. If, in our very later years, we are dependent on fixed income that comes from either SSI or an income source I had previously established we are fine with that.
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Re: Wade Pfau on depleting assets

Postby stlrick » Sun Dec 09, 2012 12:28 pm

terpfan122 wrote:Either way, we do not want to spend 7000$ a month at 97 years of age to live. But that is our personal choice. If, in our very later years, we are dependent on fixed income that comes from either SSI or an income source I had previously established we are fine with that.


freebeer wrote: My point is only that that balance between now and the future for most of us doesn't imply saving so much that we can spend the same $ until we are at a longevity that we only have a 1% chance of reaching and even less chance of enjoying. And at the end of the day there are worse things than to end up a healthy active 80 year old who needs to revise their budget downward and travel to less expensive destinations for the next 8 years....And even if in the worst case she has to go into a Medicare facility someday she has many friends who've done likewise - she wouldn't be thrilled and we her kids would certainly helping her with a better situation - but it's all sort of "bonus time" at this point.


I think there is a great tendency to underestimate the potential quality of life into the 90's. My parents are at that stage. Their bodies are weakening but their minds are clear. They tremendously appreciate and enjoy that they have the finances to get the help they need and to do the renovations necessary to remain in their lovely small home facing a golf course in a gated community in Florida rather than moving to assisted living. My father gets great pleasure getting into his backyard pool each day, and when he spoke to a company about installing a pool lift and was told that the model he was considering would cost $6000, it was with the same satisfaction any of us would have that he could simply say "When can you do the installation?" They derive great benefits and conveniences on a regular basis by paying for concierge medical care. They enjoy using a large screen desktop computer to Skype with their great grandchildren. They no longer drive, but from what I can see, the reasons they enjoy being driven in their large Lexus are identical to the reasons I might enjoy driving one.

Just because you may no longer be able to do the things that are important to you now does not mean that you will not care about doing the things that are important to you then. Bringing it all back to investing, everything I have seen suggests that the goal during the adult working and retirement years should be based on a model of consumption smoothing for the entire lifespan.
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Re: Wade Pfau on depleting assets

Postby Leesbro63 » Sun Dec 09, 2012 7:03 pm

I have dealt with a number of aging relatives in facilities that accept Medicaid (but also have full pay people spending down toward Medicaid...or just spending). What I've noticed is that the care did not differ if the person was full pay or on Medicaid. But care was better when a family member or members checked in frequently. If they know someone's watching...

The "hands on" staff doesn't really focus on who is paying what. They are, however, very focused on who has a relative who will rat them out for forgetting to change granny's diaper. So I'd be more inclined to put a relative in a Medicaid facility close to me (where I can stop in frequently)...versus being able to pay full fare but being too far away from being able to have someone check in often.
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Re: Wade Pfau on depleting assets

Postby DouglasDoug » Sun Dec 09, 2012 7:45 pm

Leesbro63, I could mistake you for friend who repeats the same words. Her mother's care is subsidized by Medicaid. The facility has its share of wealthy clients. The level of care is dictated by visitor vigilance. Make no mistake, she says, if you have no visitors the level of care is borderline negligence. She has seen a good deal and none to her liking.
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Re: Wade Pfau on depleting assets

Postby Browser » Sun Dec 09, 2012 9:35 pm

We hear a lot of stories about people who lived too long and ran out of money, or would have run out of money had they not been frugal. Not as many stories about people who died and left a pile on the table -- they were too dead to share their regrets about it, and the heirs weren't too upset about it either. :)
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Wade Pfau on depleting assets

Postby freebeer » Sun Dec 09, 2012 9:46 pm

stlrick wrote:
terpfan122 wrote:Either way, we do not want to spend 7000$ a month at 97 years of age to live. But that is our personal choice. If, in our very later years, we are dependent on fixed income that comes from either SSI or an income source I had previously established we are fine with that.


freebeer wrote: My point is only that that balance between now and the future for most of us doesn't imply saving so much that we can spend the same $ until we are at a longevity that we only have a 1% chance of reaching and even less chance of enjoying. And at the end of the day there are worse things than to end up a healthy active 80 year old who needs to revise their budget downward and travel to less expensive destinations for the next 8 years....And even if in the worst case she has to go into a Medicare facility someday she has many friends who've done likewise - she wouldn't be thrilled and we her kids would certainly helping her with a better situation - but it's all sort of "bonus time" at this point.


I think there is a great tendency to underestimate the potential quality of life into the 90's. My parents are at that stage. Their bodies are weakening but their minds are clear. They tremendously appreciate and enjoy that they have the finances to get the help they need and to do the renovations necessary to remain in their lovely small home facing a golf course in a gated community in Florida rather than moving to assisted living ...Bringing it all back to investing, everything I have seen suggests that the goal during the adult working and retirement years should be based on a model of consumption smoothing for the entire lifespan.


Rick, congratulations on your parents situation. My point remains though that this is a small minority of folks and if even they weren't affluent they might still be thrilled to be in their 90's with clear minds. And everything in life is a tradeoff and scrimping and working X years longer just in case you hit that < 5% chance may not be optimal. I'm not trying to convince you to change how *you* save for yourself - that's your choice - but I think there's no data-rooted argument that everyone should save to that level. Mr. Pfau's formula (which started this thread) seems eminently reasonable as a baseline.
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Re: Wade Pfau on depleting assets

Postby traineeinvestor » Sun Dec 09, 2012 9:55 pm

At the risk of oversimplifying things, since I don't know how long I will live, it's a choice between (i) spending more when we are younger and taking the risk of being forced to cut back on living expenses as I age and (ii) retaining the ability to spend at a similar level as we age at the risk of leaving additional money to my children.

Seems like a pretty simple decision to me - my retirement plan assumes at least one of myself and my wife will make it to 100 and we will not be cutting back on expenses as we age. If things don't work out that way, I'd be happy to leave it to the next generation to enjoy.
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Re: Wade Pfau on depleting assets

Postby wade » Mon Dec 10, 2012 2:40 am

Great discussion everyone.

stlrick made a particularly important point that this is a topic which doesn't belong in writings for the general public, as it is too easy to misinterpret as "live for today and don't worry about tomorrow." The subleties of lifetime utility maximization will be lost in that. I'll take that suggestion to heart.

And really, this is an argument more for people such as myself who tend to save too much, to realize that it is okay to start spending more. Also, the point is to not just spend more early in retirement for the sake of it. If you are already meeting your lifestyle goals with your current spending, then there is no need to increase it. There needs to be a balance.

But part of the debate does just seem to be between people with different "longevity risk aversion coefficients." In the figure below, those of you worried about a declining living standard might choose a path like with coefficient 10, whereas those of you who could relate more to the premise of the article might be somewhere between 2 and 5. You have to be very risk averse to plan for a completely smooth spending path, but if that is really what you want, then you should probably just annuitize and not be invested in stocks.

Wanting to leave a legacy, and planning for health care and long-term care costs do add some complications.

Image

And there is another issue about where to draw the line. Suppose you plan for smooth consumption until age 100. What happens at age 101? Why did you choose 100 as the maximum age?
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Re: Wade Pfau on depleting assets

Postby Browser » Mon Dec 10, 2012 10:36 am

Thanks wade - great summary. I agree completely that longevity risk aversion is an important factor. And I'm also very sympathetic with your point that the article may ring a bit more for people such as myself who, I think, tend to cut back too much and not spend. It's a lifelong habit formed when I was a saver on steroids during my working career, so I could retire before health forced me to. I accomplished that, but now I fear I'm making the mistake of not enjoying my earlier retirement years. I'm working on trying to formulate some guidelines that will give me permission to spend a little more now and not end up old, sick, and counting my shekels - which probably will end up going to the nursing home or my heirs who don't need it.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Wade Pfau on depleting assets

Postby Leesbro63 » Mon Dec 10, 2012 10:43 am

One factor that I think gets lost in these types of discussions is that beyond a certain point, spending more doesn't necessarily make one happier.
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Re: Wade Pfau on depleting assets

Postby Browser » Mon Dec 10, 2012 10:55 am

Leesbro63 wrote:One factor that I think gets lost in these types of discussions is that beyond a certain point, spending more doesn't necessarily make one happier.

Have you tried it? :)
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Wade Pfau on depleting assets

Postby terpfan122 » Tue Dec 11, 2012 9:46 am

In addition to (or combined with) the aforementioned psychological aspect of this idea is the Boglehead aspect. I think many folks on this forum enjoy saving/investing/managing money as a hobby as much as a necessity. The idea of spending down assets in a schedule that is inconsistent is not just scary but it may not even be fun! I am so happy that I found this community a few years ago because it reinforced a concept that I wanted to find. I wanted to find a way to put my financial matters on auto pilot as much as I can so that I can enjoy my hobbies. Now, if only I didn't have to work for 20 more years. :beer
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Re: Wade Pfau on depleting assets

Postby tadamsmar » Tue Dec 11, 2012 11:07 am

The bequest motive thing requires some thought.

In this context it's really a mixed motive, funds that might cover a longevity-related risk or might be a bequest.

The heir typically will not plan on getting this because that is risky for the heir. The heir tends to end up being pretty old when they get the funds (if any) and they may have been saving for retirement as if they would not get the bequest, assuming they are not already retired.

The whole thing perhaps has less utility than one might think.

Perhaps this kind of money tends to end up getting consumed in unexpected long term care expenses at some point.
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Re: Wade Pfau on depleting assets

Postby Leesbro63 » Tue Dec 11, 2012 11:47 am

Browser wrote:
Leesbro63 wrote:One factor that I think gets lost in these types of discussions is that beyond a certain point, spending more doesn't necessarily make one happier.

Have you tried it? :)


I've seen many people miserable because spending became their religion.
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Re: Wade Pfau on depleting assets

Postby Levett » Tue Dec 11, 2012 1:09 pm

It strikes me that there's an awful lot of anecdotal stuff showing up in this thread re aging and such things as assisted living.

Why not go to hard data collected by organizations for whom the data has everything to do with their business plan?

Here's a link, for example, to data collected by MetLife:

https://www.metlife.com/about/press-room/us-press-releases/2011/index.html?compID=61929

Here's a link to a comprehensive government study.

http://www.cms.gov/Medicare/Provider-Enrollment-and-Certification/CertificationandComplianc/Downloads/nursinghomedatacompendium_508.pdf

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Re: Wade Pfau on depleting assets

Postby paulsiu » Tue Dec 11, 2012 2:18 pm

You know, I always thought that 4% a year was actually just a guideline, it's more like don't withdraw more than 4% + inflation a year. This does not mean you need to actually spend the entire 4% a year. Even at retirement people sock away some money for a rainy day. In addition, it's 4% of your investment asset. If you have pension and such, that's outside of that 4% any way. This is merely a precaution so we don't run out of money and put financial stress on our kids. If we know the exact day of our death, we can spend our very last dollar (or set up an amount to be leftover for our kids) the day we die. A cheery topic for the day :-).

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Re: Wade Pfau on depleting assets

Postby Sheepdog » Tue Dec 11, 2012 2:57 pm

Well, at 79, living off of SS and savings, I have more than I had at 65 after spending an average of 4.5% a year since retirement.
Yes, I did adjust spending in bad market times and increased spending in up years and will in the future..
Yes, our standard of living and enjoyment in life has remained the same, if not better.
No, spending has not decreased since retiring, it is higher by our personal inflation rate. We enjoy life by going out more to restaurants, sports and entertainment, but less on long distance cruises, though.
No, I don't want to deplete our assets in the next 20+ years and enjoy life less, so am planning not to do so. I am not budgeting to leave a legacy for our favorite causes, but I expect there will be and have them as final beneficiaries.
Yes, I am planning as if our lives will be as good in our 90s. I won't assume less.
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