Does the absence of need for a legacy affect your AA or SWR?

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rgs92
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Does the absence of need for a legacy affect your AA or SWR?

Post by rgs92 » Fri Feb 16, 2018 12:17 pm

If one does not need (or want) to leave a legacy for inheritance (or any particular purpose), does that affect your asset allocation or Safe Withdrawal Rate?
Is anyone in this situation and, if so, how has it affected these elements of your financial planning?
Thanks for any insight.

Please note that this is not a moral or social question about leaving a legacy, as that's a subject (a legitimate one of course) for another thread (or forum).

[Follow-up question about how much risk to take 6 posts down from here.]
Last edited by rgs92 on Fri Feb 16, 2018 1:47 pm, edited 2 times in total.

ResearchMed
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by ResearchMed » Fri Feb 16, 2018 12:30 pm

rgs92 wrote:
Fri Feb 16, 2018 12:17 pm
If one does not need (or want) to leave a legacy for inheritance (or any particular purpose), does that affect your asset allocation or Safe Withdrawal Rate?
Is anyone in this situation and, if so, how has it affected these elements of your financial planning?
Thanks for any insight.

Please not that this is not a moral or social question about leaving a legacy, as that's a subject (a legitimate one of course) for another thread (or forum).
Absolutely.

We'll be trying to "spend it all", and part of that strategy will no doubt be with a few laddered SPIA's.
How we'll handle the rest, we aren't sure yet.
We have only a few of years to go now, so this is something we are actively researching with more focus.

Given that we can't/won't annuitize "everything", there will obviously be "something left", and that will go to a few dear friends plus a couple of favored non-profits.

But it will definitely allow us to "spend more" than if we wanted to preserve a larger sum.

It doesn't affect our AA as much as our planning for withdrawal strategy.
We were quite aggressive until very recently.
With the market so high, and with DH having just made a decision about a "time frame" about 3 months ago, we had recently moved a good chunk out of equities.

RM
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renue74
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by renue74 » Fri Feb 16, 2018 12:36 pm

This may sound coarse, but even if there are children/grand children, I'm not planning my retirement/AA around them. We've invested in our children, saved 100% for their college tuition and will help them along through life, but I'm not changing the way I live in order to share a legacy with them. They'll get what's left.

I live in the South and my wife and I both have seen way too many friends waiting for grandparents or parents to die so they can sell vast tracts of land or timber or businesses, while the children work in underpaying, no stress jobs. I'm not saying my kids will do that, but I've seen it happen.

Disclaimer: I neither own "vast tracts of land nor timber."

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by DorothyB » Fri Feb 16, 2018 12:39 pm

Yes. I've been retired a few years now. It doesn't affect my AA, but does impact how much I can safely (in my opinion) withdraw each year. I think I'm OK w/ running out of money when I turn 104.

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steve roy
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by steve roy » Fri Feb 16, 2018 1:21 pm

There will likely be money left over for the children when the Mrs. and I have gone to our reward, BUT ...

We don't feel we have a need to leave our kids a legacy/money. The plan DW and I have is to take our RMDs and see what we need to live on. Our AA is conservative: 30% stocks/70% bonds. Having private pensions and Social Security, we don't think we'll need to spend all the 401(k) and IRA stashes, conservative as they are, on day-to-day expenses. But we are early in retirement and haven't pencilled expenditures out. So we don't really KNOW.

Once all the financial dust has cleared, we'll see what income and outgo is. If there's bucks left over for the kids, fine and dandy. If not, oh well. Our belief is, they can travel along the great highway of life under their own financial power.

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Kalo
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Kalo » Fri Feb 16, 2018 1:33 pm

I don't think it does for me. Even though I have no children of my own, I have close relatives I would be happy to have inherit whatever is left over after I've passed away.

The problem with using this for planning in my opinion is that the future contains variables that are dispersed too widely for me to even know how things will be, including of course my age of death. I can easily imagine having no legacy to leave at the low end, to being fairly well to do at the high end, and there's not that much I can do any more to control where I wind up along that continuum.

I'm not brave enough to hold a highly risky portfolio even if I did wish to leave a large legacy. One thing to consider is that by keeping my risks lower, that is a form of legacy (reducing the likelihood that I will have to rely on the very people who would have otherwise benefited from my legacy).

I think the odds are pretty good that I will leave a tidy sum, partly because I've just never been much of a spender, and I don't see that changing now. But I don't consider it at all with regard to my AA or SWR.

Kalo
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Artsdoctor » Fri Feb 16, 2018 1:40 pm

Sure. If you're going to leave a legacy, and if it's a significant goal, then you're going to be far more aggressive with your asset allocation. You may be 50-60 years old, but if you have a specific amount of money you're thinking about leaving another generation (or generations), the money can grow for a lot longer than you're likely to be alive.

Likewise, if you goal is to leave nearly nothing, why would you be taking equity risk when you're in your 80's or 90's?

rgs92
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by rgs92 » Fri Feb 16, 2018 1:44 pm

Follow up regarding risk.

Just to add to my original question, would you lean to more or less risk. Of course, leaning to SPIAs (fixed annuities) implies less risk overall, so is that the direction you take?
Thanks again for the responses and different takes on this so far.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Jags4186 » Fri Feb 16, 2018 1:51 pm

For better or worse it's very difficult to "spend it all" without running out. Those who follow the "4% rule" are more or less guaranteed to not run out of money over a 30 year retirement, but depending on sequence of returns could finish with practically no money or many multiples of where you started.

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Smorgasbord
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Smorgasbord » Fri Feb 16, 2018 1:56 pm

I'm not at the withdrawal phase yet, but I can certainly imagine gradually increasing my withdrawal rate if market conditions have been favorable. For example, if I retire at 50 with a pile of money, and the pile is twice its original size at 65, I can see upping my spending rate.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by grabiner » Fri Feb 16, 2018 10:53 pm

If you don't need to leave a legacy, you can increase your sustainable withdrawal rate by converting most of your assets to an annuity (preferably inflation-adjusted).
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Watty
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Watty » Fri Feb 16, 2018 11:17 pm

There can be all sorts of different variations but for someone that is in this situation it is also very possible that they will not have any close family to manage their finances if they are not able to, like they are in a nursing home.

This may require that you budget for some sort of financial manager to manage their care and investments. If this is something like a law firm managing a trust this will not be cheap and the yearly fees will need to be subtracted from your 4%(or whatever) safe withdrawal rate.

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kramer
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by kramer » Sat Feb 17, 2018 1:21 am

I agree with what has been posted in this thread. It may also affect tax moves ... if you are also single with no legacy motive, in early retirement you may favor taking 0% capital gains over IRA to Roth conversions in order to save a full 15% on tax rates. But if you are married or have a legacy motive, tax basis is reset at inheritance time and it makes less sense.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by DebiT » Sat Feb 17, 2018 2:33 pm

This topic is very interesting to me. We love our sons, are on great terms with them, and think they will be available to turn decisions over in our extreme old age. Happily, they are doing very financially. I laugh because the older one is a police officer eligible to retire with an excellent pension right about when we fully retire at 70 to live off SS and our investments. So arguably he’ll be in better shape than us! So no need to leave a legacy, but do need to plan for a long old age, at least on my side, if heredity counts for anything.

I don’t understand enough about annuities , especially whether they increase SWR and would like to learn more. My question is, if our withdrawl rate only needs to be 3%, even with th an early death of one of us re SS, is that a scenario where an annuity isn’t needed? Or, what is the withdrawl rate or length of retirement where it is needed? Otar’s calculator seems to say that worst case at 95 I might need to sell the house and rent. Seems fine to me.

Is there an understandable site or reference about annuities that would help answer that SWR question?
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echidna
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by echidna » Sat Feb 17, 2018 11:40 pm

Being single, I haven't investigated the case of a couple who might want a joint and survivor annuity. So you would have to investigate for your specific case, where an annuity may be less advantageous than for a single retiree.

But what I can say is that if you are single, retiring around 70, and out of conservatism/concern about future returns/etc. planning on a 3% SWR, you are in a regime where a SPIA might make a lot of sense.

You can presently get a SPIA which pays around 5% with 4% COLA for a male, age 70. This level of COLA will likely cover future inflation at least in the near term, if not indefinitely.

Let's say your total portfolio is $1,000,000, and you plan on a SWR of $30,000 per year initially. If you annuitize $600,000, the annuity will pay you the $30,000 per year you need, with very low risk.

This leaves $400,000 available for investment, contingencies, etc., to provide additional support during retirement.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by echidna » Sun Feb 18, 2018 1:13 pm

Like some here, I am recently retired with a large enough portfolio to assure my desired retirement living expenses and then some. I'm still deciding how to allocate funds for the future. Right now, the portfolio is conservatively invested. I am leaning towards annuitizing a significant portion (in SPIA's with COLA or CPI indexing), to provide a more-or-less guaranteed base income when combined with Social Security payments. Since this is an irreversible choice, I'm taking my time making it. So far, I've bought one small SPIA at age 70, which pays 6.67% initially with full CPI indexing for life.

The assumption in this thread seems to be that the balance of the portfolio remains in market investments, hence all the discussion of AA and SWR. But I am seriously considering taking a different approach and using a large part of the remainder to buy a vacation home. This would likely be in a foreign country (a favorite location from our family travels). It would be a place to live 2-3 months per year, and to use as a base for travel around its location. I expect to cover all running costs by renting it out for part of the time we're not there, so it's cash-neutral after purchase.

It's a sort of investment - maybe it will appreciate significantly, maybe it won't, I don't care as I would not buy it for that reason. As an "investment", it's highly illiquid, but in an emergency could likely be sold fairly quickly by selling low. Or, in need, the property could be operated to generate some income with a more aggressive rental schedule.

Since I will have no death benefit on the annuities, this property would be a significant part of any legacy. I'm thinking of having some sort of trust arrangement, so the house could remain a family resource indefinitely, rather than just being sold for cash after I die. I should add that my family is well provided for, so I don't feel the need to leave any family legacy. But the house would be a nice thing to pass on to them. I haven't decided in detail yet, but will probably leave any remaining cash to some social cause.
Last edited by echidna on Sun Feb 18, 2018 2:06 pm, edited 2 times in total.

radiowave
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by radiowave » Sun Feb 18, 2018 1:34 pm

One of the big unknowns in retirement is long term care (assisted living or skilled nursing care). Spending it while you can could leave a spouse or couple in difficult if not dire straights if they don't have enough to cover these late life expenses.
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radiowave
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by radiowave » Sun Feb 18, 2018 1:35 pm

One of the big unknowns in retirement is long term care (assisted living or skilled nursing care). Spending it while you can could leave a spouse or couple in difficult if not dire straights if they don't have enough to cover these late life expenses.
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radiowave
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by radiowave » Sun Feb 18, 2018 1:35 pm

One of the big unknowns in retirement is long term care (assisted living or skilled nursing care). Spending it while you can could leave a spouse or couple in difficult if not dire straights if they don't have enough to cover these late life expenses.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by bhsince87 » Sun Feb 18, 2018 1:48 pm

I've thought this one over a bit. DW and I have no heirs and no desire for other legacy gifts. But that hasn't impacted our asset allocation or expected withdrawal rate. Those are both fairly conservative.

What it DOES impact is our retirement dates. I suspect we'd want to work longer to build a bigger legacy, or buffer for children, etc., if that was a concern.

Somewhere down the road, it might tip the scales more in favor of annuities, but IMO, the current interest rate environment makes that less than optimal.
Retirement: When you reach a point where you have enough. Or when you've had enough.

echidna
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by echidna » Sun Feb 18, 2018 2:27 pm

radiowave wrote:
Sun Feb 18, 2018 1:35 pm
One of the big unknowns in retirement is long term care (assisted living or skilled nursing care). Spending it while you can could leave a spouse or couple in difficult if not dire straights if they don't have enough to cover these late life expenses.
I'm not sure if you are referring to my post (immediately above yours) about buying a house, or not. But to answer from my perspective, yes long-term care costs are a concern.

I watched my father transition from having a generous, inflation-indexed pension from his employer which paid his retirement living costs twice over, to having live-in care which, by itself, absorbed the whole pension. He had substantial wealth in investments, so was not in any financial trouble, but this comparison gave me a new appreciation for how expensive long-term care can be.

I do intend to investigate various long-term care options, but I did point out in my post (which I have clarified a little) that "investing" in a second home does not mean you cannot extract value from that resource in need.

I do agree with you in the following sense - nearly all the SWR analyses I've seen assume a constant withdrawal rate (in real terms), whereas the reality of many lives is that medical expenses near the end of life can dominate living costs. The greatest issue is likely to arise if you live well into your 90's where the usual SWR analyses allow the portfolio to drop to a very low reserve.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by radiowave » Sun Feb 18, 2018 3:48 pm

Hi echidna

I was just making a general comment. You make some important points about SWR and the difficulty in predicting late retirment medical and LTC needs. If you self-fund LTC, and don't need those services, then you may have a large amount of assets left at end of life. If funds are not available for assisted living or LTC, and there is no LTC insurance, I'm not sure what will happen.
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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by MrPotatoHead » Sun Feb 18, 2018 5:48 pm

It has had a huge impact on my Asset Allocation and withdraw rate. For one, I am still working; I am currently a bit over 70X expenses, if there was no desire for a legacy I would be retired or semi-retired. Also, given the freedom of not having to give a furry-kitten about the subsequent generation I think my standard of living would rise tremendously in terms of real estate (waterfront living verses a view). The offspring are already employed professional(s) with salary level rivaling and soon to exceed my own. If not for legacy aspirations I would up my real estate holdings thus dropping my assets and annuitize much of the remainder(honestly religious views would interfere with this, but...the thought is there).

My current trajectory is to set aside 10-15 years in rather base line expenses and then put the rest in equities. Sans legacy aspirations I would likely not have a SWR as much as withdraw rate based in spending what I want and realize I can always downsize later on. I am also fairly comfortable that in the near future we will have comfortable ways for people to exit the living game without the social stigma, so the downward risk to me is minimal; in other words outliving my money would not necessarily become a manifested thing as alternatives may be readily available.

But the reality is, I do have legacy aspirations, and the impact on the choices I am making are profound.

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Re: Does the absence of need for a legacy affect your AA or SWR?

Post by Gnirk » Sun Feb 18, 2018 7:52 pm

Yes, I hope to leave a modest inheritance of mid to high 6 figures for each of my daughters. They work hard, max out their 401Ks, contribute to a Roth when they can. That being said, they are single and self-supporting, and though they don’t expect an inheritance, I would like to leave them one. However, my AA is still based upon MY risk tolerance because I may need these investments for Long Term Care.

My withdrawal rate at this time is less than 1%.

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Taylor Larimore
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SPIAs

Post by Taylor Larimore » Sun Feb 18, 2018 8:10 pm

rgs92 wrote:
Fri Feb 16, 2018 12:17 pm
If one does not need (or want) to leave a legacy for inheritance (or any particular purpose), does that affect your asset allocation or Safe Withdrawal Rate?
rgs92:

You have received good replies. I'll add another thought:

If you do not need to leave an inheritance, consider purchasing a Single Premium Immediate Annuity (SPIA) in your late 70s. This type annuity is easy to understand and will provide the highest guaranteed lifetime income of any investment.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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