What is the "safe, safe" withdrawal rate?

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stlutz
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What is the "safe, safe" withdrawal rate?

Post by stlutz » Mon Sep 04, 2017 3:52 pm

We've had a couple of threads recently about SWRs (discussing comments from Kitces & Bengen), and oh, maybe two or three other threads over the past several years that also consider the thoughts from other "experts" (Bernstein, Pfau, Swedroe).

After I posted in one of the other threads, I got to wondering, what actually is a "safe, safe" withdrawal rate? By "safe, safe", I mean a) that you don't run out of money before you die; and b) that your money is invested in safe assets--e.g. not stocks, gold etc.

I will consider two hypothetical scenarios. The "best case" is a single 65 year old male who retired last Friday. The "worst case" scenario considers a couple, both aged 65, who also retired last Friday. Note that I'm leaving early-retirement scenarios out of the examination.

My "safe" portfolio is constructed using 2 assets: a) A 20 year TIPS Ladder. I estimated that average yield of this portfolio to be .5% (obviously this changes daily). b) An inflation-indexed deferred annuity that starts paying at age 85. Since inflation-adjusted deferred annuities don't inflation adjust prior to payout, I conservatively assumed a 3.5%/year inflation rate for the next 20 years when deciding how much income to buy (i.e. I assumed $20K today = $10K in 20 years).

In short, the TIPS ladder funds the first 20 years of retirement; the annuity takes care of the rest.

The TIPS ladder has a payout rate of 5.2%. The annuity for the single guy has a payout rate of 45% at age 85; it is 20% for the couple.

That means that every $10K of income costs:

a) the single guy: the annuity = $44,400; TIPS ladder = $192,300 = $236,700
b) the couple: the annuity = $98,700; TIPS ladder = $192,300 = $291,000

That works out to a withdrawal rate of 4.22% for the single male and 3.44% for the couple.

What do I conclude from this?

a) I'm not going to pay attention to those who claim that "3% is the new 4%."

b) The amount of equity risk that retirees need to take is not actually that high. In my scenario, the couple obviously needs some extra return to make 4% work; the single male does not.

c) Deferred annuities are quite cheap for what they provide (a solution to the longevity issue), particularly if you only need to cover one individual.

My intent here is not to provide a full financial plan for anyone; my goal was just to run some numbers myself and see what they show since there are widely varying claims that get made by various folks.

Thoughts?

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David Jay
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Re: What is the "safe, safe" withdrawal rate?

Post by David Jay » Mon Sep 04, 2017 3:55 pm

The biggest threat to the 4% SWR is sequence-of-returns risk if you are carrying a significant equity position.

Doing what you have outlined above removes the sequence-of-returns risk.
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Re: What is the "safe, safe" withdrawal rate?

Post by Taylor Larimore » Mon Sep 04, 2017 4:01 pm

What is the "safe, safe" withdrawal rate?
stiutz:

A Single Premium Immediate Annuity (SPIA) provides the largest guaranteed life income of any investment.

This is a website to get quick quotes:

https://www.immediateannuities.com/b/in ... 0wodvDAMZw

Best wishes
Taylor
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Re: What is the "safe, safe" withdrawal rate?

Post by Grt2bOutdoors » Mon Sep 04, 2017 4:01 pm

Who underwrites inflation indexed annuities these days, don't see any listed at immediate annuities.com. Can we subsitute I bonds for Tips?
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stlutz
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Re: What is the "safe, safe" withdrawal rate?

Post by stlutz » Mon Sep 04, 2017 4:06 pm

Who underwrites inflation indexed annuities these days, don't see any listed at immediate annuities.com
There is currently only 1 provider (Principal). Almost everyone sells annuities with fixed COLAs. A 3% per year COLA is actually cheaper than a CPI one. I personally would be tempted to go with the the 3% that the CPI, but that is also less "safe, safe", so I didn't consider than in my illustration.

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Re: What is the "safe, safe" withdrawal rate?

Post by Levett » Mon Sep 04, 2017 4:07 pm

stlutz,

Take a look at Jim Otar's essay, "Lifelong Retirement Income: How to Quantify and Eliminate Luck." The essay appears in the book, Retirement Income Redesigned, edited by Evensky and Katz.

Of course, if you have the time and inclination you can wade through his book, Unveiling the Retirement Myth.

Lev

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Re: What is the "safe, safe" withdrawal rate?

Post by TravelforFun » Mon Sep 04, 2017 6:27 pm

stlutz wrote:
Mon Sep 04, 2017 3:52 pm
We've had a couple of threads recently about SWRs (discussing comments from Kitces & Bengen), and oh, maybe two or three other threads over the past several years that also consider the thoughts from other "experts" (Bernstein, Pfau, Swedroe).

After I posted in one of the other threads, I got to wondering, what actually is a "safe, safe" withdrawal rate? By "safe, safe", I mean a) that you don't run out of money before you die; and b) that your money is invested in safe assets--e.g. not stocks, gold etc.

I will consider two hypothetical scenarios. The "best case" is a single 65 year old male who retired last Friday. The "worst case" scenario considers a couple, both aged 65, who also retired last Friday. Note that I'm leaving early-retirement scenarios out of the examination.

My "safe" portfolio is constructed using 2 assets: a) A 20 year TIPS Ladder. I estimated that average yield of this portfolio to be .5% (obviously this changes daily). b) An inflation-indexed deferred annuity that starts paying at age 85. Since inflation-adjusted deferred annuities don't inflation adjust prior to payout, I conservatively assumed a 3.5%/year inflation rate for the next 20 years when deciding how much income to buy (i.e. I assumed $20K today = $10K in 20 years).

In short, the TIPS ladder funds the first 20 years of retirement; the annuity takes care of the rest.

The TIPS ladder has a payout rate of 5.2%. The annuity for the single guy has a payout rate of 45% at age 85; it is 20% for the couple.

That means that every $10K of income costs:

a) the single guy: the annuity = $44,400; TIPS ladder = $192,300 = $236,700
b) the couple: the annuity = $98,700; TIPS ladder = $192,300 = $291,000

That works out to a withdrawal rate of 4.22% for the single male and 3.44% for the couple.

What do I conclude from this?

a) I'm not going to pay attention to those who claim that "3% is the new 4%."

b) The amount of equity risk that retirees need to take is not actually that high. In my scenario, the couple obviously needs some extra return to make 4% work; the single male does not.

c) Deferred annuities are quite cheap for what they provide (a solution to the longevity issue), particularly if you only need to cover one individual.

My intent here is not to provide a full financial plan for anyone; my goal was just to run some numbers myself and see what they show since there are widely varying claims that get made by various folks.

Thoughts?
I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA be better?
Last edited by TravelforFun on Mon Sep 04, 2017 6:55 pm, edited 1 time in total.

stlutz
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Re: What is the "safe, safe" withdrawal rate?

Post by stlutz » Mon Sep 04, 2017 6:49 pm

I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA better?
Arguably, yes. I wanted to account for the the fact that many people (including me) would find it very difficult to turn over almost $900K in a lump sum to an insurer (or insurers) to generate, say, $30K in annual income.

That's also where deferring Social Security to 70 and using your own money to fund earlier parts of retirement can also be helpful (even though the actuarial numbers work out the same).

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Re: What is the "safe, safe" withdrawal rate?

Post by TravelforFun » Mon Sep 04, 2017 6:57 pm

stlutz wrote:
Mon Sep 04, 2017 6:49 pm
I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA better?
Arguably, yes. I wanted to account for the the fact that many people (including me) would find it very difficult to turn over almost $900K in a lump sum to an insurer (or insurers) to generate, say, $30K in annual income.
That's me too but if you want 'safe, safe', that's really the only way.

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Mon Sep 04, 2017 6:59 pm

What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Last edited by gilgamesh on Mon Sep 04, 2017 7:04 pm, edited 1 time in total.

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Mon Sep 04, 2017 7:03 pm

TravelforFun wrote:
Mon Sep 04, 2017 6:27 pm
I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA be better?
TIPS has liquidity where as annuity doesn't. So, if both costs the same, TIPS is definitely better. If health deteriorates, TIPS could be liquidated.

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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Mon Sep 04, 2017 7:25 pm

stlutz wrote:
Mon Sep 04, 2017 6:49 pm
I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA better?
Arguably, yes. I wanted to account for the the fact that many people (including me) would find it very difficult to turn over almost $900K in a lump sum to an insurer (or insurers) to generate, say, $30K in annual income.
Kitces has described what he calls the "hierarchy of retirement needs" whereby current income is at the base, current assets come next, and future income (and the assets needed to generate that income) is on top. According to this theory, people should be relatively unwilling to give up current assets ($900k) in order to generate a future income ($30k). I and another colleague have done some preliminary testing of this theory using consumer data and found that the data are supportive of it.

I really like your line of thinking. At times, I too have wondered at how retirement income could be generated with no exposure to stocks. Interestingly, the withdrawal calculator at Portfolio Charts indicates that from 1970 until now, the 30 SWR for a portfolio comprised of 100% ITT has been 3.8%. Extending that to 40 years only decreased the SWR to 3.3%. But ITT do not provide a guaranteed income such as you describe in the OP.
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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Mon Sep 04, 2017 7:26 pm

gilgamesh wrote:
Mon Sep 04, 2017 6:59 pm
What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What is the "safe, safe" withdrawal rate?

Post by AlohaJoe » Mon Sep 04, 2017 7:49 pm

stlutz wrote:
Mon Sep 04, 2017 3:52 pm
In short, the TIPS ladder funds the first 20 years of retirement; the annuity takes care of the rest.
[...]
Thoughts?
This is exactly the same approach taken in Sexauer, Peskin, and Cassidy's "Making Retirement Income Last a Lifetime". For a number of years they even had a website the provided a monthly update of exactly how much it would cost based on current TIPS yields and deferred annuity prices.

Image

After about five years the website stopped being updated: http://www.dcdbbenchmark.com/

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Re: What is the "safe, safe" withdrawal rate?

Post by AlohaJoe » Mon Sep 04, 2017 7:52 pm

TravelforFun wrote:
Mon Sep 04, 2017 6:27 pm
I looked into getting the same $10,000 of yearly CPI COLA income without doing the TIPS ladder and found a couple would have to pay $295K for a SIPA. This is very similar to your annuity +TIPS ladder. For the sake of simplicity, wouldn't just buying a SPIA be better?
How much of an annuity do you want to buy? You shouldn't buy more than $250,000 from a single provider, since that's all that any state will insure. Yet -- as far as anyone can tell -- there is only one insurance company left still selling inflation-adjusted SPIAs. So that means you are limited to buying a $250,000 annuity without taking on the risk that the insurance company will declare bankruptcy or otherwise adjust the terms of your annuity. Most people want to retire on more than $10,000 a year, I imagine.

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Re: What is the "safe, safe" withdrawal rate?

Post by sambb » Mon Sep 04, 2017 8:02 pm

i saw a thread in which the SWR was decried by people here, because it doesnt consider inflation. I think that there are contradictory answers to the safe SWR. is it inflation indexed? Indexed to healthcare costs? Not indexed? Doesnt make sense, so i ignore that advice.

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Re: What is the "safe, safe" withdrawal rate?

Post by Grt2bOutdoors » Mon Sep 04, 2017 8:16 pm

willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
gilgamesh wrote:
Mon Sep 04, 2017 6:59 pm
What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
As one approach's their twilight, one may lack the mental capacity to adapt, having a secure, non volatile income stream may be the difference between retaining what sanity you have left enabling SWAN or being subject to incurring a non recoverable error on your part that puts your income stream in severe jeopardy. Given the two choices, I'd opt for as much certainty as possible for floor income.
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Re: What is the "safe, safe" withdrawal rate?

Post by JustinR » Mon Sep 04, 2017 8:44 pm

sambb wrote:
Mon Sep 04, 2017 8:02 pm
i saw a thread in which the SWR was decried by people here, because it doesnt consider inflation. I think that there are contradictory answers to the safe SWR. is it inflation indexed? Indexed to healthcare costs? Not indexed? Doesnt make sense, so i ignore that advice.
The 4% rule is adjusted for inflation.

It's 4% of the INITIAL portfolio value, adjusted for inflation, each year. It's not 4% of your portfolio every year.

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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Mon Sep 04, 2017 9:24 pm

Grt2bOutdoors wrote:
Mon Sep 04, 2017 8:16 pm
willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
gilgamesh wrote:
Mon Sep 04, 2017 6:59 pm
What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
As one approach's their twilight, one may lack the mental capacity to adapt, having a secure, non volatile income stream may be the difference between retaining what sanity you have left enabling SWAN or being subject to incurring a non recoverable error on your part that puts your income stream in severe jeopardy. Given the two choices, I'd opt for as much certainty as possible for floor income.
I actually like the OP's suggestion, though not for me personally. The real draw of the proposed is the guaranteed income, not the lack of income volatility.

And in reality, for someone is approaching a truly advanced age, if they were well prepared in the early stages of their retirement (i.e. 25x their expenses saved), they can often do pretty much whatever they want (i.e. all stocks, all bonds, all SPIA) because of their limited amount of time remaining.
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Re: What is the "safe, safe" withdrawal rate?

Post by The Wizard » Tue Sep 05, 2017 7:18 am

stlutz wrote:
Mon Sep 04, 2017 6:49 pm

Arguably, yes. I wanted to account for the the fact that many people (including me) would find it very difficult to turn over almost $900K in a lump sum to an insurer (or insurers) to generate, say, $30K in annual income...
$30k seems low.
Those of us with tax deferred money in TIAA can annuitize at age 65 with a ten year guarantee currently at 6.2% payout rate.
That $900k would then yield $55,800 per year...
Attempted new signature...

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Re: What is the "safe, safe" withdrawal rate?

Post by Grt2bOutdoors » Tue Sep 05, 2017 7:43 am

The Wizard wrote:
Tue Sep 05, 2017 7:18 am
stlutz wrote:
Mon Sep 04, 2017 6:49 pm

Arguably, yes. I wanted to account for the the fact that many people (including me) would find it very difficult to turn over almost $900K in a lump sum to an insurer (or insurers) to generate, say, $30K in annual income...
$30k seems low.
Those of us with tax deferred money in TIAA can annuitize at age 65 with a ten year guarantee currently at 6.2% payout rate.
That $900k would then yield $55,800 per year...
The OP is referring to an annuity with a COLA. Is your TIAA annuity one that comes with a 3% COLA or is inflation linked?
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Re: What is the "safe, safe" withdrawal rate?

Post by Da5id » Tue Sep 05, 2017 7:43 am

I've not gotten to the point of considering annuities yet. But I worry about the whole "guaranteed to be safe" aspect. Annuities, particularly deferred ones purchased with a distant starting point, have risk to the extent that:

1) the insurance company may go bankrupt
2) if they go bankrupt, you probably are limited to receiving the amount the government "guarantees"
3) the government guarantees (which may not be the whole annuity) could conceivably change, particularly in the distant future, and particularly if for whatever reason a bunch of insurance companies are going under in concert

How much to worry about those compared to other risks is unclear, and SPIAs do seem pretty safe. But certainly picking a stable insurance company rather than getting the highest possible payout is a consideration. TIPs feel "safer" being backed by the full faith and credit of the government.

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Re: What is the "safe, safe" withdrawal rate?

Post by Admiral » Tue Sep 05, 2017 7:49 am

Maybe I'm misunderstanding what you're trying to calculate/accomplish, but:

Where is SS in your calculation? Is that not a "guaranteed income" (as much as TIPS are guaranteed, certainly) for as long as one lives from FRA onward? Are you assuming in your scenario that SS does not exist? If your retirees have earned income in their careers, then they already have a guaranteed income stream.

Right?

Or are you trying to calculate a portfolio in addition to SS? And if so, should't one take into account a SS income stream before buying an annuity, since everything is dependent on their expenses i.e. income needs.

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Re: What is the "safe, safe" withdrawal rate?

Post by KlingKlang » Tue Sep 05, 2017 8:20 am

Grt2bOutdoors wrote:
Mon Sep 04, 2017 4:01 pm
Can we subsitute I bonds for Tips?
Yes, if you start purchasing them exactly 30 years before you retire.
The disadvantages of I-Bonds are:
- The $10K per person per year purchase limit compared to unlimited purchases of TIPs.
- The current 0% fixed rate compared to a (usually) positive rate for TIPs.

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Tue Sep 05, 2017 9:37 am

willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
gilgamesh wrote:
Mon Sep 04, 2017 6:59 pm
What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
I can now see, how my statement is ambiguous...that's not what I am saying.

I am not demanding zero volatility...I am arguing against unnecessary volatility the SWR folks will impose on themselves...big difference...let me explain.

In the above example OP had shown both the floor and SWR person starts out having the same nest egg and same planned/wanted income each year. Floor person will not have to adjust his spending down, whenever he would have retired in the past from 1850 to 20xx and into the future...doesn't matter when he retired. What do you think will the SWR person withdrawing 4.22% or 3.44% person do when his portfolio goes through the great depression, or another recession or even a significant market decline as it has happened from 1850 to 2017? They will adjust there spending down...but, they didn't have to.

So, Floor person enjoyed his $10k multiple throughout his retirement, the SWR guys, who also wanted to spend the same $10k multiple couldn't (even though he should have and wanted to), as his future income is not guaranteed and spending through market crashes is just not possible.

I am ok with volatility (as long as it is analyzed in dollar terms matched to spending), but not the unnecessary volatility a SWR will have to impose on themselves, due to human nature, when future income is not guaranteed.

If the markets crash within the first ten years of my retirement, and if I were to rely on SWR, I knew I will tighten my belt...that was the main reason for me to seek alternatives. I want to enjoy the first ten years of retirement, even if the market collapses, which is when SWR is most sensitive to sequence risk. TIPS plus side portfolio plus SPIA after age 80 along with SS, does just that...there's of course a cost for this...which is acceptable for me.

Having said that, I don't agree even with your interpretation of the the question...one, my income does not fluctuate down too much. Second, I've budgeted a certain amount for all my expenses and I absolutely cannot go below that...I have to move or sell my cars...possible, but a definite detriment to my current lifestyle...TIPS assures unnecessary adjustment that would cause this detriment...only this base amount is in TIPS.
Last edited by gilgamesh on Tue Sep 05, 2017 10:03 am, edited 1 time in total.

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Tue Sep 05, 2017 9:45 am

Admiral wrote:
Tue Sep 05, 2017 7:49 am
Maybe I'm misunderstanding what you're trying to calculate/accomplish, but:

Where is SS in your calculation? Is that not a "guaranteed income" (as much as TIPS are guaranteed, certainly) for as long as one lives from FRA onward? Are you assuming in your scenario that SS does not exist? If your retirees have earned income in their careers, then they already have a guaranteed income stream.

Right?

Or are you trying to calculate a portfolio in addition to SS? And if so, should't one take into account a SS income stream before buying an annuity, since everything is dependent on their expenses i.e. income needs.
It is per $10k...none of this matters...it's for whatever you want to include or not include above that...the whole point in OP's example is, it brings it down to a simple comparison without any unnecessary clutter, which are irrelevant to the decision at hand....OP's example is not an overall retirement plan, it distills it down to all the essential elements of floor vs SWR argument.

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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Tue Sep 05, 2017 9:49 am

gilgamesh wrote:
Tue Sep 05, 2017 9:37 am
willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
gilgamesh wrote:
Mon Sep 04, 2017 6:59 pm
What happens during a significant market decline? You don't have to do anything. Single person withdrawing at 4.22% and a couple withdrawing at 3.44%, will both prabably adjust their spending down. This to me is the biggest advantage of TIPS + SPIA

Spending adjustments with SWR is not a solution, it's the problem.
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
I can now see, how my statement is ambiguous...that's not what I am saying.

I am not demanding zero volatility...I am arguing against unnecessary volatility the SWR folks will impose on themselves...big difference...let me explain.

In the above example OP had shown both the floor and SWR person starts out having the same nest egg and same planned/wanted income each year. Floor person will not have to adjust his spending down, whenever he would have retired in the past from 1850 to 20xx and into the future...doesn't matter when he retired. What do you think will the SWR person withdrawing 4.22% or 3.44% person do when his portfolio goes through the great depression, or another recession or even a significant market decline as it has happened from 1850 to 2017? They will adjust there spending down...but, they didn't have to.

So, Floor person enjoyed his $10k multiple throughout his retirement, the SWR guys, who also wanted to spend the same $10k multiple couldn't (even though he should have and wanted to), as his future income is not guaranteed and spending through market crashes is just not possible.

I am ok with volatility (as long as it is analyzed in dollar terms matched to spending), but not the unnecessary volatility a SWR will have to impose on themselves, due to human nature, when future income is not guaranteed.

If the markets crash within the first ten years, and if I were to rely on SWR, I knew I will tighten my belt...that was the main reason for me to seek alternatives. I want to enjoy the first ten years of retirement, even if the market collapses, which is when SWR is most sensitive to sequence risk. TIPS plus side portfolio plus SPIA after age 80 along with SS, does just that...there's of course a cost for this...which is acceptable for me.

Having said that, I don't agree even with your interpretation of the the question...one, my income does not fluctuate down too much. Second, I've budgeted a certain amount for all my expenses and I absolutely cannot go below that...I have to move or sell my cars...possible, but a definite detriment to my current lifestyle...TIPS assures unnecessary adjustment that would cause this detriment...only this base amount is in TIPS.
I can definitely see the value in someone flooring their necessary expenses with 'guaranteed' income sources like SS, annuities, and TIPS. Such a person could easily invest the rest of their portfolio into stocks and bonds and use a SWR or something higher for their discretionary expenses.

But I'm not so sure that the person with TIPS and annuities would be SWAN through another major depression either. The government could just stop offering TIPS for whatever reason, and insurance companies could go broke en masse (which happened in the GD). State guaranty associations might not be able to handle all of the claims if multiple companies go belly up simultaneously. It seems very possible that informed retirees would know that these types of events could occur and ratchet down their spending, saving as much of their payouts as they could, to try to prepare.

I just don't see many strategies leaving the retiree SWAN and truly secure through another GD. Perhaps if they weren't just financially independent but completely independent (i.e. growing their own food) they would still SWAN.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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HomerJ
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Re: What is the "safe, safe" withdrawal rate?

Post by HomerJ » Tue Sep 05, 2017 10:04 am

willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
I've dealt with variable incomes throughout my career, but my spending has been fairly steady the past 10 years. I've established my baseline lifestyle, and I wouldn't want to go lower if possible.

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Tue Sep 05, 2017 10:11 am

floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than any 30 year period before me (not too many independent 30 year periods), for the 30 years after I retire, which is a totally independent 30 year period...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
Last edited by gilgamesh on Tue Sep 05, 2017 10:17 am, edited 3 times in total.

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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Tue Sep 05, 2017 10:14 am

HomerJ wrote:
Tue Sep 05, 2017 10:04 am
willthrill81 wrote:
Mon Sep 04, 2017 7:26 pm
Why place so much focus on a fixed income throughout one's entire retirement? We've all dealt with variable incomes throughout our careers; why suddenly demand zero volatility in one's income during retirement?
I've dealt with variable incomes throughout my career, but my spending has been fairly steady the past 10 years. I've established my baseline lifestyle, and I wouldn't want to go lower if possible.
Unless someone is retiring right on the edge (i.e. 4% of their portfolio is barely enough to cover truly necessary expenses), a "baseline lifestyle" need not be affected at all by a small degree of income volatility in retirement. A 5% cut in your income from the prior year, for instance, probably isn't going to impact your life noticeably. Also, keep in mind that retirees spending in real dollars tends to go down 1-2% each year until they expire anyway.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What is the "safe, safe" withdrawal rate?

Post by willthrill81 » Tue Sep 05, 2017 10:20 am

gilgamesh wrote:
Tue Sep 05, 2017 10:11 am
floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than the past...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
The "full faith and credit" argument only applies to current TIPS, not future ones which may not be offered at all.

If a $250k SPIA and SS would cover your necessary expenses, then you're certainly on more secure ground.

Generally speaking, though, over the long-term, I put at least as much faith in the power of private industry as anything else, including our government.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Tue Sep 05, 2017 10:49 am

willthrill81 wrote:
Tue Sep 05, 2017 10:20 am
gilgamesh wrote:
Tue Sep 05, 2017 10:11 am
floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than the past...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
The "full faith and credit" argument only applies to current TIPS, not future ones which may not be offered at all.

If a $250k SPIA and SS would cover your necessary expenses, then you're certainly on more secure ground.

Generally speaking, though, over the long-term, I put at least as much faith in the power of private industry as anything else, including our government.
Current TIPS could build a ladder for most of a 30 year retirement, no?...I know one or two may be missing, which is risking one year of unknown inflation if matured 1 year before.

The $250k could be increased if one could get it from different states. However, $250k in todays dollars at age 80, with mortality credit at age 80, should be a substantial amount.

"Over the long term" just doesn't matter in retirement, if your immediate withdrawal is affected by near term market fluctuations. Also, it's not just long term power of private industry, it's not even just short term powers of private industry either, stock prices also fluctuate based on human psychology/feelings at that time.
Last edited by gilgamesh on Tue Sep 05, 2017 5:07 pm, edited 2 times in total.

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Re: What is the "safe, safe" withdrawal rate?

Post by smitcat » Tue Sep 05, 2017 11:00 am

gilgamesh wrote:
Tue Sep 05, 2017 10:49 am
willthrill81 wrote:
Tue Sep 05, 2017 10:20 am
gilgamesh wrote:
Tue Sep 05, 2017 10:11 am
floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than the past...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
The "full faith and credit" argument only applies to current TIPS, not future ones which may not be offered at all.

If a $250k SPIA and SS would cover your necessary expenses, then you're certainly on more secure ground.

Generally speaking, though, over the long-term, I put at least as much faith in the power of private industry as anything else, including our government.
Current TIPS could build a ladder for most of a 30 year retirement, no?...I know one or two may be missing, which is risking one year of unknown inflation if matured 1 year before or after.

The $250k could be increased if one could get it from different states. However, $250k in todays dollars at age 80, with mortality credit at age 80, should be a substantial amount.

Over the long term just doesn't matter in retirement, when your immediate withdrawal is affected by near term market fluctuations. Also, it's not just long term power of private industry, it's not even just short term powers of private industry either, stock prices also fluctuate based on human psychology/feelings at that time.

The idea is very intriguing with a split holding.
One question - what does the income look like after taxes with an annuity SS and RMD"s in the later years? And how does that play out when you end up with one survivor?

gilgamesh
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Re: What is the "safe, safe" withdrawal rate?

Post by gilgamesh » Tue Sep 05, 2017 11:24 am

smitcat wrote:
Tue Sep 05, 2017 11:00 am
gilgamesh wrote:
Tue Sep 05, 2017 10:49 am
willthrill81 wrote:
Tue Sep 05, 2017 10:20 am
gilgamesh wrote:
Tue Sep 05, 2017 10:11 am
floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than the past...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
The "full faith and credit" argument only applies to current TIPS, not future ones which may not be offered at all.

If a $250k SPIA and SS would cover your necessary expenses, then you're certainly on more secure ground.

Generally speaking, though, over the long-term, I put at least as much faith in the power of private industry as anything else, including our government.
Current TIPS could build a ladder for most of a 30 year retirement, no?...I know one or two may be missing, which is risking one year of unknown inflation if matured 1 year before or after.

The $250k could be increased if one could get it from different states. However, $250k in todays dollars at age 80, with mortality credit at age 80, should be a substantial amount.

Over the long term just doesn't matter in retirement, when your immediate withdrawal is affected by near term market fluctuations. Also, it's not just long term power of private industry, it's not even just short term powers of private industry either, stock prices also fluctuate based on human psychology/feelings at that time.

The idea is very intriguing with a split holding.
One question - what does the income look like after taxes with an annuity SS and RMD"s in the later years? And how does that play out when you end up with one survivor?
I am glad you asked this question as I wanted to address that in the other thread.

In my case our SS will go down to 2/3 as my wife will piggy back on mine. It was easier to prepare for us. My wife does not like vacations, she is a home body and loves it. Therefore, our big vacation expenses, which wont be there after me, which is more than the 1/3rd of SS will cover the reduction in income...I probably won't do much either, plus I can cut down on other thing she wants.,,frankly troubling things to plan for...

Taxes will also go up as a single survivor. I am planning to do Roth conversion. Which will bring this down considerably, plus the excess vacation money will go towards this too. RMD will also be very minimum.

SPIA is a joint and survivor annuity paying same amount till both passes away.

Was this your question?

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Re: What is the "safe, safe" withdrawal rate?

Post by Grt2bOutdoors » Tue Sep 05, 2017 12:45 pm

KlingKlang wrote:
Tue Sep 05, 2017 8:20 am
Grt2bOutdoors wrote:
Mon Sep 04, 2017 4:01 pm
Can we subsitute I bonds for Tips?
Yes, if you start purchasing them exactly 30 years before you retire.
The disadvantages of I-Bonds are:
- The $10K per person per year purchase limit compared to unlimited purchases of TIPs.
- The current 0% fixed rate compared to a (usually) positive rate for TIPs.
So, I took a look at the TIP issued on July 12, 2012 and compared it to an I bond issued in July 2012.
Current inflation adjusted amount of TiP per $1,000 is now $1,064.48. The TIP was issued with a 0.125% real rate coupon. The I bond's fixed rate is zero. The value of I bond as of September 2017 is $1,076.40, close in value but did not earn the coupon (did not do math, but figure that is worth another $10 or so) so basically a wash. Yes, you could begin a ladder of I bonds. Most folks do not have a large sum of monies to save for retirement, so don't think purchasing "only" $10/20k (if couple) would be a problem. Given choice, would recommend 401k first, IRA, combo of I bonds/taxable account. Inflation has been abnormally low, if holding a EE bond you would now need inflation to average 4.2% per year to obtain a doubling in the I bond's value. Possible, likely? who knows.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: What is the "safe, safe" withdrawal rate?

Post by smitcat » Tue Sep 05, 2017 1:18 pm

gilgamesh wrote:
Tue Sep 05, 2017 11:24 am
smitcat wrote:
Tue Sep 05, 2017 11:00 am
gilgamesh wrote:
Tue Sep 05, 2017 10:49 am
willthrill81 wrote:
Tue Sep 05, 2017 10:20 am
gilgamesh wrote:
Tue Sep 05, 2017 10:11 am
floor can SWAN much better than SWR...Floor relies on the full faith and credit of the United states government and SWR relies on our future stock markets not doing worse than the past...for me personally, I'll SWAN much better with floor.

SPIA, at age 80 along with SS should fall within the state guarantee...I think some SPIA will give that based on where it was purchased and other on where I live...so, I could spread this risk over at least two states. But, still safer than relying on the stock market.
The "full faith and credit" argument only applies to current TIPS, not future ones which may not be offered at all.

If a $250k SPIA and SS would cover your necessary expenses, then you're certainly on more secure ground.

Generally speaking, though, over the long-term, I put at least as much faith in the power of private industry as anything else, including our government.
Current TIPS could build a ladder for most of a 30 year retirement, no?...I know one or two may be missing, which is risking one year of unknown inflation if matured 1 year before or after.

The $250k could be increased if one could get it from different states. However, $250k in todays dollars at age 80, with mortality credit at age 80, should be a substantial amount.

Over the long term just doesn't matter in retirement, when your immediate withdrawal is affected by near term market fluctuations. Also, it's not just long term power of private industry, it's not even just short term powers of private industry either, stock prices also fluctuate based on human psychology/feelings at that time.

The idea is very intriguing with a split holding.
One question - what does the income look like after taxes with an annuity SS and RMD"s in the later years? And how does that play out when you end up with one survivor?
I am glad you asked this question as I wanted to address that in the other thread.

In my case our SS will go down to 2/3 as my wife will piggy back on mine. It was easier to prepare for us. My wife does not like vacations, she is a home body and loves it. Therefore, our big vacation expenses, which wont be there after me, which is more than the 1/3rd of SS will cover the reduction in income...I probably won't do much either, plus I can cut down on other thing she wants.,,frankly troubling things to plan for...

Taxes will also go up as a single survivor. I am planning to do Roth conversion. Which will bring this down considerably, plus the excess vacation money will go towards this too. RMD will also be very minimum.

SPIA is a joint and survivor annuity paying same amount till both passes away.

Was this your question?
Yes - that kinda answers the question. For us continuing with annuities / SS and the inevitable RMD's will cause taxes to rise with both of us and also when only one is left. I try and look at the amounts that we will be able to spend no necessarily the amounts that are coming in. Right now we are contemplating the choice between keeping annuities (1035 X-change) or removing them from the future plans. Roth conversions will help but they only go so far as we have modeled them out in the future.

AlbertEinstein
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Re: What is the "safe, safe" withdrawal rate?

Post by AlbertEinstein » Mon Sep 11, 2017 9:39 am

stlutz wrote:
Mon Sep 04, 2017 3:52 pm
We've had a couple of threads recently about SWRs (discussing comments from Kitces & Bengen), and oh, maybe two or three other threads over the past several years that also consider the thoughts from other "experts" (Bernstein, Pfau, Swedroe).

After I posted in one of the other threads, I got to wondering, what actually is a "safe, safe" withdrawal rate? By "safe, safe", I mean a) that you don't run out of money before you die; and b) that your money is invested in safe assets--e.g. not stocks, gold etc.

I will consider two hypothetical scenarios. The "best case" is a single 65 year old male who retired last Friday. The "worst case" scenario considers a couple, both aged 65, who also retired last Friday. Note that I'm leaving early-retirement scenarios out of the examination.

My "safe" portfolio is constructed using 2 assets: a) A 20 year TIPS Ladder. I estimated that average yield of this portfolio to be .5% (obviously this changes daily). b) An inflation-indexed deferred annuity that starts paying at age 85. Since inflation-adjusted deferred annuities don't inflation adjust prior to payout, I conservatively assumed a 3.5%/year inflation rate for the next 20 years when deciding how much income to buy (i.e. I assumed $20K today = $10K in 20 years).

In short, the TIPS ladder funds the first 20 years of retirement; the annuity takes care of the rest.

The TIPS ladder has a payout rate of 5.2%. The annuity for the single guy has a payout rate of 45% at age 85; it is 20% for the couple.

That means that every $10K of income costs:

a) the single guy: the annuity = $44,400; TIPS ladder = $192,300 = $236,700
b) the couple: the annuity = $98,700; TIPS ladder = $192,300 = $291,000

That works out to a withdrawal rate of 4.22% for the single male and 3.44% for the couple.

What do I conclude from this?

a) I'm not going to pay attention to those who claim that "3% is the new 4%."

b) The amount of equity risk that retirees need to take is not actually that high. In my scenario, the couple obviously needs some extra return to make 4% work; the single male does not.

c) Deferred annuities are quite cheap for what they provide (a solution to the longevity issue), particularly if you only need to cover one individual.

My intent here is not to provide a full financial plan for anyone; my goal was just to run some numbers myself and see what they show since there are widely varying claims that get made by various folks.

Thoughts?
0% and don't quit your day job.

Phil DeMuth
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Re: What is the "safe, safe" withdrawal rate?

Post by Phil DeMuth » Mon Sep 11, 2017 10:08 am

There is no such thing as a safe withdrawal rate. There is no such thing as a risk-free asset. For any scenario I propose that will give you a certain cash flow over X years, you will be able to point out a scenario or perhaps twenty scenarios where it fails.

I don't mean to say that some aren't more probable than others, or that the exercise isn't worthwhile, but we live with uncertainty and no one has a guarantee.

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Re: What is the "safe, safe" withdrawal rate?

Post by itstoomuch » Mon Sep 11, 2017 12:27 pm

+ to this thread.

We added rentals with good net yields and growth.
Our deferred annuities have exit provisions.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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