Scott Burns' Hedonic Tilt

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LeVolant
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Scott Burns' Hedonic Tilt

Post by LeVolant » Fri Nov 06, 2015 10:01 pm

Hi all

I found this take on retirement withdrawal rates quite interesting but I suspect I there must be some downside(s) that I'm missing.
Basically the idea is to help retirees have more money to spend early in retirement by withdrawing a constant dollar amount annually with no adjustments for inflation. Each year in retirement inflation will eat away at the actual purchasing power but (hopefully) it would be gradual.

https://assetbuilder.com/knowledge-cent ... less-later

Would be very interested in your thoughts on this. Thank you all in advance

heyyou
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Re: Scott Burns' Hedonic Tilt

Post by heyyou » Fri Nov 06, 2015 11:59 pm

Inflation is the risk, but reward comes with accepting that risks could happen. I'm grateful that I had a job with COLA raises in the 1980s. I doubt that many here would embrace it. Speaking of English braces, we are belt and suspenders investors here.

Hedonic Tilt would be ideal for a COLA pensioner who wants to spend down his/her taxable savings, if the pension was enough to live on.

dbr
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Re: Scott Burns' Hedonic Tilt

Post by dbr » Sat Nov 07, 2015 9:19 am

There are many students of the issue who point out that people actually do spend less and less as they age until expenses skyrocket for end of life care issues. Based on that the idea makes sense. I have read the criticism that studies that show this are flawed because too many of the subjects in the data base spend less because they run out of money rather than because they need less.

I would also be concerned that this does not take account of bouts of high inflation that might occur.

However, I think that rather than let some withdrawal scheme determine your standard of living it would be better to anticipate what you think you are actually going to do and test that in a retirement calculator. There are most likely lots of other changes in financial plan, such as selling a home and moving to rental and other such changes in financial situation.

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nisiprius
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Re: Scott Burns' Hedonic Tilt

Post by nisiprius » Sat Nov 07, 2015 10:35 am

"Hedonic tilt" is a pretty highfalutin word for "overspending and hoping."

I think it's completely unsound. The idea of planning is that you make the best assumptions you can. No, you don't plan for the worst imaginable asteroid-hits-earth case, but you don't plan for the average, either, because you might not be average. You make those assumptions just as objectively as you can, not knowing how the numbers will work out. Then you stick with them.

If you don't like the numbers that are implicit in the assumptions you made, the one thing you must not do is say "Well, maybe those assumptions were too pessimistic, so now I will go back and change the assumptions until they give me the results I want." If you're going to do this, you might as well quit pretending you are planning and admit that your "plan" is to cross your fingers and wing it.
dbr wrote:There are many students of the issue who point out that people actually do spend less and less as they age until expenses skyrocket for end of life care issues. Based on that the idea makes sense. I have read the criticism that studies that show this are flawed because too many of the subjects in the data base spend less because they run out of money rather than because they need less.
I couldn't find it again when I looked for it, but there was one study that said this, which I think was the source of the "old people spend less" meme. I think it became a meme because it told people what they wanted to hear. The problem is that the study was very explicit: it was not considering healthcare costs.

And it's not just healthcare in the strict sense. There is a big penumbra of possible costs, that affect some people but not others, that are not quite healthcare and not covered by insurance. Things that are luxury or comfort items for the young become health items for the older and more frail. Some elderly people need to set their house temperature higher in winter. Some will want to hire someone to help with cleaning, but may not be so sick that this is covered by any kind of insurance.
I would also be concerned that this does not take account of bouts of high inflation that might occur.
That, to me, is what makes Burns' idea nonsense. He's assuming that everyone spends less as they age on average, that this is such a regular thing that you can plan on it. Then he's assuming that inflation just happens to be a good match for that spending decline--that it's an economic law that retirees' expenses are roughly level in nominal dollars.

As the Church Lady used to say, "Verrrrry conveeeeenient."

But the average rate of inflation might not just happen to match the average rate of real-dollar expense decline. And inflation is not constant. Prices roughly doubled in just 8 years from 1974 to 1982. They doubled in in less time than that around 1920. But during the last 25 years it has not quite doubled.

Does anyone believe that the elderly's spending declined three times as fast with age then as it does nowadays?

Scott Burns' thinks the elderly can live comfortably on a fixed-dollar-number income. Well, I can tell you that during the 1970s the papers and politicians' speeches were full of talk about the bad situation of "elderly people living on fixed incomes."

It would be convenient if the bursts of inflation just happened to line up with periods in retirement when one's expenses were declining rapidly, but I don't think it's something prudent to plan on.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Independent
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Re: Scott Burns' Hedonic Tilt

Post by Independent » Sat Nov 07, 2015 11:00 am

nisiprius wrote:
I would also be concerned that this does not take account of bouts of high inflation that might occur.
That, to me, is what makes Burns' idea nonsense. He's assuming that everyone spends less as they age on average, that this is such a regular thing that you can plan on it. Then he's assuming that inflation just happens to be a good match for that spending decline--that it's an economic law that retirees' expenses are roughly level in nominal dollars.

As the Church Lady used to say, "Verrrrry conveeeeenient."

But the average rate of inflation might not just happen to match the average rate of real-dollar expense decline. And inflation is not constant. Prices roughly doubled in just 8 years from 1974 to 1982. They doubled in in less time than that around 1920. But during the last 25 years it has not quite doubled.

Does anyone believe that the elderly's spending declined three times as fast with age then as it does nowadays?

Scott Burns' thinks the elderly can live comfortably on a fixed-dollar-number income. Well, I can tell you that during the 1970s the papers and politicians' speeches were full of talk about the bad situation of "elderly people living on fixed incomes."

It would be convenient if the bursts of inflation just happened to line up with periods in retirement when one's expenses were declining rapidly, but I don't think it's something prudent to plan on.
+1

If I wanted to plan for lower expenses as I age, I would look at each category in my retirement budget and try to decide what's in that category that I'd really want to cut back as I grow older. I'd think about whether I'd really be "happy" with that reduction. I'd ask, "If I think I can happily live without this when I'm 75, why can't I live without it today?" And, of course, I'd ask what expenses will go up as I become more prone to health problems.

When I did this exercise for my own case, I came up with a U-shape. Probably extra travel early in retirement that I'd eventually tire of, then extra help with living and medical care later in life.

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Re: Scott Burns' Hedonic Tilt

Post by Carefreeap » Sat Nov 07, 2015 11:22 am

The biggest flaw I see is there is no discussion about time in assisted living. If you still have $2M after your hedonistic spending plan, no problem. But around here assisted living can be $10k/mth...today. Hate to think about how much that might cost in 30 years when I might need it.

And I don't think planning on going on Medicaid is a solution. I understand that many places won't take Medicaid patients. But I'll know soon enough because I'm pretty sure I'm going to have to deal with that with my father since he and my mother didn't believe in saving for the future. And while I expected to make it on my own and never expected to receive an inheritance, I sure as heck resent having to clean up their financial messes. :annoyed

randomguy
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Re: Scott Burns' Hedonic Tilt

Post by randomguy » Sat Nov 07, 2015 7:24 pm

Independent wrote: I'd think about whether I'd really be "happy" with that reduction. I'd ask, "If I think I can happily live without this when I'm 75, why can't I live without it today?" And, of course, I'd ask what expenses will go up as I become more prone to health problems.
Dont' confuse can and want. You can live without trips to europe. You may or may not want to. You can live in a studio. You might want to live in a 2 bedroom house. And so on. Pretty much any spending above about 20k is all about wants not needs.

Is the plan perfect? Nope. It is too conservative in the cases where you are getting good returns. Is the idea of spending more now at the risk of spending less sound? For some people. Between the combo of the average SWR being like 5-6% (4% is the "worst" case) and the odds of a pair of 65 year olds living to 95 is low (figure costs drop when one bites the bullet) and being agressive early makes sense. Obviously if you a a 2% SWR and otherwise hyper conservative, this is a lousey approach. You need to know who you are before picking a scheme. If you feel missing out on life as much as running low (nobody with SS runs out of money) on money later in life, this makes sense. If you stay up night worrying about not having money in 30+ years, this might not be the way to go.

hnzw rui
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Re: Scott Burns' Hedonic Tilt

Post by hnzw rui » Sun Nov 08, 2015 3:33 am

heyyou wrote:Hedonic Tilt would be ideal for a COLA pensioner who wants to spend down his/her taxable savings, if the pension was enough to live on.
Also works for someone on SS if fixed costs are low enough that they can be easily covered with SS.

delamer
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Re: Scott Burns' Hedonic Tilt

Post by delamer » Sun Nov 08, 2015 9:39 pm

1. If there is equity in a home that could pay for health and/or long-term care costs, that could mitigate the concern about a spike in those expenses in late retirement.

2. No withdrawal strategy can be "set it and forget it." They should be reviewed and revised based on portfolio returns, health issues, etc.

Independent
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Re: Scott Burns' Hedonic Tilt

Post by Independent » Mon Nov 09, 2015 9:29 am

randomguy wrote:
Independent wrote: I'd think about whether I'd really be "happy" with that reduction. I'd ask, "If I think I can happily live without this when I'm 75, why can't I live without it today?" And, of course, I'd ask what expenses will go up as I become more prone to health problems.
Dont' confuse can and want. You can live without trips to europe. You may or may not want to. You can live in a studio. You might want to live in a 2 bedroom house. And so on. Pretty much any spending above about 20k is all about wants not needs.
I agree. That's why I used "happily" in my post. That modifier was meant to recognize that most of us can plan for spending that comfortably exceeds bare survival.

Note that I also said that when I went through the exercise, I came up with a U-shaped pattern that seemed appropriate for me.

I was agreeing with the prior post that said it would be very rare indeed to have your desired spending decrease at exactly the inflation rate, especially when we consider the different inflation rates experienced by people retiring in 1970 vs. 1995, for example. People should not blindly assume their desired spending will go down as they age. I think people who are tempted to assume that should ask themselves this question. They may discover solid reasons for planning reduced spending (I did), or they may discover they should plan for level or increased spending.

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