A different take on retirement income: time segmentation

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willthrill81
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 3:04 pm

Peter Foley wrote:
Mon Jul 16, 2018 2:51 pm
My thought here is that we are talking about a group of people that have saved enough for retirement to cover the basics and have some ability to use discretionary spending to fund activities of interest that cost more than everyday living.
Precisely. I think that many, likely most, Bogleheads will fit into this category.
Peter Foley wrote:
Mon Jul 16, 2018 2:51 pm
Backtracking to the chart and applying a very rough 4% withdrawal to the early 60's age group, we are taking about people who have a minimum of $1,000,000 in retirement savings and perhaps closer to $2,000,000.* (A 4% withdrawal from $2M = $80,000, which when supplemented with $30K of SS benefits, is in the range shown on the chart.)
Your numbers are definitely in the ballpark, although Social Security benefits and other income sources like pensions may be able to satisfy at least a portion of retirees' essential spending needs. For instance, If I defer SS benefits until age 70, even with the SSA's projected 25% haircut, that would almost cover all of our anticipated essential spending needs at that time. Consequently, our investments will need to cover both essential and discretionary spending between retirement and age 70 and discretionary only after age 70. For planning purposes though, I'm ignoring SS benefits and will treat whatever we actually get as icing on top of an already delicious cake.
“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: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 3:05 pm

Dottie57 wrote:
Mon Jul 16, 2018 3:03 pm
I divy my portfolio by pre-SS and receiving SS. SS will cover most of my basic needs at age 70. So my portfolio at that time should be 90% for non essential spending.

Between 62 and 70 , I need to fund all expenses from portfolio.
Same here with the exception of around age 55 to 70.
“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: A different take on retirement income: time segmentation

Post by corn18 » Mon Jul 16, 2018 3:23 pm

I like this concept. My essential budget look like this right now (3 years out from retirement): sorry for the formatting issues

BUDGET

CATEGORY MONTHLY ANNUAL
AUTO FUEL 150 1,800.00
AUTO SERVICE 75 900.00
CLOTHES 300 3,600.00
DOGS / CATS 200 2,400.00
FOOD 700 8,400.00
DINING 700 8,400.00
HEALTH / BEAUTY 300 3,600.00
HOUSE MAINT 250 3,000.00
ENTERTAINMENT 200 2,400.00
MEDICAL 500 6,000.00
LUMPY STUFF 365 4,376.00
MISC 750 9,000.00

TOT DISC 4,490 53,876

HOUSE (taxes/ins) 767 9,204.00
LIFE INSURANCE 220 2,640.00
CELL PHONE 150 1,800.00
CABLE 141 1,692.00
ELECTRIC / GAS 150 1,795.80
WATER 110 1,320.00
INTERNET 64 762.24
AUTO INS 150 1,800.00

TOT NON-DISC 1,751 21,014

TOTAL EXP 6,241 74,890

Gotta cover this until I die. But this is pretty frugal living for us, so anything above that goes to cars, travel or whatever. But as long as we cover the essentials, we are doing ok.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 3:30 pm

HomerJ wrote:
Mon Jul 16, 2018 2:02 pm
(Although I personally think ignoring inflation, and then just revisiting your plan every 5 years works too. You can always buy supplemental SPIAs as you go).
Would you then retain the funds used to purchase future SPIAs in something like TIPS or just a stock/bond allocation?
“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: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 3:32 pm

The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.
“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: A different take on retirement income: time segmentation

Post by The Wizard » Mon Jul 16, 2018 3:42 pm

willthrill81 wrote:
Mon Jul 16, 2018 3:32 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.
Wade Pfau sometimes comes to the October BH gathering. I'll mention this to him if I see him this year...
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 3:43 pm

The Wizard wrote:
Mon Jul 16, 2018 3:42 pm
willthrill81 wrote:
Mon Jul 16, 2018 3:32 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.
Wade Pfau sometimes comes to the October BH gathering. I'll mention this to him if I see him this year...
Thank you! It would certainly be interesting to hear his take on it.
“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: A different take on retirement income: time segmentation

Post by Snowjob » Mon Jul 16, 2018 3:48 pm

willthrill81 wrote:
Mon Jul 16, 2018 2:04 pm
Snowjob wrote:
Mon Jul 16, 2018 12:15 pm
I think the only difference is I would limit my "DSP" to a vacation fund where as Will is looking at a much larger component of spending -- all discretionary.
Any spending category that the retiree believes will decline over time as well as any categories that could be at least temporarily reduced in the event of a big market downturn, such as vacationing, dining out, or gifts could be included in the discretionary spending portfolio. At least some vehicle expenses could possibly be included as well; most 80 year olds aren't spending much on cars.
Agreed, I'm only willing to front load the items I know I will enjoy disproportionately earlier in my retirement. Call my take on this the low end of a time segmentation strategy as opposed to the 'all discretionary spending' at the high end.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 4:00 pm

Snowjob wrote:
Mon Jul 16, 2018 3:48 pm
willthrill81 wrote:
Mon Jul 16, 2018 2:04 pm
Snowjob wrote:
Mon Jul 16, 2018 12:15 pm
I think the only difference is I would limit my "DSP" to a vacation fund where as Will is looking at a much larger component of spending -- all discretionary.
Any spending category that the retiree believes will decline over time as well as any categories that could be at least temporarily reduced in the event of a big market downturn, such as vacationing, dining out, or gifts could be included in the discretionary spending portfolio. At least some vehicle expenses could possibly be included as well; most 80 year olds aren't spending much on cars.
Agreed, I'm only willing to front load the items I know I will enjoy disproportionately earlier in my retirement. Call my take on this the low end of a time segmentation strategy as opposed to the 'all discretionary spending' at the high end.
That's part of the allure of this strategy to me: it's very flexible with regard to what retirees want to define as essential vs. discretionary. No other withdrawal methods I've seen explicitly 'front load', as you say, some of retirees' spending, but I think that this would be appealing to a lot of retirees. Not only does it match up better with retirees' actual spending, but it could also be gratifying to note that if one passes away halfway into a '30 year retirement', which is very possible for a 65 year old, that they would have gotten about as much enjoyment from their portfolio as they prudently could, while still leaving behind a legacy for others.
“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: A different take on retirement income: time segmentation

Post by Hyperborea » Mon Jul 16, 2018 4:27 pm

The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.
Is that only because you are allocating the same dollars to two SPIAs where one has a much shorter expected duration than the joint expectancy and the other one is only marginally shorter? Also, because of that the female partners SPIA would be for a smaller monthly amount than the male partner. How does the total cost compare to the joint SPIA if you equalize the monthly payments of both of the SPIAs?
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: A different take on retirement income: time segmentation

Post by Snowjob » Mon Jul 16, 2018 4:33 pm

willthrill81 wrote:
Mon Jul 16, 2018 4:00 pm
Snowjob wrote:
Mon Jul 16, 2018 3:48 pm
willthrill81 wrote:
Mon Jul 16, 2018 2:04 pm
Snowjob wrote:
Mon Jul 16, 2018 12:15 pm
I think the only difference is I would limit my "DSP" to a vacation fund where as Will is looking at a much larger component of spending -- all discretionary.
Any spending category that the retiree believes will decline over time as well as any categories that could be at least temporarily reduced in the event of a big market downturn, such as vacationing, dining out, or gifts could be included in the discretionary spending portfolio. At least some vehicle expenses could possibly be included as well; most 80 year olds aren't spending much on cars.
Agreed, I'm only willing to front load the items I know I will enjoy disproportionately earlier in my retirement. Call my take on this the low end of a time segmentation strategy as opposed to the 'all discretionary spending' at the high end.
That's part of the allure of this strategy to me: it's very flexible with regard to what retirees want to define as essential vs. discretionary. No other withdrawal methods I've seen explicitly 'front load', as you say, some of retirees' spending, but I think that this would be appealing to a lot of retirees. Not only does it match up better with retirees' actual spending, but it could also be gratifying to note that if one passes away halfway into a '30 year retirement', which is very possible for a 65 year old, that they would have gotten about as much enjoyment from their portfolio as they prudently could, while still leaving behind a legacy for others.
The next challenge is to figure out how to manage front loading the additional withdrawals while keeping your income sufficiently low enough to qualify Obamacare subsidies that allow early retirement in the first place! Guess those Roth accounts are going to be depleted fairly quickly...

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 5:25 pm

Snowjob wrote:
Mon Jul 16, 2018 4:33 pm
willthrill81 wrote:
Mon Jul 16, 2018 4:00 pm
Snowjob wrote:
Mon Jul 16, 2018 3:48 pm
willthrill81 wrote:
Mon Jul 16, 2018 2:04 pm
Snowjob wrote:
Mon Jul 16, 2018 12:15 pm
I think the only difference is I would limit my "DSP" to a vacation fund where as Will is looking at a much larger component of spending -- all discretionary.
Any spending category that the retiree believes will decline over time as well as any categories that could be at least temporarily reduced in the event of a big market downturn, such as vacationing, dining out, or gifts could be included in the discretionary spending portfolio. At least some vehicle expenses could possibly be included as well; most 80 year olds aren't spending much on cars.
Agreed, I'm only willing to front load the items I know I will enjoy disproportionately earlier in my retirement. Call my take on this the low end of a time segmentation strategy as opposed to the 'all discretionary spending' at the high end.
That's part of the allure of this strategy to me: it's very flexible with regard to what retirees want to define as essential vs. discretionary. No other withdrawal methods I've seen explicitly 'front load', as you say, some of retirees' spending, but I think that this would be appealing to a lot of retirees. Not only does it match up better with retirees' actual spending, but it could also be gratifying to note that if one passes away halfway into a '30 year retirement', which is very possible for a 65 year old, that they would have gotten about as much enjoyment from their portfolio as they prudently could, while still leaving behind a legacy for others.
The next challenge is to figure out how to manage front loading the additional withdrawals while keeping your income sufficiently low enough to qualify Obamacare subsidies that allow early retirement in the first place! Guess those Roth accounts are going to be depleted fairly quickly...
This strategy could certainly be used for early retirement as well. Whether front-loading the withdrawals in order to cover higher discretionary spending would be enough to reduce or eliminate one's ACA subsidies would obviously depend entirely on the specific retiree's situation.

But you bring up a very interesting point regarding how Roth accounts could be used with this strategy. The traditional wisdom is to hold Roth accounts for as long as possible so as to maximize their after-tax value. But for those employing this strategy, taking advantage of the Roth's tax-free withdrawals (after age 59.5 of course, plus contributions made to Roth IRAs prior to that age) relatively early in the retirement might increase the retiree's after-tax income over the course of the entire retirement period. For instance, if one's essential spending only places a retiree in the 12% bracket, but part of their discretionary spending will move them into the 22% bracket, they may be better off taking that '22% part' of their DS from Roth accounts, even if this is early in their retirement. If they waited until the latter part of their retirement to do so, the withdrawals may not even be needed if DS drops as it usually does. This method would be disadvantageous to heirs, who would prefer to inherit Roth accounts, all else being equal, but I don't personally see that as a big issue; others might.

There are many here who are far better crunching these numbers than I am. Perhaps one of them will take a swing at this one.
“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: A different take on retirement income: time segmentation

Post by Wricha » Mon Jul 16, 2018 6:23 pm

willthrill81 wrote:
Sun Jul 15, 2018 5:36 pm
Withdrawal methods for retirees are obviously one of the most discussed topics on this forum. It is clear that there is no one-size-fits-all approach because everyone has different needs. But I've been contemplating a general withdrawal strategy that could be easily modified in countless ways to fit different people's needs. I think that it may have some real value, and I'd like to hear feedback about it.

The problems retirees with investable portfolios face can be tough to address. Perhaps foremost among these is that retirees don't want to run out of income before they run out of life. There are approaches for dealing with this, such as (1) starting with historically very low withdrawal rates, (2) buying lifetime annuities, or (3) creating income ladders. There are issues with all of these approaches though, potentially including having a high likelihood of having a very large portfolio left at death and not spending as much as was possible (1 & 3) or 'locking in' historically low rates of return and (usually) permanently giving control of the annuitized assets (2).

Another problem not mentioned nearly as often is that while most of the traditional withdrawal strategies assume relatively fixed income needs from the point of retirement until death, this is not supported by real world data. Approximately two-thirds of retirees report that their spending declines over their retirement (half of the remainder report no change in spending, and the other half report spending increases). Retirees tend to reduce their annual spending in real dollars by 1-2% annually, even during their latter years when increased medical costs are offset by reduced transportation, food, and discretionary spending; there are clearly exceptions to this, but they are indeed exceptions to the widespread trend.

This means that retirees' are likely to need/want to spend more in the early years of retirement and less in the later years of retirement. But since retirements have a significant possibility of lasting decades, spending more in early years raises the potential problems of encountering a poor sequence of returns early in the retirement, one's lifetime lasting longer one had planned for (e.g. when creating an income ladder or determining withdrawal rates), or both.

To date, the focus has been primarily on sacrificing retirees' need/want for more income in the early stages of retirement for the security of reducing the likelihood of running out of money. A notable exception to this are the concepts of time segmentation and essential-versus-discretionary strategies, which Wade Pfau briefly described as follows below.
Time segmentation also differs from an essential-versus-discretionary strategy because it does not build a lifetime income floor. Rather, there is an income front-end with contractual protections. The assumption is that people have not saved enough to fund their entire lifetime of spending. Importantly, time segmentation also accounts for the fact that spending needs may change, and this requires flexibility and the avoidance of irreversible decisions.

...

At its core, though, time segmentation involves investing differently for retirement spending goals falling at different points in retirement. Fixed income assets with greater security are generally reserved for earlier retirement expenses, and higher volatility investments with greater growth potential are employed to support later retirement expenses.
https://www.advisorperspectives.com/art ... ent-income

Potentially combining these two approaches may offset some of the disadvantages of the common withdrawal methods. The basic gist of what I propose is this: split retirees' portfolio into two, one for essential spending (ES portfolio) and another for discretionary spending (DS portfolio). Then, apply different withdrawal methods for the two portfolios, based on your need, willingness, and ability to take on risk for both ES and DS. Income strategies involving use of the ESP should logically be more conservative than those involving the DSP. And while the primary purpose of the DSP would be to fund discretionary spending, which typically declines as retirees' age, a secondary purpose could be to at least partially fund significant essential spending needs that might arise, such as long-term care.

For the ESP, income strategies could involve purchasing immediate or deferred income annuities, creating a bond or CD ladder, the '4% rule of thumb' or an even lower starting withdrawal rate if desired, or some combination thereof. (It would not likely be advisable to use all of the ESP to purchase annuities, even if they included an inflation rider, since 'lumpy' ES needs may come along that need larger amounts of capital than the monthly annuity payment.) And all of this would be in addition to whatever Social Security benefits were available to the retirees.

For the DSP, which would consist of whatever remains after the ESP is funded, income strategies could be more aggressive in terms of both asset allocation (e.g. more stock heavy) and withdrawal rate than the common recommendations. I envision a percentage-of-portfolio withdrawal method with 6% annual withdrawals potentially being useful for a 65 year old couple. Using FIRECalc, a 70/30 portfolio with 6% annual withdrawals for 20 years would have left 31% of the original portfolio intact in real dollars in the worst case; the average ending portfolio balance would have been 89% of the starting balance. By the time they reach 85, most retirees' discretionary spending is finished, so depleting the majority of the DSP would not be a problem (it could almost be viewed as a goal). But in the majority of historical periods at least, a large portion of the DSP would remain intact, leaving the retirees with a bequest and/or funds for long-term care or other significant expenses later in life.

Before I start discussing models as to how this might play out with real numbers, I'd like to get feedback regarding what pros/cons you see of this strategy.
Thank you for sharing. I think it is well thought out. It’s value will help one understand why the portfolio needs to be diversified in a logical/thoughtful way. I thinks a good tool for a financial planner (sorry).

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Mon Jul 16, 2018 6:35 pm

Wricha wrote:
Mon Jul 16, 2018 6:23 pm
Thank you for sharing. I think it is well thought out. It’s value will help one understand why the portfolio needs to be diversified in a logical/thoughtful way. I thinks a good tool for a financial planner (sorry).
You're welcome! I'm glad that this strategy I've been contemplating for a while now isn't being resoundingly shot down by this group of very intelligently and financially savvy folks. :D

You're right that this strategy might be too complex for a lot of DIY retirees to implement on their own, though its basic operation is fairly simple.
1. Estimate your essential spending needs.
2. Determine how much income you need to fund your essential spending needs beyond that provided by Social Security, pensions, real estate income, etc.
3. Use whatever mix of safe withdrawals, bond/TIPS/CD ladders, and annuities you desire to satisfy your essential spending.
4. Place the remainder of your overall portfolio in a 'sub' portfolio for discretionary spending.
5. Use a more aggressive withdrawal strategy for the discretionary spending portfolio, such as a 5-7% 'percentage-of-portfolio' method.

A financial planner could certainly help with this, but I think that a fair number of DIYers could manage it without a problem.
“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: A different take on retirement income: time segmentation

Post by Dottie57 » Mon Jul 16, 2018 6:41 pm

willthrill81 wrote:
Mon Jul 16, 2018 3:32 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.

The SPIA amount is great while alive, not so much when death occurs for one of them since the SPIA amount is halved.

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Re: A different take on retirement income: time segmentation

Post by The Wizard » Mon Jul 16, 2018 7:22 pm

Hyperborea wrote:
Mon Jul 16, 2018 4:27 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.
Is that only because you are allocating the same dollars to two SPIAs where one has a much shorter expected duration than the joint expectancy and the other one is only marginally shorter? Also, because of that the female partners SPIA would be for a smaller monthly amount than the male partner. How does the total cost compare to the joint SPIA if you equalize the monthly payments of both of the SPIAs?
This is an excellent question.
I don't have the answer and I'm single nowadays anyhow.
But it's something to be researched, clearly...
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Re: A different take on retirement income: time segmentation

Post by The Wizard » Mon Jul 16, 2018 7:27 pm

Dottie57 wrote:
Mon Jul 16, 2018 6:41 pm
willthrill81 wrote:
Mon Jul 16, 2018 3:32 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.

The SPIA amount is great while alive, not so much when death occurs for one of them since the SPIA amount is halved.
I understand.
But the survivor receives the higher SS benefit plus all the joint assets.
It may not be necessary to have 100% of the income the couple had once there's just the survivor.
Am I right?
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Re: A different take on retirement income: time segmentation

Post by cresive » Mon Jul 16, 2018 7:43 pm

willthrill81 wrote:
Sun Jul 15, 2018 10:52 pm
WanderingDoc wrote:
Sun Jul 15, 2018 7:12 pm
Very well thought out and interesting idea. Good thoughts from Sandtrap as well.
Thanks!
WanderingDoc wrote:
Sun Jul 15, 2018 7:12 pm
I tend to think we shouldn't be so rigid in assuming lower spending in retirement. It should be more at an individual (and year by year) basis.

For example, there have been years where I spent $120K and years where I spend $12K, perhaps both intentionally and unintentionally. Was perfectly content doing both. Why are we assuming that retired people just want to sit home all day, or not fly first class, or not eat in nice restaurants? I think people are unique and life is not that simple.

Someone could be 50 years old and spend $50K/yr. until their 55th birthday. Then they may want to open a restaurant or start a business, and want to make a $300K lump sum withdrawal without relying on outside investors yet. This is a very plausible scenario.

I think an even more intelligent "hybrid" approach would be a mix of portfolios of stocks/bonds and real estate. You have your real estate which pays you say $5K/mo. consistently. When the mortgages are payed off (by your tenants by the way), this will jump to $11-12K/mo. in income, in your 50s-60s, depending on when you started purchasing properties. This will also allow you to be more aggressive in your equity allocations, which could be used to fund further business and charitable pursuits.
It's true that not all retirees' spending goes down by a consistent 1-2% in real terms. Kitces actually believes that it may be slightly more realistic to model spending drop by 10% or more every decade in one fail swoop rather than bit by bit from year to year. But data from both Morningstar's David Blanchett and over 30 years of data from the Bureau of Labor Statistics supports the idea that retirees' spending does go down over time, particularly their discretionary spending.

Image

Those who want to increase their likelihood of more discretionary spending should either allocate more to their DSP, reduce their DSP withdrawal rate, or both.

And yes, allocations from either the ESP or DSP could certainly include some real estate. Some retirees 'count' on some portion of their real estate rental income (e.g. 70%) as part of their income floor, like Social Security benefits.
The information in your graphic is compelling. I do question if the numbers are a snapshot--i.e. the average spending of each group in today's dollars, or tracking spending throughout retirement. I wonder how much inflation affects (i.e. offsets) the decline in spending. A 10% decrease in spending can be offset by even 3% inflation over time.

Just in case I am not presenting my question clearly, in 2018, the average 70 y.o. spends $75K versus a 60 y.o. who spends $94K. When that 60y.o. ages in 10 years, he may have a 10% decrease in spending that is totally offset by inflation and will thus continue to spend the equivalent of today's 70 y.o. plus inflation which equates to $94K in today's dollars.
If this is the case, then you may need to adjust your spending theory.

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Re: A different take on retirement income: time segmentation

Post by golfCaddy » Mon Jul 16, 2018 7:58 pm

You're ignoring the cost of assisted living or nursing home care. For many people, assuming they live long enough, their spending will spike near the end of their life or their spouse's life.

marcopolo
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Re: A different take on retirement income: time segmentation

Post by marcopolo » Mon Jul 16, 2018 9:23 pm

willthrill81 wrote:
Mon Jul 16, 2018 8:44 am
Snowjob wrote:
Mon Jul 16, 2018 5:55 am
The Wizard wrote:
Mon Jul 16, 2018 4:17 am
Theory is that retirees overall spending tends to decline with age.
How much of this is because they spent much of their modest nest eggs early on, unwisely perhaps, and now don't really have enough remaining to spend more?

On the other hand, we have people with larger portfolios who simply lose interest in doing stuff as they age and their portfolios grow significantly.

I know we have examples of both cases above, but I suspect that, in the general public, retirees who run low on money are more common.
What does the data show on this?
That was my initial concern.

A chart below shows that this was spending for affluent households so on the surface it leads you to believe this is people with larger portfolios losing interest. I have not seen the study directly but I browsed the link to the Kitces site that was posted as well. There are several studies and while I am sure there is some truth to this I am more sceptical.

Anecdotally I have not seen my parents slow down at all (now late 70's) and their spending has been capped by smaller portfolio balances due to some poor investment decisions not any sort of natural decline. Frankly between mortgage repayment, projects and other various items they could probably spend another 50% of their portfolio (which they don't have / can't afford) today just on that. The only thing that will slow them down is early death or severe health decline.

My grandmother whom I only really knew in her mid 80's -> early 90's seemed to watch jeopardy and wheel of fortune every day. Read the paper to see the obituaries. Yelled at my grandfather for eating icecream for breakfast and not turning on his hearing aids. That seemed to be her routine. But life was different back then. Depression era kids, pre-internet. Simple life, never spent much. They worked for 50 years at a low to middle wages and passed on in the same small house they had their whole lives. Seemed to travel a little in their 70s from the family photos I found.

My grandparents both lived to their 90s and their actual spending pattern may have fit the spending decline that this data shows. My parents (if one does die early) will show a chart that has spending continuing to grow as much as their portfolio allows and then at some point when that death occurs, there will be a one time dramatic reset. There will be a reduction of income as well though (small pension, soc. sec. etc are likely reduced) and there is one less person consuming, so the decline will not be as extraordinary on a per head basis. Further, this really only helps if your modeling a couple who is married where one dies. What if the retiree is single? Death is simply the end point.

I prefer to think of any natural spending decline as an additional layer of safety. Even if you end with extra money at the end, this is simply additional funds to distribute to charity or leave some for your kids, help out with grand kids college etc. I think the only risk would be the risk of regret that you didn't spend enough during the early years on the bucket list trips. To that end, instead of a 2 portfolio split that models a larger decline in spending, a solution might be to model a decline in your vacation budget on its own -- Put a sum of money into 70/30 balanced fund, call it the big vacation fund and take a healthy 6-7% a year out to cover big trips until its depleted. At that point your living more local anyway and hopefully any natural spending declines would free up enough money for a trip here or there if you did happen to experience that natural decline.
Thanks for sharing your parents' and grandparents' experiences.

My parents are just about to enter retirement (father will be 70, and mother will be 65). It's looking like they will do a lot of traveling over the next 5-10 years, but it's doubtful beyond that. My father has some health issues that are minor now but could become very restrictive to their lifestyle down the road. My mother says that she's planning on them having "five good years" to do what's left on their bucket list. While their discretionary spending decreases will probably be lumpy, I think that they are quite likely to occur.

I believe it was Kitces who noted from working with clients directly and indirectly through other advisors that it seemed very common for health issues in retirees' mid- to late-70s to lead to them slowing down and spending less on travel, restaurants, clothing, etc. Someone would get a hip replacement but could no longer walk as far they could before, eyesight would decline to the point that they could not drive anymore, etc. Without good mobility, it's harder to go on pricey vacations or even dine out often.

But nonetheless, I believe that using a percentage-of-portfolio approach to retirees' discretionary spending portfolios is better than just amortizing it over a certain period. By doing so, retirees cannot exhaust their discretionary portfolios, leaving them the options of either continued discretionary spending later in retirement or paying for medical costs like long-term care.

Those who are really concerned about long-term care expenses or other expenses that tend to occur near the end of one's life might want to allocate some additional funds for that purpose to their essential spending portfolio or maybe even a third portfolio just for that.
I am optimistic some of this will change in the next 20 years. Think about how much more independent people can be today due to advances like computers, internet, cell phones, etc. In the next 20 years we will have self-driving cars, probably more efficient delivery services, telemedicine, and others things we have not thought about yet that will likely allow people to be more independent and active longer into their retirement years.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Snowjob
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Re: A different take on retirement income: time segmentation

Post by Snowjob » Mon Jul 16, 2018 11:19 pm

marcopolo wrote:
Mon Jul 16, 2018 9:23 pm
willthrill81 wrote:
Mon Jul 16, 2018 8:44 am
Snowjob wrote:
Mon Jul 16, 2018 5:55 am
The Wizard wrote:
Mon Jul 16, 2018 4:17 am
Theory is that retirees overall spending tends to decline with age.
How much of this is because they spent much of their modest nest eggs early on, unwisely perhaps, and now don't really have enough remaining to spend more?

On the other hand, we have people with larger portfolios who simply lose interest in doing stuff as they age and their portfolios grow significantly.

I know we have examples of both cases above, but I suspect that, in the general public, retirees who run low on money are more common.
What does the data show on this?
That was my initial concern.

A chart below shows that this was spending for affluent households so on the surface it leads you to believe this is people with larger portfolios losing interest. I have not seen the study directly but I browsed the link to the Kitces site that was posted as well. There are several studies and while I am sure there is some truth to this I am more sceptical.

Anecdotally I have not seen my parents slow down at all (now late 70's) and their spending has been capped by smaller portfolio balances due to some poor investment decisions not any sort of natural decline. Frankly between mortgage repayment, projects and other various items they could probably spend another 50% of their portfolio (which they don't have / can't afford) today just on that. The only thing that will slow them down is early death or severe health decline.

My grandmother whom I only really knew in her mid 80's -> early 90's seemed to watch jeopardy and wheel of fortune every day. Read the paper to see the obituaries. Yelled at my grandfather for eating icecream for breakfast and not turning on his hearing aids. That seemed to be her routine. But life was different back then. Depression era kids, pre-internet. Simple life, never spent much. They worked for 50 years at a low to middle wages and passed on in the same small house they had their whole lives. Seemed to travel a little in their 70s from the family photos I found.

My grandparents both lived to their 90s and their actual spending pattern may have fit the spending decline that this data shows. My parents (if one does die early) will show a chart that has spending continuing to grow as much as their portfolio allows and then at some point when that death occurs, there will be a one time dramatic reset. There will be a reduction of income as well though (small pension, soc. sec. etc are likely reduced) and there is one less person consuming, so the decline will not be as extraordinary on a per head basis. Further, this really only helps if your modeling a couple who is married where one dies. What if the retiree is single? Death is simply the end point.

I prefer to think of any natural spending decline as an additional layer of safety. Even if you end with extra money at the end, this is simply additional funds to distribute to charity or leave some for your kids, help out with grand kids college etc. I think the only risk would be the risk of regret that you didn't spend enough during the early years on the bucket list trips. To that end, instead of a 2 portfolio split that models a larger decline in spending, a solution might be to model a decline in your vacation budget on its own -- Put a sum of money into 70/30 balanced fund, call it the big vacation fund and take a healthy 6-7% a year out to cover big trips until its depleted. At that point your living more local anyway and hopefully any natural spending declines would free up enough money for a trip here or there if you did happen to experience that natural decline.
Thanks for sharing your parents' and grandparents' experiences.

My parents are just about to enter retirement (father will be 70, and mother will be 65). It's looking like they will do a lot of traveling over the next 5-10 years, but it's doubtful beyond that. My father has some health issues that are minor now but could become very restrictive to their lifestyle down the road. My mother says that she's planning on them having "five good years" to do what's left on their bucket list. While their discretionary spending decreases will probably be lumpy, I think that they are quite likely to occur.

I believe it was Kitces who noted from working with clients directly and indirectly through other advisors that it seemed very common for health issues in retirees' mid- to late-70s to lead to them slowing down and spending less on travel, restaurants, clothing, etc. Someone would get a hip replacement but could no longer walk as far they could before, eyesight would decline to the point that they could not drive anymore, etc. Without good mobility, it's harder to go on pricey vacations or even dine out often.

But nonetheless, I believe that using a percentage-of-portfolio approach to retirees' discretionary spending portfolios is better than just amortizing it over a certain period. By doing so, retirees cannot exhaust their discretionary portfolios, leaving them the options of either continued discretionary spending later in retirement or paying for medical costs like long-term care.

Those who are really concerned about long-term care expenses or other expenses that tend to occur near the end of one's life might want to allocate some additional funds for that purpose to their essential spending portfolio or maybe even a third portfolio just for that.
I am optimistic some of this will change in the next 20 years. Think about how much more independent people can be today due to advances like computers, internet, cell phones, etc. In the next 20 years we will have self-driving cars, probably more efficient delivery services, telemedicine, and others things we have not thought about yet that will likely allow people to be more independent and active longer into their retirement years.
Agreed, all reinforce to me that the only real decline I'll see is in travel. I likely wont be skiing the alps for a several weeks at a time when I'm in my late 80s. But you bet your ass i'll be headed everywhere in my self driving car, fancy wheel chair or anything else they cook up. And if I cant go out I'll use that extra money to pay for people to come to me. The $$ will be spent that I can assure you.

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willthrill81
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 1:01 am

cresive wrote:
Mon Jul 16, 2018 7:43 pm
willthrill81 wrote:
Sun Jul 15, 2018 10:52 pm
WanderingDoc wrote:
Sun Jul 15, 2018 7:12 pm
Very well thought out and interesting idea. Good thoughts from Sandtrap as well.
Thanks!
WanderingDoc wrote:
Sun Jul 15, 2018 7:12 pm
I tend to think we shouldn't be so rigid in assuming lower spending in retirement. It should be more at an individual (and year by year) basis.

For example, there have been years where I spent $120K and years where I spend $12K, perhaps both intentionally and unintentionally. Was perfectly content doing both. Why are we assuming that retired people just want to sit home all day, or not fly first class, or not eat in nice restaurants? I think people are unique and life is not that simple.

Someone could be 50 years old and spend $50K/yr. until their 55th birthday. Then they may want to open a restaurant or start a business, and want to make a $300K lump sum withdrawal without relying on outside investors yet. This is a very plausible scenario.

I think an even more intelligent "hybrid" approach would be a mix of portfolios of stocks/bonds and real estate. You have your real estate which pays you say $5K/mo. consistently. When the mortgages are payed off (by your tenants by the way), this will jump to $11-12K/mo. in income, in your 50s-60s, depending on when you started purchasing properties. This will also allow you to be more aggressive in your equity allocations, which could be used to fund further business and charitable pursuits.
It's true that not all retirees' spending goes down by a consistent 1-2% in real terms. Kitces actually believes that it may be slightly more realistic to model spending drop by 10% or more every decade in one fail swoop rather than bit by bit from year to year. But data from both Morningstar's David Blanchett and over 30 years of data from the Bureau of Labor Statistics supports the idea that retirees' spending does go down over time, particularly their discretionary spending.

Image

Those who want to increase their likelihood of more discretionary spending should either allocate more to their DSP, reduce their DSP withdrawal rate, or both.

And yes, allocations from either the ESP or DSP could certainly include some real estate. Some retirees 'count' on some portion of their real estate rental income (e.g. 70%) as part of their income floor, like Social Security benefits.
The information in your graphic is compelling. I do question if the numbers are a snapshot--i.e. the average spending of each group in today's dollars, or tracking spending throughout retirement. I wonder how much inflation affects (i.e. offsets) the decline in spending. A 10% decrease in spending can be offset by even 3% inflation over time.

Just in case I am not presenting my question clearly, in 2018, the average 70 y.o. spends $75K versus a 60 y.o. who spends $94K. When that 60y.o. ages in 10 years, he may have a 10% decrease in spending that is totally offset by inflation and will thus continue to spend the equivalent of today's 70 y.o. plus inflation which equates to $94K in today's dollars.
If this is the case, then you may need to adjust your spending theory.
That graph is a snapshot from a few years ago, but the longitudinal (time series) data collected on the topic support it as well. I refer you to David Blanchett's (of Morningstar) work on the topic. The Bureau of Labor Statistics has also gathered corroborating data on this issue for decades.
“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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willthrill81
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 1:02 am

Snowjob wrote:
Mon Jul 16, 2018 11:19 pm
marcopolo wrote:
Mon Jul 16, 2018 9:23 pm
willthrill81 wrote:
Mon Jul 16, 2018 8:44 am
Snowjob wrote:
Mon Jul 16, 2018 5:55 am
The Wizard wrote:
Mon Jul 16, 2018 4:17 am
Theory is that retirees overall spending tends to decline with age.
How much of this is because they spent much of their modest nest eggs early on, unwisely perhaps, and now don't really have enough remaining to spend more?

On the other hand, we have people with larger portfolios who simply lose interest in doing stuff as they age and their portfolios grow significantly.

I know we have examples of both cases above, but I suspect that, in the general public, retirees who run low on money are more common.
What does the data show on this?
That was my initial concern.

A chart below shows that this was spending for affluent households so on the surface it leads you to believe this is people with larger portfolios losing interest. I have not seen the study directly but I browsed the link to the Kitces site that was posted as well. There are several studies and while I am sure there is some truth to this I am more sceptical.

Anecdotally I have not seen my parents slow down at all (now late 70's) and their spending has been capped by smaller portfolio balances due to some poor investment decisions not any sort of natural decline. Frankly between mortgage repayment, projects and other various items they could probably spend another 50% of their portfolio (which they don't have / can't afford) today just on that. The only thing that will slow them down is early death or severe health decline.

My grandmother whom I only really knew in her mid 80's -> early 90's seemed to watch jeopardy and wheel of fortune every day. Read the paper to see the obituaries. Yelled at my grandfather for eating icecream for breakfast and not turning on his hearing aids. That seemed to be her routine. But life was different back then. Depression era kids, pre-internet. Simple life, never spent much. They worked for 50 years at a low to middle wages and passed on in the same small house they had their whole lives. Seemed to travel a little in their 70s from the family photos I found.

My grandparents both lived to their 90s and their actual spending pattern may have fit the spending decline that this data shows. My parents (if one does die early) will show a chart that has spending continuing to grow as much as their portfolio allows and then at some point when that death occurs, there will be a one time dramatic reset. There will be a reduction of income as well though (small pension, soc. sec. etc are likely reduced) and there is one less person consuming, so the decline will not be as extraordinary on a per head basis. Further, this really only helps if your modeling a couple who is married where one dies. What if the retiree is single? Death is simply the end point.

I prefer to think of any natural spending decline as an additional layer of safety. Even if you end with extra money at the end, this is simply additional funds to distribute to charity or leave some for your kids, help out with grand kids college etc. I think the only risk would be the risk of regret that you didn't spend enough during the early years on the bucket list trips. To that end, instead of a 2 portfolio split that models a larger decline in spending, a solution might be to model a decline in your vacation budget on its own -- Put a sum of money into 70/30 balanced fund, call it the big vacation fund and take a healthy 6-7% a year out to cover big trips until its depleted. At that point your living more local anyway and hopefully any natural spending declines would free up enough money for a trip here or there if you did happen to experience that natural decline.
Thanks for sharing your parents' and grandparents' experiences.

My parents are just about to enter retirement (father will be 70, and mother will be 65). It's looking like they will do a lot of traveling over the next 5-10 years, but it's doubtful beyond that. My father has some health issues that are minor now but could become very restrictive to their lifestyle down the road. My mother says that she's planning on them having "five good years" to do what's left on their bucket list. While their discretionary spending decreases will probably be lumpy, I think that they are quite likely to occur.

I believe it was Kitces who noted from working with clients directly and indirectly through other advisors that it seemed very common for health issues in retirees' mid- to late-70s to lead to them slowing down and spending less on travel, restaurants, clothing, etc. Someone would get a hip replacement but could no longer walk as far they could before, eyesight would decline to the point that they could not drive anymore, etc. Without good mobility, it's harder to go on pricey vacations or even dine out often.

But nonetheless, I believe that using a percentage-of-portfolio approach to retirees' discretionary spending portfolios is better than just amortizing it over a certain period. By doing so, retirees cannot exhaust their discretionary portfolios, leaving them the options of either continued discretionary spending later in retirement or paying for medical costs like long-term care.

Those who are really concerned about long-term care expenses or other expenses that tend to occur near the end of one's life might want to allocate some additional funds for that purpose to their essential spending portfolio or maybe even a third portfolio just for that.
I am optimistic some of this will change in the next 20 years. Think about how much more independent people can be today due to advances like computers, internet, cell phones, etc. In the next 20 years we will have self-driving cars, probably more efficient delivery services, telemedicine, and others things we have not thought about yet that will likely allow people to be more independent and active longer into their retirement years.
Agreed, all reinforce to me that the only real decline I'll see is in travel. I likely wont be skiing the alps for a several weeks at a time when I'm in my late 80s. But you bet your ass i'll be headed everywhere in my self driving car, fancy wheel chair or anything else they cook up. And if I cant go out I'll use that extra money to pay for people to come to me. The $$ will be spent that I can assure you.
You'll be a rare one indeed if you do spend your portfolio. Most retirees don't.
“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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willthrill81
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 1:11 am

golfCaddy wrote:
Mon Jul 16, 2018 7:58 pm
You're ignoring the cost of assisted living or nursing home care. For many people, assuming they live long enough, their spending will spike near the end of their life or their spouse's life.
There are ways to skin that cat. If retirees want to pay for long-term care insurance, that can be factored into their essential spending. Or if their discretionary portfolio is large enough, they can use it to self-insure against the risk of significant long-term care.

From what I've seen regarding research on the matter, about 80% of those who ever receive long-term care do so for under twothree years, which might cost around $300k in today's dollars. For most Bogleheads, that's not a sum that would sink a surviving spouse's retirement, for instance, especially if they started with a solid overall portfolio. Planning for that possibility might make SPIAs more attractive than otherwise. But even if they used something like the '4% rule of thumb' with their essential spending portfolio, they have a high historical likelihood of having most of that money intact at the end of their planned retirement period.
Last edited by willthrill81 on Tue Jul 17, 2018 9:40 am, edited 1 time in total.
“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: A different take on retirement income: time segmentation

Post by GAAP » Tue Jul 17, 2018 9:34 am

It sounds like you are budgeting the assets rather than the expenses in a way -- I'm curious how you would handle a fundamental change in the definition of essential or a fundamental change in the scope necessary for essential items. Healthcare is probably the most obvious example for those, but other items could apply -- especially for early retirees.

Healthcare brings up another potential concern. Since the inflation rate for that is different from overall inflation, any estimate to fund it can easily get out of whack over time. Let's assume you significantly over-estimate healthcare inflation -- how would you handle a decrease in essential expenses?

We frequently discuss real portfolio growth as if that is sufficient. The earlier that someone retires, the less likely that is to be true, since some luxury items become necessities over time. How many people on this forum were on the internet 25 years ago? Remember, that predates http and graphical webpages. I was, but only because my employer (a telecom company) provided access to a limited subset of people. Budgeting for that at home wasn't even a consideration at the time. I don't know what the next fundamental change will be, but it could easily affect me -- and certainly my children. The portfolio really needs to grow in excess of inflation to support that sort of thing.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 10:02 am

GAAP wrote:
Tue Jul 17, 2018 9:34 am
It sounds like you are budgeting the assets rather than the expenses in a way
Retirees using this method would base the level of assets in their essential spending portfolio on their own estimation of their essential spending. The only real difference between this as a 'total portfolio' approach is that by disaggregating essential and discretionary spending, we can try to 'front load' some of retirees' withdrawals with discretionary spending.
GAAP wrote:
Tue Jul 17, 2018 9:34 am
Healthcare brings up another potential concern. Since the inflation rate for that is different from overall inflation, any estimate to fund it can easily get out of whack over time. Let's assume you significantly over-estimate healthcare inflation -- how would you handle a decrease in essential expenses?
If a retiree overestimated his essential spending and saw his ESP grow significantly, then he's got a great first-world problem on his hands! And if retirees use something like the '4% rule of thumb' or an even lower starting withdrawal rate, they've been historically likely to be able to increase their withdrawals beyond inflation over time as their portfolio grows and sequence of returns risk diminishes. Retirees could literally do anything they wanted with this additional money: leave it in the ESP, move it to the DSP, or donate the money to heirs or charity either now or later.
GAAP wrote:
Tue Jul 17, 2018 9:34 am
We frequently discuss real portfolio growth as if that is sufficient. The earlier that someone retires, the less likely that is to be true, since some luxury items become necessities over time. How many people on this forum were on the internet 25 years ago? Remember, that predates http and graphical webpages. I was, but only because my employer (a telecom company) provided access to a limited subset of people. Budgeting for that at home wasn't even a consideration at the time. I don't know what the next fundamental change will be, but it could easily affect me -- and certainly my children. The portfolio really needs to grow in excess of inflation to support that sort of thing.
That's certainly a possibility, but note that as of 2015, only about 1/6 retirees saw their inflation-adjusted spending increase through retirement. And I suspect that a lot, perhaps most, of this group saw their spending increase simply because they had the funds to allow it to happen. The clear and widespread trend among retirees is that they spend more when they are younger, healthier, and feel better. Having more of their own cohort group around to do things with might also be a contributing factor. Constantly upgrading their computers, phones, TVs, etc. seems to become less important to them as they age, declining mobility leads to less traveling, dining out, etc., and so on. Both the cross-sectional and longitudinal data are clear about this.

But as I've noted above, the 'success' of this strategy does not hinge on retirees' essential spending remaining flat in real dollars and their discretionary spending declining. If the ESP has at least a modest allocation to stocks, then it's historically very likely that it will grow in real dollars over time if a low (i.e. 4%) initial withdrawal rate is used. And using something like the percentage-of-portfolio approach to make withdrawals from the DSP means that that portfolio can never be depleted; even if annual withdrawals are 5-6%, the bulk of the DSP is historically likely to remain intact after 20 years of withdrawals. This is because withdrawals will shrink if/when the DSP does.

This strategy is an attempt to address one of the real world but often overlooked problem with constant or increased overall spending approaches like the '4% rule of thumb' and the VPW. Rather than remain flat or increase over time, the very clear trend is the opposite; retirees need/want to spend more early in retirement than later.
“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

Dottie57
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Re: A different take on retirement income: time segmentation

Post by Dottie57 » Tue Jul 17, 2018 11:40 am

The Wizard wrote:
Mon Jul 16, 2018 7:27 pm
Dottie57 wrote:
Mon Jul 16, 2018 6:41 pm
willthrill81 wrote:
Mon Jul 16, 2018 3:32 pm
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
Married couples would get higher income in retirement from SPIAs if each bought a single life SPIA for $500,000 rather than buying a joint life SPIA for $1M.

This also helps solve that nasty problem after the death of the first spouse where the survivor has excess income in a higher tax bracket.
That's a very good idea that I've never heard of before.
The Wizard wrote:
Mon Jul 16, 2018 2:50 pm
We should have Wade take a look at this concept...
I'm flattered! 8-) Though I strongly suspect that Professor Pfau would want to annuitize most or all of the ESP, which I would not be a proponent of, as noted above.

The SPIA amount is great while alive, not so much when death occurs for one of them since the SPIA amount is halved.
I understand.
But the survivor receives the higher SS benefit plus all the joint assets.
It may not be necessary to have 100% of the income the couple had once there's just the survivor.
Am I right?
My dad died 1.5 years ago. Mom has less income and feels it. 100% is very beneficial for survivor. Higher taxes are not the end of the world. I am single and have been paying them all my life.

smitcat
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Re: A different take on retirement income: time segmentation

Post by smitcat » Tue Jul 17, 2018 11:45 am

corn18 wrote:
Mon Jul 16, 2018 3:23 pm
I like this concept. My essential budget look like this right now (3 years out from retirement): sorry for the formatting issues

BUDGET

CATEGORY MONTHLY ANNUAL
AUTO FUEL 150 1,800.00
AUTO SERVICE 75 900.00
CLOTHES 300 3,600.00
DOGS / CATS 200 2,400.00
FOOD 700 8,400.00
DINING 700 8,400.00
HEALTH / BEAUTY 300 3,600.00
HOUSE MAINT 250 3,000.00
ENTERTAINMENT 200 2,400.00
MEDICAL 500 6,000.00
LUMPY STUFF 365 4,376.00
MISC 750 9,000.00

TOT DISC 4,490 53,876

HOUSE (taxes/ins) 767 9,204.00
LIFE INSURANCE 220 2,640.00
CELL PHONE 150 1,800.00
CABLE 141 1,692.00
ELECTRIC / GAS 150 1,795.80
WATER 110 1,320.00
INTERNET 64 762.24
AUTO INS 150 1,800.00

TOT NON-DISC 1,751 21,014

TOTAL EXP 6,241 74,890

Gotta cover this until I die. But this is pretty frugal living for us, so anything above that goes to cars, travel or whatever. But as long as we cover the essentials, we are doing ok.
Our numbers are not that dissimilar but we have these items under non-discretionary as opposed to discretionary:
- auto
- Food (not dining)
- home maintenance
- medical

kaudrey
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Re: A different take on retirement income: time segmentation

Post by kaudrey » Tue Jul 17, 2018 2:57 pm

The Wizard wrote:
Mon Jul 16, 2018 4:17 am
Theory is that retirees overall spending tends to decline with age.
How much of this is because they spent much of their modest nest eggs early on, unwisely perhaps, and now don't really have enough remaining to spend more?

On the other hand, we have people with larger portfolios who simply lose interest in doing stuff as they age and their portfolios grow significantly.

I know we have examples of both cases above, but I suspect that, in the general public, retirees who run low on money are more common.
What does the data show on this?
Well, anecdotally, my parents are 80, and their spending is way down right now compared to when they retired 20 years ago, because my mother's health is such that they can't travel to FL for 3 months (renting a place), can't go on vacations, and rarely go out to dinner or do other things because she isn't very mobile due to her illness.

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corn18
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Re: A different take on retirement income: time segmentation

Post by corn18 » Tue Jul 17, 2018 4:47 pm

smitcat wrote:
Tue Jul 17, 2018 11:45 am
corn18 wrote:
Mon Jul 16, 2018 3:23 pm
I like this concept. My essential budget look like this right now (3 years out from retirement): sorry for the formatting issues

BUDGET

CATEGORY MONTHLY ANNUAL
AUTO FUEL 150 1,800.00
AUTO SERVICE 75 900.00
CLOTHES 300 3,600.00
DOGS / CATS 200 2,400.00
FOOD 700 8,400.00
DINING 700 8,400.00
HEALTH / BEAUTY 300 3,600.00
HOUSE MAINT 250 3,000.00
ENTERTAINMENT 200 2,400.00
MEDICAL 500 6,000.00
LUMPY STUFF 365 4,376.00
MISC 750 9,000.00

TOT DISC 4,490 53,876

HOUSE (taxes/ins) 767 9,204.00
LIFE INSURANCE 220 2,640.00
CELL PHONE 150 1,800.00
CABLE 141 1,692.00
ELECTRIC / GAS 150 1,795.80
WATER 110 1,320.00
INTERNET 64 762.24
AUTO INS 150 1,800.00

TOT NON-DISC 1,751 21,014

TOTAL EXP 6,241 74,890

Gotta cover this until I die. But this is pretty frugal living for us, so anything above that goes to cars, travel or whatever. But as long as we cover the essentials, we are doing ok.
Our numbers are not that dissimilar but we have these items under non-discretionary as opposed to discretionary:
- auto
- Food (not dining)
- home maintenance
- medical
That makes good sense. I think I will make that change. Thanks!

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Re: A different take on retirement income: time segmentation

Post by golfCaddy » Tue Jul 17, 2018 5:36 pm

willthrill81 wrote:
Sun Jul 15, 2018 10:52 pm
Image
Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.

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Re: A different take on retirement income: time segmentation

Post by smitcat » Tue Jul 17, 2018 5:47 pm

golfCaddy wrote:
Tue Jul 17, 2018 5:36 pm
willthrill81 wrote:
Sun Jul 15, 2018 10:52 pm
Image
Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.
I would believe that it is due to the fact that it is an average of all those folks whom would typically tend to downsize and/or move to supported living in later years.

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Re: A different take on retirement income: time segmentation

Post by GAAP » Tue Jul 17, 2018 5:48 pm

golfCaddy wrote:
Tue Jul 17, 2018 5:36 pm

Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.
Downsizing would be one reason. In California, Proposition 13 limits on property taxes would apply also -- assuming the house isn't sold.

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Re: A different take on retirement income: time segmentation

Post by golfCaddy » Tue Jul 17, 2018 6:02 pm

willthrill81 wrote:
Tue Jul 17, 2018 1:11 am
There are ways to skin that cat. If retirees want to pay for long-term care insurance, that can be factored into their essential spending. Or if their discretionary portfolio is large enough, they can use it to self-insure against the risk of significant long-term care.

From what I've seen regarding research on the matter, about 80% of those who ever receive long-term care do so for under twothree years, which might cost around $300k in today's dollars. For most Bogleheads, that's not a sum that would sink a surviving spouse's retirement, for instance, especially if they started with a solid overall portfolio. Planning for that possibility might make SPIAs more attractive than otherwise. But even if they used something like the '4% rule of thumb' with their essential spending portfolio, they have a high historical likelihood of having most of that money intact at the end of their planned retirement period.
You have to peel back the layers under the numbers though. At 55, the average life expectancy for a man is another 25 years. The average man who makes it to retirement age dies by 80. Despite that, most people on this board plan for the tail end of the distribution, where one or both spouses make it to 95+. The longer you live, the more likely it is you'll need increased levels of care. Some people who might otherwise need nursing home care move in with relatives and get care from them. How strong is the familial safety net? Your link only reports numbers for nursing home care, not all types of LTC. In home nurses and assisted living facilities can be expensive, but aren't included in the nursing home statistics. I do agree if you have sufficient assets, ex. $5M+, almost any sensible retirement strategy will work.
Last edited by golfCaddy on Tue Jul 17, 2018 6:16 pm, edited 2 times in total.

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Re: A different take on retirement income: time segmentation

Post by golfCaddy » Tue Jul 17, 2018 6:05 pm

GAAP wrote:
Tue Jul 17, 2018 5:48 pm
golfCaddy wrote:
Tue Jul 17, 2018 5:36 pm

Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.
Downsizing would be one reason. In California, Proposition 13 limits on property taxes would apply also -- assuming the house isn't sold.
No one in my extended family downsized voluntarily. They stayed in the house they were in, as long as they were capable of independent living.

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Re: A different take on retirement income: time segmentation

Post by GAAP » Tue Jul 17, 2018 6:13 pm

golfCaddy wrote:
Tue Jul 17, 2018 6:05 pm
GAAP wrote:
Tue Jul 17, 2018 5:48 pm
golfCaddy wrote:
Tue Jul 17, 2018 5:36 pm

Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.
Downsizing would be one reason. In California, Proposition 13 limits on property taxes would apply also -- assuming the house isn't sold.
No one in my extended family downsized voluntarily. They stayed in the house they were in, as long as they were capable of independent living.
Mine either.

But, my parents bought their California house in 1972. Proposition 13 passed in 1978, reducing the actual tax rate at the time to 1% of assessed 1976 valuation, and limiting annual increases to a maximum of 2% per year. Regular inflation and retirement income grew a lot faster than that, resulting in a decreased relative level of housing expense.

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Re: A different take on retirement income: time segmentation

Post by DC3509 » Tue Jul 17, 2018 6:16 pm

willthrill81 wrote:
Mon Jul 16, 2018 11:38 am
goodenyou wrote:
Mon Jul 16, 2018 11:17 am
What do you think of the theory that the SPIA allows for a more aggressive equity portfolio that likely will lead to more growth and likely more legacy?
I don't buy it. Buying a SPIA is not likely to provide retirees with a meaningfully greater amount in their portfolio to allocate to equities. The payout ratio for a SPIA with an inflation-adjustment for a 65 year old couple is roughly 4% these days, which is close to the '4% rule of thumb'. Granted, the '4% rule' hasn't held with only nominal bonds in the past, but there's no need for a retiree to hold only nominal bonds any more. They can now buy TIPS, and with current real returns, they can guarantee about 27 years of inflation-adjusted spending, very close to the 30 year mark used with the '4% rule'. A small (e.g. 25%) allocation to stocks would historically be very prudent to add anyway to a ESP.

Yes, the SPIA is guaranteed for life, but that comes at the expense of giving up those assets forever, including any potential for growth and legacy that may come with retaining those assets.

So if a person who desires a 50/50 overall AA puts half of it in a SPIA instead of bonds, that doesn't enable them to be more 'aggressive' with the other half.
This is an extremely stimulating thread and why I love this board and community -- thank you.

I picked this quote however because I just listened to an excellent podcast with Robert Merton yesterday where he presented a lot of persuasive counter-arguments to this point. I should say -- I generally agreed with you, perhaps before yesterday. But what Merton says -- and I think there is a lot of merit to this is -- for the vast majority of people -- not people like us who sit around and think about these subjects and who read these message boards and follow personal finance as a hobby -- for most just "regular" people -- the actual size of a portfolio is meaningless. What they want is income. They have been used to getting a check for X their entire life; in retiree, they would like to get a check for X too. People don't look at their Social Security payouts and say "I have a total social security portfolio of X--- thousands" -- they say I get a check for X amount each month,

So to your point -- if you can cover all of your essential spending through SS and another financial mechanism that is guaranteed for life -- SPIA annuity -- why not do it? And doesn't all of the other evidence you present here about how your spending rate goes down in retirement counsel against the inflation protection anyway? Who cares in inflation eats away the value of the annuity if your spending is very likely to go down?

Moreover, if you have all of your essential spending taken care of with this fixed income combination, why couldn't you be a little more aggressive with the rest?

Here is an example -- let's say you have a modest couple, 70 years old. They live in a LCOLA and spend $60,000 per year. They have saved $400,000 total -- which I know, seems like nothing here, except when you consider that the average retiree has a lot less than that. In order to meet the spending need of $50K, we need $5,000 per month. Most people in this boat aren't going to care if they use the 4% rule, 5% rule, 55% rule, or how much little sisters of the poor gets when it is all over. They care about somehow getting to $5,000 per month, and whatever else happens, or whatever formula gets them there, that's all that matters. Let's say SS will supplement about $3,000 per month. Great. But we still have a $2,000 shortfall every month. The 4% rule is going to get you to $1333 -- a pretty big shortfall every month, and a risk -- small but there -- that your generation is going to be the one that screws up all of the financial planning model and not have the type of returns that sustains the 4% rule for the long run. Now, let's say instead of just parking the $400K in Vanguard that you buy a $275K SPIA -- no inflation adjustment -- joint and several -- you get $1,425 per month. You are already ahead of the 4% game. Let's say you take the remaining $125K and use the 4% rule -- that's an additional $416 per month. We are still a tiny bit short of the spending goal, but pretty close. Or closer than just using the 4% rule.

One final point -- several of your messages and other responses mention long-term care. I am convinced that most people on this message board do not have the view that Medicaid will just pay for it someday. That's laudable, but, again, the exception. Medicaid covers 62% of all nursing home patients and more than 50% in many individual states, including states with huge senior populations like Florida. Again, most people want income and are not fretting about how they will pay for their nursing home. If you destined for Medicaid someday anyway because you really haven't saved a lot for long-term care (my hypothetical couple above will blow through $400K pretty quickly in a nursing home) and you don't have LTC insurance -- I think those people are even better candidates for SPIA partial annuities because the reality is that they are likely headed for Medicaid anyway.

Just some food for thought!

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Re: A different take on retirement income: time segmentation

Post by H-Town » Tue Jul 17, 2018 6:18 pm

This approach would face 2 big counter arguments:

1) Money is fungible. It doesn't matter you spend money our of need or want, it's still money. Putting money in buckets is mental accounting.

2) Simplicity. It's difficult to solve an equation that has both portfolio earnings and personal spending habits as variables. It's much simpler to separate these two things: 1) manage investment portfolio, and 2) manage everyday spending. With these two separated, one can use 3-fund portfolio with AA is based on need, willingness, and ability to take risk.

Nevertheless, this is a very good thought exercise. It's helpful to go through this thought process and determine how to manage your finance during your golden age. As an old saying goes: if you can't keep it simple, you probably don't understand it enough.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 6:25 pm

smitcat wrote:
Tue Jul 17, 2018 5:47 pm
golfCaddy wrote:
Tue Jul 17, 2018 5:36 pm
willthrill81 wrote:
Sun Jul 15, 2018 10:52 pm
Image
Part of this chart is weird. Housing goes down quite a bit as you age. Unless the assumption is most people enter retirement with a mortgage payment, it's not clear why this would be the case.
I would believe that it is due to the fact that it is an average of all those folks whom would typically tend to downsize and/or move to supported living in later years.
Mortgages also get paid off for many. Many also move to lower cost of living areas.
“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: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 6:29 pm

golfCaddy wrote:
Tue Jul 17, 2018 6:02 pm
willthrill81 wrote:
Tue Jul 17, 2018 1:11 am
There are ways to skin that cat. If retirees want to pay for long-term care insurance, that can be factored into their essential spending. Or if their discretionary portfolio is large enough, they can use it to self-insure against the risk of significant long-term care.

From what I've seen regarding research on the matter, about 80% of those who ever receive long-term care do so for under twothree years, which might cost around $300k in today's dollars. For most Bogleheads, that's not a sum that would sink a surviving spouse's retirement, for instance, especially if they started with a solid overall portfolio. Planning for that possibility might make SPIAs more attractive than otherwise. But even if they used something like the '4% rule of thumb' with their essential spending portfolio, they have a high historical likelihood of having most of that money intact at the end of their planned retirement period.
You have to peel back the layers under the numbers though. At 55, the average life expectancy for a man is another 25 years. The average man who makes it to retirement age dies by 80. Despite that, most people on this board plan for the tail end of the distribution, where one or both spouses make it to 95+. The longer you live, the more likely it is you'll need increased levels of care. Some people who might otherwise need nursing home care move in with relatives and get care from them. How strong is the familial safety net? Your link only reports numbers for nursing home care, not all types of LTC. In home nurses and assisted living facilities can be expensive, but aren't included in the nursing home statistics. I do agree if you have sufficient assets, ex. $5M+, almost any sensible retirement strategy will work.
Frankly, it's not realistic to expect anyone to elaborate on every possible detail of every possible expense that they might encounter in retirement.

When it comes to long-term care, the bottom line is that there are no really good solutions beyond building a large portfolio.
“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: A different take on retirement income: time segmentation

Post by petulant » Tue Jul 17, 2018 6:39 pm

willthrill81 wrote:
Sun Jul 15, 2018 11:02 pm
petulant wrote:
Sun Jul 15, 2018 7:32 pm
It seems likely that discretionary spending will be higher and concentrated in younger years of retirement, while essential spending will be spread out and rising as inflation and healthcare take their toll. As a corollary, it seems likely that reductions in real spending by retirees come from the reduction in discretionary spending, while essential spending might actually increase.

The result is that the need for discretionary funding may be highest the early years, while essential spending has a decades-long horizon that must be able to grow with inflation.
Bingo!
petulant wrote:
Sun Jul 15, 2018 7:32 pm
That means the appropriate asset allocation for the two segments of the portfolio might be counterintuitive for a retiree who is actually in the withdrawal period. Discretionary spending might more appropriately be less aggressive since it will be shorter-term, while essential spending may appropriately have a substantial stock component to ensure inflation-resistant growth into the later years.
The essential spending portfolio (ESP) I've outlined in this strategy needs to have some components that are at least historically capable of keeping pace with inflation. This could come from an inflation-adjusted annuity, a TIPS ladder, and/or some allocation to stocks or real estate, for instance. This would be in addition to any Social Security benefits the retiree had as well, which are inflation-adjusted.

The discretionary spending portfolio (DSP) could be far more flexible because withdrawals from it are, by definition, not essential. Retirees that want to trade off growth in their DSP for assurance of smoother withdrawals over time should likely tilt their DSP towards fixed income, and vice versa for those who want to maximize spending over the longer-term at the expense of more volatility in withdrawals should tilt toward more volatile asset classes. It really comes down here almost entirely to their willingness to take on risk; there is little to no need to take on risk in their DSP since it is for discretionary spending only, but for that same reason they are certainly able to take on risk for a potential upside.
Well, my point is that once you consider the time impact, the essential portfolio should be more aggressive, while the discretionary portfolio should be more conservative, assuming one is actually at withdrawal. So any exercise in making the discretionary portfolio more aggressive because it’s discretionary would be counteracted by the timing need to keep it conservative, while the long-term needs for an essential portfolio counsel in favor of stocks and counteract your desire for complete stability. Not to be offensive, but it raises the question whether this is a worthwhile exercise.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 7:19 pm

DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
But what Merton says -- and I think there is a lot of merit to this is -- for the vast majority of people -- not people like us who sit around and think about these subjects and who read these message boards and follow personal finance as a hobby -- for most just "regular" people -- the actual size of a portfolio is meaningless. What they want is income. They have been used to getting a check for X their entire life; in retiree, they would like to get a check for X too. People don't look at their Social Security payouts and say "I have a total social security portfolio of X--- thousands" -- they say I get a check for X amount each month,

So to your point -- if you can cover all of your essential spending through SS and another financial mechanism that is guaranteed for life -- SPIA annuity -- why not do it?
I don't know what data Merton is basing his claim on, but research is clear that investors do not favor annuities, at least 'full annuitization'. Their distaste for annuities even has a name: the annuity paradox.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
And doesn't all of the other evidence you present here about how your spending rate goes down in retirement counsel against the inflation protection anyway? Who cares in inflation eats away the value of the annuity if your spending is very likely to go down?
That only works if inflation increases at the same rate as spending declines. If inflation is 5% but real spending only declines by 1%, then the retiree is losing ground. In the 1940s or 1970s, this would have crushed retirees' essential spending. Further, it's not nearly as safe of an assumption to say that essential spending, which is what you would buy the SPIA for, will decline during retirement as to say that discretionary spending will decline.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
Moreover, if you have all of your essential spending taken care of with this fixed income combination, why couldn't you be a little more aggressive with the rest?
I covered why an another post in this thread. Basically, the reason is because a SPIA with an inflation rider currently has a payout ratio of about 4%, the same as the '4% rule of thumb'. Consequently, if retirees basically trade the fixed income component of their overall AA for a SPIA, they still have the same amount of stocks as they did before. They might not have to trade quite all of their fixed income, but the benefit will be small. And considering that the retirees permanently lose control of the funds used to buy the SPIA, that seems like a poor tradeoff. Perhaps that will change in the future as interest rates and annuity payout ratios improve.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
One final point -- several of your messages and other responses mention long-term care. I am convinced that most people on this message board do not have the view that Medicaid will just pay for it someday. That's laudable, but, again, the exception. Medicaid covers 62% of all nursing home patients and more than 50% in many individual states, including states with huge senior populations like Florida. Again, most people want income and are not fretting about how they will pay for their nursing home. If you destined for Medicaid someday anyway because you really haven't saved a lot for long-term care (my hypothetical couple above will blow through $400K pretty quickly in a nursing home) and you don't have LTC insurance -- I think those people are even better candidates for SPIA partial annuities because the reality is that they are likely headed for Medicaid anyway.
I too believe that far too many here overlook Medicaid when examining the LTC issue. For those who can realistically employ the type of strategy I'm recommending here, I think that self-insurance may be the best way to go. And this does make SPIAs more attractive, although it would not be strictly necessary to buy a SPIA at the outset of retirement; it could be done if/when one spouse begins receiving LTC so as to protect the remaining spouse. Here is what one attorney laid out as a legal strategy here.
Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $119,220 (in 2016). However, Mrs. Jones has $229,220 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.
https://www.elderlawanswers.com/annuiti ... ning-12008

This leaves control of the assets under both spouses' control until the time that one begins receiving LTC. Once that begins, they can use whatever assets they wish to buy a SPIA to protect the other spouse. If both are receiving LTC, it's much less of a concern.

Good questions and thoughts!
“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: A different take on retirement income: time segmentation

Post by packer16 » Tue Jul 17, 2018 7:29 pm

I think the biggest value add of time segmentation & your ESP/DSP analysis is it determines your need to take risk (as it quantifies your needs) in a portfolio to meet your needs. You need to perform this analysis to determine your needed asset allocation. Once you do that it may be easier to have a balanced portfolio & rebalance when changes occur versus recalcing the portfolios over time.

One area I think that is common and totally changes portfolios needs are semi-retirement, where you work part time after you retire from your primary job & multiple careers with rests in between. In reality most folks still will work when they "retire" if to provide mental/physical stimulation or money for out of budget expenses like trips.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 7:35 pm

petulant wrote:
Tue Jul 17, 2018 6:39 pm
Well, my point is that once you consider the time impact, the essential portfolio should be more aggressive, while the discretionary portfolio should be more conservative, assuming one is actually at withdrawal. So any exercise in making the discretionary portfolio more aggressive because it’s discretionary would be counteracted by the timing need to keep it conservative, while the long-term needs for an essential portfolio counsel in favor of stocks and counteract your desire for complete stability. Not to be offensive, but it raises the question whether this is a worthwhile exercise.
Why would you want to be more conservative with your discretionary portfolio than with your essential portfolio? If you depleted most of your discretionary portfolio by the time you were in your mid-80s, that's not a real problem. But if you do that with your essential portfolio, you may be in real trouble.
“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: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 7:39 pm

packer16 wrote:
Tue Jul 17, 2018 7:29 pm
I think the biggest value add of time segmentation & your ESP/DSP analysis is it determines your need to take risk (as it quantifies your needs) in a portfolio to meet your needs. You need to perform this analysis to determine your needed asset allocation. Once you do that it may be easier to have a balanced portfolio & rebalance when changes occur versus recalcing the portfolios over time.
Thanks for the kind words. In addition, I think that being more aggressive yet still flexible (e.g. 6% percentage-of-portfolio withdrawals, perhaps higher) with the discretionary spending portfolio than what the 'safe withdrawal research' suggests can add value to retirees as well. In most historical instances, this could still leave the retirees with most of their DSP intact after a couple of decades, but even returns were poor over that period, they would still have some discretionary funds and (hopefully) their essential spending portfolio intact.

An inability to cover your essential spending is a far more detrimental than an inability to cover all of your discretionary spending desires.
“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: A different take on retirement income: time segmentation

Post by packer16 » Tue Jul 17, 2018 7:50 pm

Thanks for your references to Kitces site. It is quite the resource.

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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 7:54 pm

packer16 wrote:
Tue Jul 17, 2018 7:50 pm
Thanks for your references to Kitces site. It is quite the resource.

Packer
No problem! :beer Kitces is possibly my favorite financial writer.
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Re: A different take on retirement income: time segmentation

Post by willthrill81 » Tue Jul 17, 2018 7:59 pm

thangngo wrote:
Tue Jul 17, 2018 6:18 pm
This approach would face 2 big counter arguments:

1) Money is fungible. It doesn't matter you spend money our of need or want, it's still money. Putting money in buckets is mental accounting.
You could certainly use this strategy with a single portfolio; most Bogleheads would. But disaggregating the funds needed to cover your essential spending, being more conservative with it, from you discretionary spending, being more aggressive with it, is not at all mere mental accounting.
thangngo wrote:
Tue Jul 17, 2018 6:18 pm
2) Simplicity. It's difficult to solve an equation that has both portfolio earnings and personal spending habits as variables. It's much simpler to separate these two things: 1) manage investment portfolio, and 2) manage everyday spending. With these two separated, one can use 3-fund portfolio with AA is based on need, willingness, and ability to take risk.

How will you know your need and ability to take on risk without determining what your spending needs vs. wants are?
thangngo wrote:
Tue Jul 17, 2018 6:18 pm
Nevertheless, this is a very good thought exercise. It's helpful to go through this thought process and determine how to manage your finance during your golden age. As an old saying goes: if you can't keep it simple, you probably don't understand it enough.
Thanks for the kind words.

Implementation could be quite simple, as I laid out in a prior post I'm quoting below. For most Bogleheads, this would be a cakewalk.
willthrill81 wrote:
Mon Jul 16, 2018 6:35 pm
1. Estimate your essential spending needs.
2. Determine how much income you need to fund your essential spending needs beyond that provided by Social Security, pensions, real estate income, etc.
3. Use whatever mix of safe withdrawals, bond/TIPS/CD ladders, and annuities you desire to satisfy your essential spending.
4. Place the remainder of your overall portfolio in a 'sub' portfolio for discretionary spending.
5. Use a more aggressive withdrawal strategy for the discretionary spending portfolio, such as a 5-7% 'percentage-of-portfolio' method.
“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

petulant
Posts: 325
Joined: Thu Sep 22, 2016 1:09 pm

Re: A different take on retirement income: time segmentation

Post by petulant » Tue Jul 17, 2018 8:01 pm

willthrill81 wrote:
Tue Jul 17, 2018 7:35 pm
petulant wrote:
Tue Jul 17, 2018 6:39 pm
Well, my point is that once you consider the time impact, the essential portfolio should be more aggressive, while the discretionary portfolio should be more conservative, assuming one is actually at withdrawal. So any exercise in making the discretionary portfolio more aggressive because it’s discretionary would be counteracted by the timing need to keep it conservative, while the long-term needs for an essential portfolio counsel in favor of stocks and counteract your desire for complete stability. Not to be offensive, but it raises the question whether this is a worthwhile exercise.
Why would you want to be more conservative with your discretionary portfolio than with your essential portfolio? If you depleted most of your discretionary portfolio by the time you were in your mid-80s, that's not a real problem. But if you do that with your essential portfolio, you may be in real trouble.
I didn't say it should be more conservative overall. I just said there is a reason to be conservative with it that does not exist with the essential portfolio. The reason to be conservative is that if one retires in their mid-60s, they would reasonably expect a short time horizon to spend a lot of their discretionary portfolio--maybe 10 or 15 years. A shorter time horizon is a reason to stay conservative; on the other hand, the discretionary nature is a reason to stay aggressive. With the essential portfolio, there is a reason to be very conservative, but the time frame involved counsels toward being more aggressive. Overall, I would postulate that these factors are a wash, and there's no reason to create the segmented buckets in the first place. Under this postulate, retirees would be better off creating one portfolio that matches their overall risk tolerance.

Here's an example. Say with the essential portfolio, you suggest TIPS or other conservative investments. However, for a married couple between 60 and 65 looking to retire, there is a substantial possibility at least one will make it to age 90-95. They have 30 years left on their portfolio, which actually advocates for a stock allocation, perhaps a 30/70 stock-bond or 50/50 stock-bond portfolio. Then, with their discretionary assets, they would like to be more aggressive, but they also realize they plan to spend most of the money in the next 10 or so years. This counsels in favor of a 50/50 stock-bond allocation, or maybe a 70/30 at the most aggressive, for this couple. The result is that the couple could have a 50/50 stock-bond portfolio without creating segmented buckets. Do you see what I mean?

DC3509
Posts: 277
Joined: Wed Jul 12, 2017 7:25 am

Re: A different take on retirement income: time segmentation

Post by DC3509 » Tue Jul 17, 2018 8:38 pm

willthrill81 wrote:
Tue Jul 17, 2018 7:19 pm
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
But what Merton says -- and I think there is a lot of merit to this is -- for the vast majority of people -- not people like us who sit around and think about these subjects and who read these message boards and follow personal finance as a hobby -- for most just "regular" people -- the actual size of a portfolio is meaningless. What they want is income. They have been used to getting a check for X their entire life; in retiree, they would like to get a check for X too. People don't look at their Social Security payouts and say "I have a total social security portfolio of X--- thousands" -- they say I get a check for X amount each month,

So to your point -- if you can cover all of your essential spending through SS and another financial mechanism that is guaranteed for life -- SPIA annuity -- why not do it?
I don't know what data Merton is basing his claim on, but research is clear that investors do not favor annuities, at least 'full annuitization'. Their distaste for annuities even has a name: the annuity paradox.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
And doesn't all of the other evidence you present here about how your spending rate goes down in retirement counsel against the inflation protection anyway? Who cares in inflation eats away the value of the annuity if your spending is very likely to go down?
That only works if inflation increases at the same rate as spending declines. If inflation is 5% but real spending only declines by 1%, then the retiree is losing ground. In the 1940s or 1970s, this would have crushed retirees' essential spending. Further, it's not nearly as safe of an assumption to say that essential spending, which is what you would buy the SPIA for, will decline during retirement as to say that discretionary spending will decline.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
Moreover, if you have all of your essential spending taken care of with this fixed income combination, why couldn't you be a little more aggressive with the rest?
I covered why an another post in this thread. Basically, the reason is because a SPIA with an inflation rider currently has a payout ratio of about 4%, the same as the '4% rule of thumb'. Consequently, if retirees basically trade the fixed income component of their overall AA for a SPIA, they still have the same amount of stocks as they did before. They might not have to trade quite all of their fixed income, but the benefit will be small. And considering that the retirees permanently lose control of the funds used to buy the SPIA, that seems like a poor tradeoff. Perhaps that will change in the future as interest rates and annuity payout ratios improve.
DC3509 wrote:
Tue Jul 17, 2018 6:16 pm
One final point -- several of your messages and other responses mention long-term care. I am convinced that most people on this message board do not have the view that Medicaid will just pay for it someday. That's laudable, but, again, the exception. Medicaid covers 62% of all nursing home patients and more than 50% in many individual states, including states with huge senior populations like Florida. Again, most people want income and are not fretting about how they will pay for their nursing home. If you destined for Medicaid someday anyway because you really haven't saved a lot for long-term care (my hypothetical couple above will blow through $400K pretty quickly in a nursing home) and you don't have LTC insurance -- I think those people are even better candidates for SPIA partial annuities because the reality is that they are likely headed for Medicaid anyway.
I too believe that far too many here overlook Medicaid when examining the LTC issue. For those who can realistically employ the type of strategy I'm recommending here, I think that self-insurance may be the best way to go. And this does make SPIAs more attractive, although it would not be strictly necessary to buy a SPIA at the outset of retirement; it could be done if/when one spouse begins receiving LTC so as to protect the remaining spouse. Here is what one attorney laid out as a legal strategy here.
Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $119,220 (in 2016). However, Mrs. Jones has $229,220 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.
https://www.elderlawanswers.com/annuiti ... ning-12008

This leaves control of the assets under both spouses' control until the time that one begins receiving LTC. Once that begins, they can use whatever assets they wish to buy a SPIA to protect the other spouse. If both are receiving LTC, it's much less of a concern.

Good questions and thoughts!
Thank you -- a couple follow-up points --

In Merton's interview -- which is well worth the full listen -- he basically says that not enough people look at annuities; everyone looks at what that total amount of the 401 (k) is -- not nearly enough people are thinking in terms of I make X income now, what can I do to get close to X income in retirement. Merton thinks that our 401 (K) statements should have a potential income annuity amount at the top -- not your total pot of money. He thinks the pot of money is meaningless to most people.

Yes, agree if inflation runs wild, annuities are risky. But if interest rates stay low, 4% withdrawal money is risky. Merton basically says -- let's say the 4% rule is right and has a 96% success rate -- what if you happen to be in the 4% that fails? Then what? At least with an income annuity -- you still have some cash coming in. You could theoretically have zero under the 4% method. I, for one, have not usually entertained the doomsday hypotheticals and preferred to play my chances, but if you are two middle or lower middle class retirees with no other assets -- the potential of being in the 4% perhaps is terrifying, or should be terrifying. And maybe the 4% failure rate will be a lot higher for this generation, given all of the various circumstances that we frequently discuss here.

If you take out the inflation rider, the SPIA pays out more than 4%. Not tons more, but more. For some people, eking out another $200-$300 bucks a month the difference between making it, and not making it. Again, not the crowd on this board, but a lot of regular people out there. In my prior example -- $300 is 6% of your total income for the month. Nothing to sniff at.

Yes, the Medicaid compliant annuity is a def option. One drawback -- and I have seen nothing written about this -- the annuity cannot run for longer than the anticipated lifespan of the annuitant. Wouldn't getting a regular life SPIA earlier be a better option? What if you outlive the life expectancy?

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