Year 2000 retirees using the '4% rule' - Where are they now?

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willthrill81
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Sun Jan 21, 2018 11:21 pm

asterix0 wrote:
Sun Jan 21, 2018 10:44 pm
I have read several pages of this thread and have wondered if the minimum required distributions for tax sheltered accounts can be addressed. Even if one only spends at the SWR, taxes (at a marginal rate) will also deplete a retirement account for required distributions beyond the SWR as money moves from sheltered to non-sheltered vehicles.
The formula for computing required minimum distributions is very conservative in terms of its combination of life expectancy and size relative to the portfolio. It is built on the idea of 0% growth, which is obviously a fallacious one. With even very conservative growth rate assumptions, a retiree needn't worry about RMDs resulting in them running out of money, though their portfolio balance is likely to decline over time. Apart from a desire to leave behind an estate, this is not really a problem.

For instance, using the Schwab RMD calculator, a retiree born 1/1/1948 with a $1M portfolio as of the end of 2017 and experiencing 2% annual growth would have an RMD this year of $36,496. A graph of this is shown below. The retiree's portfolio becomes depleted over time, but the actual dollar amount of the RMDs does not begin decreasing until age 86, when they would be $43,806. At age 95, they would be $37,748; at age 100, $28,394. So unless you plan on outliving over 99% of the population, you don't really have to worry about running out of income due to RMDs. Sequence of returns risk is a FAR bigger factor to be concerned about.

Image

The graph below is the same with the exception that the growth rate of the portfolio is 4% instead of 2%. Here, the nominal dollar amount of the RMDs does not begin decreasing until age 94 ($64,368 that year) when the portfolio would still have $461k.

Image

RMDs are not the bugaboo that many think they are. And if you don't need the RMDs, you can just reinvest them through a taxable account. Plus, if you can do Roth conversions along the way, this can also help to minimize the issue even more.

Wade Pfau has a nice, though a bit technical, blog post on the topic that is worth reading.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by ryman554 » Mon Jan 22, 2018 9:39 am

willthrill81 wrote:
Sun Jan 21, 2018 11:21 pm
RMDs are not the bugaboo that many think they are. And if you don't need the RMDs, you can just reinvest them through a taxable account.
This bears repeating and highlighting.

So many times I have seen folks ask what to do with the part of their RMD they don't need. There is the unspoken need to spend it. If you don't need it, reinvest it! Your heirs/charity will thank you later.

Leesbro63
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Leesbro63 » Mon Jan 22, 2018 10:23 am

People can’t seem to get that RMD is a tax issue mainly and a cash flow issue secondarily. It’s not a spending issue at all.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 22, 2018 10:54 am

ryman554 wrote:
Mon Jan 22, 2018 9:39 am
willthrill81 wrote:
Sun Jan 21, 2018 11:21 pm
RMDs are not the bugaboo that many think they are. And if you don't need the RMDs, you can just reinvest them through a taxable account.
This bears repeating and highlighting.

So many times I have seen folks ask what to do with the part of their RMD they don't need. There is the unspoken need to spend it. If you don't need it, reinvest it! Your heirs/charity will thank you later.
Yes, it's very interesting why people often think the money must be spent.

For reinvestment, stock ETFs are probably the best choice for most. They're generally very tax efficient, and heirs will inherit them at an stepped-up basis.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by FactualFran » Mon Jan 22, 2018 3:42 pm

cutehumor wrote:
Sun Jan 21, 2018 7:17 pm
awhile back, i found an online article about retiree in 2000. one million invested from 2000-2010 with 4 percent withdrawal in vanguard 500. 100% stock portfolio would be broke. no bonds and no rebalancing
That is not the result I calculate. Someone who 1) at the end of 1999 put a lump sum in the Vanguard 500 Index fund minus a 4% withdrawal for 2000 and 2) at the end of each later year withdrew an amount equal to the amount withdrawn for 2000 adjusted for inflation, would have had at the end of 2017 an account with a balance equal to 31% of the initial balance. The account would not have been depleted, yet, and the withdrawal for 2018 would have already been made.

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willthrill81
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Mar 13, 2018 8:26 pm

Valuethinker wrote:
Tue Jan 09, 2018 9:05 am
The forward projections don't work if you assume 0% real return on bonds, and 3% on equities, going forward?
If there was no volatility to returns, I seem to recall that a 1.25% real rate of return is just enough to get the '4% rule' to work for a 30 year period. So as long as the sequence of returns wasn't too bad, a 0% real return on bonds and 3% real on equities would work as long as the stock allocation was at least 45% or so.

I think it's worth saying as well that the projections for relatively low equity returns going forward are generally only for the next decade of returns, not the next 30 years. True, the first decade is the most important, but the above returns should still work.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by MnD » Tue Mar 13, 2018 9:54 pm

Leesbro63 wrote:
Mon Jan 22, 2018 10:23 am
People can’t seem to get that RMD is a tax issue mainly and a cash flow issue secondarily. It’s not a spending issue at all.
Thank you sir.
I grow so tired of people exclaiming that for people with largely traditional tax deferred savings, that RMD's are going to destroy their portfolio.
1) You don't have to spend it. You can save it and reinvest it.
2) It's unlikely that any of the RMD is going to be at a higher tax rate than when you deferred it.
3) if a small percentage is above your deferral rate and the rest is below it - you still come out way ahead.
4) Lots of people will be dead well before RMD's become an onerous tax issue.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dbr » Wed Mar 14, 2018 10:21 am

MnD wrote:
Tue Mar 13, 2018 9:54 pm
Leesbro63 wrote:
Mon Jan 22, 2018 10:23 am
People can’t seem to get that RMD is a tax issue mainly and a cash flow issue secondarily. It’s not a spending issue at all.
Thank you sir.
I grow so tired of people exclaiming that for people with largely traditional tax deferred savings, that RMD's are going to destroy their portfolio.
1) You don't have to spend it. You can save it and reinvest it.
2) It's unlikely that any of the RMD is going to be at a higher tax rate than when you deferred it.
3) if a small percentage is above your deferral rate and the rest is below it - you still come out way ahead.
4) Lots of people will be dead well before RMD's become an onerous tax issue.
Indeed. Maybe it is just a confusion in understanding language instead of doing math. That happens a lot in investing. In this case the confusing word is "distribution" which seems to be taken to mean a bunch of things it doesn't mean and maybe not to mean the thing it does mean.* The same problem comes up when people equate dividends with spending, etc. In the end that is also a tax issue and not a spending issue.

*The thing it does mean is that the tax code insists that people who deferred income eventually have to pay tax on the income by distributing some of it from the tax deferred account and (possibly) paying tax on the distribution as taxable income.**

**Taxable income is not related in any way to income as cash flow, related to finding the wherewithall to spend money.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Wed Mar 14, 2018 11:14 am

After thinking about it for a while, I believe that there are at least four reasons why the '4% rule' is even safer than indicated by history.

1. Virtually no one is strictly implementing it without regard to their portfolio's performance. Any sane person who sees their portfolio drop significantly in the early stages of retirement will reduce their spending, move some of their portfolio into annuities, etc. They will do something to reduce the 'probability of ruin' (POR), evidenced by data in #4 below.

2. For those retiring at around age 65, they are unlikely to survive for 30 years. For two opposite-sex spouses aged 65, there is only an 18% chance that at least one of them will survive to age 95, and the likelihood of both surviving to that age is less than 1%. Of course, the spending needs of the surviving spouse will be less than before.

3. Most over the age of 65 reduce their spending in real dollars by 1-2% per year, even throughout their 80s when their healthcare spending goes up but their total spending still tends to decrease.

4. The actual POR is far lower than many believe. Approximately .43% of adults over the age of 65, about one in 233, declare bankruptcy, and it seems that exceptionally few of these are due to a poor sequence of returns.
Are there actual retirees who go broke due to a sequence of poor returns? I’m not convinced. I’ve never met one. Or, read about one by name. I would think that if 5% of retirees were going broke for that reason, we would spot one or two occasionally and the elder bankruptcy rate would be much higher than half a percent.
http://www.theretirementcafe.com/2016/0 ... oke_8.html

All of that being said, I do not advocate that anyone employ the '4% rule' as a withdrawal strategy. I believe that there are a number of superior withdrawal strategies. The point I'm trying to make here is that if a withdrawal method as relatively poor as the '4% rule' is likely to be very safe going forward, other strategies that add further layers of safety are likely to be exceptionally safe, at least when it comes to reducing POR.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by grayfox » Thu Mar 22, 2018 11:16 am

So it works well because no one will actually follow it or live long enough to see it fail?!? :confused

Has anyone linked to this article from earlyretirenow.com?

The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village)

It seems to be relevant to this thread.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Thu Mar 22, 2018 11:25 am

grayfox wrote:
Thu Mar 22, 2018 11:16 am
So it works well because no one will actually follow it?!? :confused
It works well as a starting point. But yes, I've not seen or heard of anyone who has rigidly followed any constant spending strategy in retirement.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Leesbro63 » Thu Mar 22, 2018 11:28 am

grayfox wrote:
Thu Mar 22, 2018 11:16 am
So it works well because no one will actually follow it or live long enough to see it fail?!? :confused

Has anyone linked to this article from earlyretirenow.com?

The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village)

It seems to be relevant to this thread.
I never thought about it, but yeah, those who say "behavior will prevent the 4% rule from failing" are just saying that the 4% rules shouldn't be trusted.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Thu Mar 22, 2018 11:39 am

Leesbro63 wrote:
Thu Mar 22, 2018 11:28 am
grayfox wrote:
Thu Mar 22, 2018 11:16 am
So it works well because no one will actually follow it or live long enough to see it fail?!? :confused

Has anyone linked to this article from earlyretirenow.com?

The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village)

It seems to be relevant to this thread.
I never thought about it, but yeah, those who say "behavior will prevent the 4% rule from failing" are just saying that the 4% rules shouldn't be trusted.
It's not that the 'rule' shouldn't be trusted per se, but rather that investors don't always trust constant spending strategies.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Thu Mar 22, 2018 2:47 pm

Leesbro63 wrote:
Thu Mar 22, 2018 11:28 am
grayfox wrote:
Thu Mar 22, 2018 11:16 am
So it works well because no one will actually follow it or live long enough to see it fail?!? :confused

Has anyone linked to this article from earlyretirenow.com?

The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village)

It seems to be relevant to this thread.
I never thought about it, but yeah, those who say "behavior will prevent the 4% rule from failing" are just saying that the 4% rules shouldn't be trusted.
A fixed 4% WR is not historically 100% safe for a 30 year time period with any allocation. It's pretty close for allocations from 50% to 100% equities. Will it be going forward? Nobody knows. It can be made closer to success by being flexible (able to adjust spending) and with a glide path to reduce sequence of return risks (the big cause of failure).

Really, no withdrawal strategy is 100% future safe without perfect knowledge of the future.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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