hudson wrote: ↑
Sat Jul 14, 2018 8:48 pm
Willthrill81's "keep playing" theory is intriguing.
Here's an example of what I mean. Let's assume we have an opposite sex couple, both age 66, with $250k in retirement assets. Social Security benefits will be average for one of the spouses ($1,221) and half that for the other ($611) spousal benefit) for a total of $1,831 monthly, ~$22k annually. Their income needs, inclusive of taxes, are $34k, so they have a $12k gap. The '4% rule of thumb' would give them $10k annually, leaving them with a $2k shortfall. Single premium immediate annuities, with a current payout ratio of about 5.75% with full survivor benefit, would give them guaranteed income but with no inflation protection (at that rate). So they take $125k to buy a SPIA, providing them with $7,188 of annual income, and apply the '4% rule' to the rest, providing them another $5k of annual income with 'inflation protection', just enough to squeak by. They don't have enough to have the luxury of leaving a large bequest behind, though odds are that something will be left of the $125k that they leave invested.
Has this couple 'won the game'? It depends on your perspective, but I'd say that most Bogleheads wouldn't be too pleased with this position. Does this couple have enough to keep 'playing' (i.e. put most of their portfolio in stocks)? I'd say no way. They're right on the edge of being able to make ends meet, and if inflation really outpaces their likely tendency to drop their spending by 1-2% in real dollars annually, they could get in a squeeze later on due to their annuity income being fixed. We don't know how much discretionary spending is built in to the above numbers that could be trimmed if needed, but it couldn't be too much.
Compare this to a couple with $5 million of retirement assets with $150k of income needs, $100k of which is discretionary. A 3.33% withdrawal rate would be very solid for such a couple, and with almost any low-cost, balanced portfolio, they will be in great shape. Have they 'won' the game? I'd say unequivocally yes. Do they need to 'quit playing'? They could, but why would they? A 3.33% withdrawal rate is very conservative over a 30 year period, and the likelihood that they'll both be around at age 96 is low; the odds that they'll both be alive for the full 30 years is very
low, and when one of them dies, we can logically assume that their spending will decline. And with two-thirds of their budget being discretionary, they could easily cut that back if they really needed to (which is historically very unlikely at that low of a withdrawal rate). By continuing to 'play the game', they can leave behind a large bequest to heirs or charity, potentially doing a lot of good for others after their passing.
My point is that if one is truly confident that they have indeed 'won the game', there's usually little reason to 'quit playing'.
“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