AlohaJoe wrote: ↑Wed Oct 05, 2022 8:56 pm
nigel_ht wrote: ↑Wed Oct 05, 2022 3:38 pm
One reason that WR gets a lot of attention is that when you retire your starting portfolio is now set…and SWR gives you a planning number for what you can expect it to support in the worst case without running out of money.
So? Unless you can show that constant spending is predictable 30 years out the number is not that useful as a planning number.
SWR isn’t a planning number for constant spending…it’s commonly used as your constant dollar WR number but it provides two things:
A ceiling for how much you can spend in a year and not deplete your portfolio in the historical worst case. You can spend less if you want to which most folks seem to ignore when talking about SWR as a withdrawal strategy.
A working number for what you can reasonably expect your portfolio to produce in the historical worst case. If your estimated expenses are above this number you understand you have a higher risk of failure if things turn out badly.
You can choose to address this (OMY, reducing expenses, side hustle after retirement, whatever) or just live with the additional risk.
Most folks can figure out what their major expenses will be.
No, they can't. This is factually false. We can look at actual retiree spending surveys and see your claim is false. A Society of Actuaries report found that 72% of retirees failed to "figure out" what their major expenses would be. Even your phrasing is wrong. You don't "figure out" your major expenses. Because they are in the future, we can't predict it.
They can figure out what food, shelter, transportation, taxes and good health looks like expenses wise.
What will your property taxes be 25 years from now? How do you "figure that out"? You can't even figure out what the property tax increase next year will be. This forum is full of people who couldn't "figure out" their insurance rate increase and are posting about it. How do you "figure out" whether you're going to get divorced in 20 years? Whether you will suffer elderly fraud in 10 years? Whether home insurance companies will leave your state?
You can figure out your nominal expenses.
Look I go into detail what I do here:
viewtopic.php?t=383126
But the TL;DR version is that you treat this as a firm fixed price estimate for a project.
You use conservative numbers for your cost estimates.
You create a contingency reserve for known unknowns.
You create a management reserve for unknown unknowns.
That’s your “bid” for the expenses under a “normal” requirement.
If the bid is too high, you don’t retire.
If the bid is too low, you risk losing money (ie deplete your portfolio paying for uncovered setbacks).
Retirement planning is a classic case of garbage in, garbage out. Spending estimates 30 years into the future are complete garbage. People are trying to seek certainty where there isn't any. Picking 5% withdrawals, simply because it is a nice round number, works just as well.
There are business strategies to address uncertainty. You do need to balance “safety” with “winning the bid”.
We will choose additional risk to retire “early” (if you consider 60 early) and leave additional career income on the table.
Property tax, etc don’t worry me. It’s covered in the contingency reserve estimates and that we want to geoarbritage to some degree anyway.
We could divorce in 20 years or even 20 months. That impacts more than expenses.
The proper way to address this isn’t to make one plan that covers everything but a plan for retirement as a couple and two plans for retiring as individuals.
The pentagon has more than one war plan sitting on the shelf. Folks should have a couple of What If plans where things like divorce makes things diverge significantly. Or early death of one spouse.
I should probably add that to my post…I actually have plans for multiple Courses of Actions but only two are fleshed out: Most Likely and Most Dangerous.
The real risk is health care. 15 years of memory care will break the plan unless we are already in a CCRC. CCRC costs are another area that can break the plan. I have an earmark for entry costs but who knows what it will be when we try to buy in…or even if CCRCs still exist in the same way they do today.