What is retirement rule of thumb

[TrunkMonkey]

Stop Trolling.

You asked for Monet Carlo and I posted Monte Carlo, WITH INFLATION = 3% constant.

Your 4% withdrawal strategy fails 20% of the time with those assumptions.

An immediate annuity or GMWB is guaranteed AND offers a HIGHER withdrawal rate.

[jIM_Ohio]

Originally Posted by TrunkMonkey

Stop Trolling.

You asked for Monet Carlo and I posted Monte Carlo, WITH INFLATION = 3% constant.

Your 4% withdrawal strategy fails 20% of the time with those assumptions.

An immediate annuity or GMWB is guaranteed AND offers a HIGHER withdrawal rate.

Not a troll, been here for YEARS

there is an error in the statistical makeup of this formula

Sure, if you have excel handy just plug in a "theoretical" portfolio, I assumed 60% stocks 40% bonds. Assume that the standard deviation of returns and expected returns is:

Stocks: StdDev = 0.2, Mean = 10%
Bonds: StdDev = 0.05, Mean = 5%

Log Return = log(st/st-1) = N(0,1) * StdDev * dt ^ 0.5 + (Mean - StdDev ^2/2) * dt
Return = exp(log return)

The standard deviations of each asset class are "correct" but the combined standard deviation of them together will be MUCH MUCH lower than what your basic spreadsheet shows, and the historical deviation (what really happened) is much lower too. The lower deviation will increase the success rate. Not sure of the allocation used for the example (because a 80-20 portfolio and a 40-60 portfolio will behave much differently).

Here is why- the percentage of assets each holds changes, and based on this site (which uses REAL market data) the deviation for a 55-45 portfolio is 9.9% with a return of 8.5%. If you lower allocation to 40-60 the deviation will be 7.1% with a return of 7.7%. I know from running these calculators that if you can get a 40-60 portfolio to close to 90% success, the likelihood of problems will be low based on past performance. 40-60 pretty much takes volatility and knocks it out of the park (notice how the volatility is less than the return- that is the key).

When you rebalance, any excess or depletion of one asset will be balanced (rebalanced is the technical term) which smooths out the deviation of the whole portfolio. Whether 80-20, 60-40 or 40-60 this efficiency is true.

So to use a spreadsheet to give you the "returns" when a real monte carlo simular (here)
Flexible Retirement Planner

uses real market performance, and a higher success rate with better inputs (relative to spending patterns, saving patterns, taxing patterns and similar) is a much better comparison tool. Your numbers are fake, and while they might be close to what happens, I would bet that it you did that to create data to help you prove annuities are better, even though very little data used represents real world investment performance.

Only a salesman would create a spreadsheet with fake data to prove a fake point so their product looks better.

An immediate annuity or GMWB is guaranteed AND offers a HIGHER withdrawal rate

I have yet to see you provide a specific example of how this works. You claim rider, you claim that withdraw rate, and change products to solve one problem when the original product could not solve a problem.

Try these examples and use any combination of products you want to solve all the issues within that example:

Example A
Need $30,000 of expenses
$250k in a Roth
$250k in an IRA
$250k in a taxable account
$750k total.
Portfolio used is a 40-60 stocks bonds portfolio
30 year retirement

4% initial withdraw rate with 3% inflation increases has a 99% chance of success.
year 1 withdraw is 30k
year 10 withdraw is $40k
year 20 withdraw is $54k
year 30 withdraw is $72k

On death on average of $539k is available for a beneficiary (meaning money is not exhausted at death).

Show me an annuity solution which matches those incomes for those years and still leaves something for a beneficiary.


Example 2
Need $60,000 of expenses
$250k in a Roth
$1,250k in an IRA
$250k in a taxable account
$1.75 M total.
Portfolio used is a 83-17 stocks bonds portfolio
50 year retirement

3.3% initial withdraw rate with 3% inflation increases has a 87% chance of success.
year 1 withdraw is 60k
year 10 withdraw is $80k
year 20 withdraw is $108k
year 30 withdraw is $146k
year 40 withdraw is $195k
year 50 withdraw is $263k

On death on average of $4.75 Million (this is not a misprint) is available for a beneficiary (meaning money is not exhausted at death).

Show me an annuity solution which matches those incomes for those years and still leaves something for a beneficiary.

Example 3
Need $40,000 of expenses
$250k in a Roth
$250k in an IRA
$250k in a taxable account
$750k total.
Portfolio used is a 40-60 stocks bonds portfolio
20 year retirement

5.4% initial withdraw rate with 3% inflation increases has a 99% chance of success.
year 1 withdraw is 30k
year 10 withdraw is $40k
year 20 withdraw is $54k


On death on average of $$382k is available for a beneficiary (meaning money is not exhausted at death).

Show me an annuity solution which matches those incomes for those years and still leaves something for a beneficiary.

---
For each example, you need the same asset base I started with and show taxes paid on any IRA withdraws to access the money to pay for the annuity. It is my assumption the taxes paid are part of the yearly income stream (so if 100% after tax money paid for the annuity, then its apples to apples on expenses because both expenses had the same taxes paid).


For each example, state the annuities payout at years 1-10-20-30-40-50 as appropriate.
For each example, state how much is available for a spouse to live off of

Don't change the rules, you can use any product you want, but the data points need to match.

--

4% technique is flexible , that is why so many people use it.

[TrunkMonkey]

Your point about the standard deviation is actually wrong. Because the Bond and Stock portfolio in my example ARE NOT CORRELATED. They use a different random number.

So the standard deviation in my theoretical excel model is LOWER then what it actually would be. In a real world return the values would be correlated and the standard deviation would be higher.

This is because Var(X+Y) = Var(X) + Var(Y) + 2*COVARIANCE(X,Y)

How do you get a 99% success rate, I just POSTED MY SOLUTION. You can plug it into excel.

The sad fact is YOU HAVE NO DATA TO BACK UP YOUR ARGUMENT. You pull 99% out of your head.

To answer your question, a GMWB would give you a withdrawal guarantee and access to your portfolio.

[jIM_Ohio]

Originally Posted by TrunkMonkey

Your point about the standard deviation is actually wrong. Because the Bond and Stock portfolio in my example ARE NOT CORRELATED. They use a different random number.

So the standard deviation in my theoretical excel model is LOWER then what it actually would be. In a real world return the values would be correlated and the standard deviation would be higher.

This is because Var(X+Y) = Var(X) + Var(Y) + 2*COVARIANCE(X,Y)

How do you get a 99% success rate, I just POSTED MY SOLUTION. You can plug it into excel.

The sad fact is YOU HAVE NO DATA TO BACK UP YOUR ARGUMENT. You pull 99% out of your head.

To answer your question, a GMWB would give you a withdrawal guarantee and access to your portfolio.

LOL I see you cannot handle any of those examples. HMMMM must be because you are a bad salesman, a bad acutary, an idiot, or a simple minded troll.

I linked to the monte carlo I used- it gave the 99% success rate. That simulator used REAL market data. That same site references REAL data and the standard deviations I used are from REAL market performance. The reason the success rate is higher than what you posted is because different asset classes were added AND I used a 40-60 portfolio- and I KNOW (based on past performance) that a 40-60 portfolio is really not that volatile, so it can provide very (VERY) consistent returns 75% of the time (between 1-15% returns 75% of the time).

That link is this (you should check it out to learn something)
Flexible Retirement Planner

Some key features of this powerful calculator:

●
Runs a full 10,000 Monte Carlo Simulation iterations over both the accumulation and distribution phases of the plan

●
Accounts for inflation and taxes (including IRA RMDs) in all calculations

●
Allows adjustments to the rate of return, annual savings, and annual expenses over the entire course of the plan

●
Lets you experiment with what-if scenarios like a large stock market drop, or an unexpected long-term care expense

●
Comes with complete documentation, including listings of peer reviewed source code


The site also references some sources for its data

Like I said all along the 4% technique requires planning, and if you can find a way to make a 40-60 portfolio work (it will work very well for 20 and 30 year periods- it even handled a 5% withdraw rate with 90%+ success), then it can trump most examples. If you notice the middle example did not use a 40-60 because its success rate for a 50 year retirement is low.

None of that was pulled from my head, but I can see you need to pull your head from your ass.

You need to learn more about asset allocation, because you cannot take the standard deviation of one bond class, and the standard deviation of one stock class, and then mush them together and call that the real standard deviation of combining them together.

I know this for two very good reasons:

1) the standard deviation of a portfolio is not the average deviation of the assets inside the portfolio, the standard deviation of a portfolio is the performance of the portfolio with its returns averaged and analyzed (follow that?- might be tough for a simple mind).
2) depending on the portfolio (stocks-bonds and the types of stocks held) the deviations and return profiles change.
a 100% total stock market portfolio (S&P 500) has a known average return of 10.3% and 14.5% (I reference the above monte carlo which
a 70-7-23 portfolio (domestic stocks-bonds-international stocks) has an average return of 10.5% and a deviation of 15.8
a 62-17-21 portfolio has an average return of 10% and a deviation of 14.3 **used in example 2**
a 41-45-15 portfolio has an average return of 8.5% and a deviation of 9.9%
a 30-60-10 portfolio has an average return of 7.5% and a deviation of 7.1 **used in examples 1 and 3**


The standard deviation of the total market index will be about 19 with an average return of about 11% (similar to your numbers). But once bonds are added (for example 40% total market and 60% diversified bonds) that return drops to 7.5% average and deviation drops to 7.1%. That is what has happened over last 90 years and that is what I use for planning and in examples 1 and 3 above.


The 4% technique requires planning
this planning involves knowledge of

1) Asset allocation
2) you will probably not spend all your money you accumulated
3) spending and spending patterns
4) Inflation
5) returns and deviations of returns
6) willingness to accept risks the market(s) provide
7) You will take advantage of current tax laws to best of your ability (long term capital gains rates, Roth conversions for example)


When an annuity is chosen, the person buying the annuity is basically saying #5 is too much, and they shift that risk to the insurance company, the trade off is they have little money left in the end, and the other risks will be higher (inflation and spending for example).


All data I use is real, and suggesting otherwise suggests your only way to argue is to whine, you cannot deal with facts or examples, as I have yet to see you either provide an example of your own with full data, or answer my examples, or the questions of other posters.

You are a troll and deserve to be banned.

[TrunkMonkey]

Good lord will you stop already.

I wouldn't mind talking to someone who actually understood anything about what they were talking about. I guess you are good at writting drivel and looking things up on the internet but you don't have a great deal of financial knowledge.

The link seems like a pretty legitimate site, but I don't agree with the assumptions they use. There is nothing wrong with my analysis. I actually tried plugging in their return and standard deviation and didn't get the same percentage results. I was getting 92% where theirs was 99%.

What you could take issue with is the returns plugged into the "analyzer", for bonds, the mean return, probably taken from historical average is way to high.

Right now a 10 yr treasury is like ~2.5%. Their average return is 6%?

Anyway I produced a model that I created myself in excel, you had a link to the internet. I'm not very impressed.

Here is an interesting link about immediate annuities and people's misunderstanding of their benefits.

securing-guaranteed-retirement-income: Personal Finance News from Yahoo! Finance

You clearly have an agenda that is due to your own delusional thinking. It's bad financial advice.

[disneysteve]

Originally Posted by TrunkMonkey

Here is an interesting link about immediate annuities and people's misunderstanding of their benefits.

I think that is a decent article and while it doesn't totally spell it out, it suggests what I mentioned earlier - using an annuity for part of your retirement plan along with your other investments. I think the debate really arises when an annuity proponent suggests that all anyone needs is an annuity.

Put part of your money in an annuity. Leave the rest in a diversified portfolio to keep growth and inflation protection in the mix.

[jIM_Ohio]

Originally Posted by TrunkMonkey

Good lord will you stop already.

You come here and tout annuities as a good solution, and have not provided any financial planning substance to back up your claims. When you stop, I stop.

Originally Posted by TrunkMonkey

I wouldn't mind talking to someone who actually understood anything about what they were talking about. I guess you are good at writting drivel and looking things up on the internet but you don't have a great deal of financial knowledge.

Written by someone who's only knowledge and reference of the 4% rule was from wiki, and you could not use anything other than wiki to back up your claims.

I explained 4% rule, and when you questioned it deeper, I posted references based on your suggestions it was myth more than factual. I stand behind my posts and knowledge and have explained it in other threads (check the search function out).

Originally Posted by TrunkMonkey

The link seems like a pretty legitimate site, but I don't agree with the assumptions they use. There is nothing wrong with my analysis. I actually tried plugging in their return and standard deviation and didn't get the same percentage results. I was getting 92% where theirs was 99%.

What assumptions do you disagree with? You make general comments all over this thread, and have not once provided any specifics with what you are claiming is bad or good, and have not provided any working examples as to how to apply your "solution" to people's problems.

Originally Posted by TrunkMonkey

What you could take issue with is the returns plugged into the "analyzer", for bonds, the mean return, probably taken from historical average is way to high.

Right now a 10 yr treasury is like ~2.5%. Their average return is 6%?

VBMFX: Performance Overview for VANGUARD BOND INDEX FD TOTAL BO - Yahoo! Finance
avg return is 5.8% over 5 years and 6.2% over 10 years

Originally Posted by TrunkMonkey

Anyway I produced a model that I created myself in excel, you had a link to the internet. I'm not very impressed.

That's OK, as you have done little to suggest annuities can be effective as a solution either. I think my posts will hold up in the court of public opinion though.

Originally Posted by TrunkMonkey

Here is an interesting link about immediate annuities and people's misunderstanding of their benefits.

securing-guaranteed-retirement-income: Personal Finance News from Yahoo! Finance

You clearly have an agenda that is due to your own delusional thinking. It's bad financial advice.

It's not bad advice, its a bad listener. 4% works and I have yet to see a convincing argument posed by you with an alternative which does work.

[jIM_Ohio]

Your article was drivel like your posts

Demand for annuities may pick up if retirees' anxiety about securing stable income is compounded by a new political push to boost adoption of the products. In a recent survey by MetLife, 55% of American workers said they would rather receive their nest egg slowly over the course of their retired lifetime than as a lump sum, while only 9% said they'd prefer to manage the lump sum. MetLife, which sells annuities, has a financial interest in promoting this finding, as well as the fact that 44% of survey respondents said they would like their workplace retirement plan to include an annuity option.

Insurance companies aren't the only ones promoting annuities. The Obama administration has indicated its support for annuities, and the Department of Labor will hold hearings in mid-September on promoting lifetime income options as part of retirement plans. Among other issues, the hearings will cover the question of whether 401(k) statements should be required to include an estimated monthly benefit if the current account balance were annuitized.

then read further down, and you will realize the posters here were saying this well before you linked this article.

Annuities' drawbacks include a lack of inflation protection and a lack of flexibility if a retiree's circumstances change dramatically due to illness or another major upheaval, says John Scherer, a certified financial planner with Trinity Financial Planning. A ladder of Treasuries or CDs can provide guaranteed income for the short term while leaving long-term money available for more aggressive investing and liquid to accommodate changing priorities, Scherer says.

[jIM_Ohio]

Originally Posted by disneysteve

I think that is a decent article and while it doesn't totally spell it out, it suggests what I mentioned earlier - using an annuity for part of your retirement plan along with your other investments. I think the debate really arises when an annuity proponent suggests that all anyone needs is an annuity.

Put part of your money in an annuity. Leave the rest in a diversified portfolio to keep growth and inflation protection in the mix.

I saw it more as an article which said annuities simplify planning. Usually when simplification is done, either some assumptions need to be removed, or a problem gets overlooked.