What is retirement rule of thumb

[jIM_Ohio]

4% is a guideline
it has known inefficiencies which an individual can plan around (either take advantage of, or save less for example). If 4% appears to save too much, the next best plan I have seen is the 5%-95% model (withdraw 5%, but in down years always leave at least 95% of account balance intact).

4% has inefficiencies because it worked through the 1970's, and if such a decade (flat real returns) does not happen in your retirement, or you die young, you significantly over saved.

5% still has the same inefficiencies, but they appear less.

7% would have same inefficiencies, but they appear less.

Any percentage has the same ineffciencies- and that is it is impossible to know the correct withdraw rate if you do not know when you die. Either something is left, or you live on social security after you run out of assets.

The opposite of that inefficiency is an annuity. The pro is you will never run out of money, the cons are multiple- the top 2 which come to mind are
1) inflation adjustments- the 7% rate for an immediate annuity probably does not have an inflation component built in (the 4% rule DOES have an inflation component built in)
2) Annuities are not transferable on death unless the rate is decreased (so again the 7% rate for an immediate annuity would probably NOT have the ability to transfer income to a spouse, the 4% withdraw rate lets you transfer assets to whomever you want using beneficiary designations on the accounts you withdraw from.

No one single tool can give the best results. Not annuities, not the 4% rule, not stocks, not I-bonds or TIPs. The best plan is one which looks at all the risks, and balances all the risks.

[disneysteve]

I am saying the withdrawal rate of 4% people so often quote is wrong.

I don't think it is wrong. I do think it is often misunderstood. Many people don't care about leaving a big inheritance when they die. As the old guy (can't think of his name) in Ocean's Twelve said, "I want the last check I write to bounce." If you aren't concerned about preserving principal, you can spend more than 4%/year. In doing so, you just increase the possibility that you will outlive your money (which can even happen with the 4% rate just not as likely).

The great comedian Stephen Wright said, "I know when I'm going to die. My birth certificate has an expiration date." Of course, none of us actually knows how long we have to live so we are all trying to plan for something without knowing the details. If I know I need $50,000/year in retirement, with an annual inflation adjustment, but I don't know how many years I need it for, it makes planning kind of tough. The 4% rule tries to address that. An annuity does not. Many advisers, however, will recommend an annuity purchase with a portion of your retirement savings. They will also ladder annuities since the older you are when you purchase one, the higher your rate.

[jIM_Ohio]

The withdrawal rate people were advocating was 4%. The assumptions and numbers they quoted was 4% of the initial balance. So if you have a 100K lump sum the withdrawal is 4K per year.

This is too low and bad advice, so I am saying the withdrawal rate of 4% people so often quote is wrong.

It is wrong because it inefficiently deals with the risks of investment losses and outliving your assets. Buying an annuity is a way of insuring these risks, instead some push 4% withdrawal rate as a means of self insuring these risks.

The second point was debating the amounts of money quoted as necessary to sustain people in retirement. You didn't specifically say that was how much people needed but its the same as the 4% rule people always cite. It is a commonly thrown out statistic that does not have a lot of backing.

The old people have all the money and they could afford to spend more income in retirement.

Compare apples to apples

If a person needs 30k of income in retirement after SS payments

they could do one of three things

1) trust the 4% rule
2) buy an annuity for the 30k income
3) do a combination of #1 and #2

The 4% rule suggests a person would need $750k (25X 30k=750k)
An annuity which gave $30k in income would cost about $450k today (I plugged numbers into this web site Immediate Annuities - Instant Annuity Quote Calculator.)

That is like comparing red apples to green apples.
The comparisons are close, but not the same.

In the problem statement, if someone told me they needed 30k, I would assume that was after tax. The 4% rule is before tax (taxes are part of the 4% based on trinity study).

The 4% rule gives a good target for pre-tax savings (750k saved pre-tax provides 30k of post tax income every year for 30+ years). The annuity cost depends on if the annuity is purchased inside an IRA or with taxable monies.

To get a 30k annuity for 450k, if that money was in a 401k, it would take about a 525k-692k withdraw to purchase the 450k annuity (because the 401k would be taxed). This assumes about 35% fed taxes.

If you left the 450k inside an IRA, the money would not be taxed when you purchased the annuity, but each months check would be taxed (IRA money has not been taxed yet). So $2500 after tax (30k annual after tax) is about $2900 before tax (so 30k after tax is about same as $34,500 before tax).

If I change that, it means for a $2500 post tax annuity it would need $2875 pre-tax and $34,500 annually, that annuity costs about $550k. So around 100k of the annuity cost covers the taxes over life of the withdraws.


The risk with annuities will be high inflation. The risk with the withdraw rate will be portfolio returns and return volatility. Some people favor taking one risk over the other or the other risk over the first.

[TrunkMonkey]

Compare apples to apples

If a person needs 30k of income in retirement after SS payments

they could do one of three things

1) trust the 4% rule
2) buy an annuity for the 30k income
3) do a combination of #1 and #2

The 4% rule suggests a person would need $750k (25X 30k=750k)
An annuity which gave $30k in income would cost about $450k today (I plugged numbers into this web site Immediate Annuities - Instant Annuity Quote Calculator.)

That is like comparing red apples to green apples.
The comparisons are close, but not the same.

In the problem statement, if someone told me they needed 30k, I would assume that was after tax. The 4% rule is before tax (taxes are part of the 4% based on trinity study).

The 4% rule gives a good target for pre-tax savings (750k saved pre-tax provides 30k of post tax income every year for 30+ years). The annuity cost depends on if the annuity is purchased inside an IRA or with taxable monies.

To get a 30k annuity for 450k, if that money was in a 401k, it would take about a 525k-692k withdraw to purchase the 450k annuity (because the 401k would be taxed). This assumes about 35% fed taxes.

If you left the 450k inside an IRA, the money would not be taxed when you purchased the annuity, but each months check would be taxed (IRA money has not been taxed yet). So $2500 after tax (30k annual after tax) is about $2900 before tax (so 30k after tax is about same as $34,500 before tax).

If I change that, it means for a $2500 post tax annuity it would need $2875 pre-tax and $34,500 annually, that annuity costs about $550k. So around 100k of the annuity cost covers the taxes over life of the withdraws.


The risk with annuities will be high inflation. The risk with the withdraw rate will be portfolio returns and return volatility. Some people favor taking one risk over the other or the other risk over the first.

I guess you are phrasing your advice a little differently now. You should tell people the different options available.

If someone needs 30K per year for retirement, and has SS of 20K. You are advising people that they will need 25 * 40K = 750K saved based on the 4% rule.

A male age 62 needs 420K for an annuity. A male age 50 needs 500K, to generate 30K.

YOU SHOULD BE TELLING PEOPLE, if you mention the 4% rule, that you can also retire AT AGE 50 using an annuity with as little as 500K saved, this doesn't include SS, so tell the people to CUT BACK a little before they reach age 62!

I think I would rather retire at age 50 then work till age 67 and collect only 4%.

That is awful advice, what you are doing is a crime.

I don't think it is comparing apples to oranges at all. It is all about 2 things risk vs benefit calculation. You assume that people are as risk adverse as you are, and the advice you give is not correct.

Because what are you prefacing it on? What does it mean that its a "rule of thumb". Where is the evidence. Don't tell me you are following "common wisdom" or "rules of thumb" like sheep. There are lots of rules of thumb like drinking 8 glasses of water a day that turn out to be completely untrue.

I think if you look at historical returns and show the distribution of returns over many scenarios you are getting closer to proving this. But I have seen no study that does this.

Benefits of Annuity:
Retiring by age 50, or some younger age, more time spent in retirement
Guaranteed stream of income
Ability to save extra cash in more risky assets
Not dropping dead before retirement

Risks:
No access to the principle
Leaving money to children

Also consider that the probability of a male age 21 dying before age 67 is about 17%.

[jIM_Ohio]

I guess you are phrasing your advice a little differently now. You should tell people the different options available.

06-03-2010, 02:06 PM
b) returns
Unless the investment is an annuity, then the returns will vary, and the variance of returns becomes almost as important as inflation. Stocks return (on average) 9% per year. But the variance of the data which gives the 9% return includes -6% happening as often as +24%. If too many of those low return years (-6%-+4%) happen early enough in retirement, "forever" becomes a very short period of time.

I guess you didn't read the posts before you chimed in- that post is on page 1 (made by me) before you posted once, and I mentioned annuities then.

If someone needs 30K per year for retirement, and has SS of 20K. You are advising people that they will need 25 * 40K = 750K saved based on the 4% rule.

you are misquoting me- I said 30k income in addition to SS, please read the posts before replying

A male age 62 needs 420K for an annuity. A male age 50 needs 500K, to generate 30K.

This simple statement does not account for taxes or inflation. It also does not deal with a spouse which needs the same income. You ask the 4% rule to be objective, yet do not give objective advice about annuities.

For example that price you list above has this disclaimer on it, which you have yet to post

You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries.

YOU SHOULD BE TELLING PEOPLE, if you mention the 4% rule, that you can also retire AT AGE 50 using an annuity with as little as 500K saved, this doesn't include SS, so tell the people to CUT BACK a little before they reach age 62!

Don't tell me what to tell people. Lots of facts missing above which you are not telling people, yet you are criticizing anyone which touts 4% and gives details as to how it works. 4% rule IMO is more efficient than an annuity. Taxes, inflation, beneficiaries are the top 3 reasons its more efficient, and that is just for starters.

I think I would rather retire at age 50 then work till age 67 and collect only 4%.

Especially if you don't want your spouse to have money to spend after the annuitant dies. If you retire at 50 with any income, within 24 years (age 74) you have lost 50% of the annuity to inflation (so 30k buys only 15k worth of goods for example). The 4% rule would have the initial 30k withdraw at 60k to deal with same inflation problem.

That is awful advice, what you are doing is a crime.

You are advocating a product, not dealing with the people and their behaviors.

I don't think it is comparing apples to oranges at all. It is all about 2 things risk vs benefit calculation. You assume that people are as risk adverse as you are, and the advice you give is not correct.

The advice I gave is very correct (4% rule works). More people I communicate with plan with the 4% rule than plan to purchase an annuity- there must be a reason for that. You assume I am risk averse? Annuities are for risk averse people, the 4% rule has less risk than an annuity. Inflation, inheritance and taxes are 3 reasons why.

Because what are you prefacing it on? What does it mean that its a "rule of thumb". Where is the evidence. Don't tell me you are following "common wisdom" or "rules of thumb" like sheep. There are lots of rules of thumb like drinking 8 glasses of water a day that turn out to be completely untrue.

TRINITY STUDY.

I think if you look at historical returns and show the distribution of returns over many scenarios you are getting closer to proving this. But I have seen no study that does this.

TRINITY STUDY

Benefits of Annuity:
Retiring by age 50, or some younger age, more time spent in retirement
Guaranteed stream of income
Ability to save extra cash in more risky assets
Not dropping dead before retirement

The annuity has no impact on a person's life span, so that last bullet point is not valid

Risks:
No access to the principle
Leaving money to children

INFLATION

Also consider that the probability of a male age 21 dying before age 67 is about 17%.

The last statistic means nothing- except that if you bought annuity before you died, your family lost everything... if you used 4% rule they have money to bury you.

[TrunkMonkey]

I tried to find any kind of data on the "trinity study" here

You can invest in TIPS and have a higher withdrawal rate.

Trinity Study:
Ironically, the 4% rule of thumb would, in many instances, mandate a more frugal level of retirement expenditures than a portfolio that was fully invested in government inflation-indexed bonds, such as U.S. Treasury Inflation Protected Securities (TIPS). As of mid-October 2008, Treasury Inflation Protected Securities (TIPS) boasted real yields of approximately 3%. A laddered, 100%-TIPS portfolio yielding 3% real would sustain a 5% safe withdrawal rate over a 30-year period. A 100%-TIPS portfolio yielding 3% real would not only be less volatile than a diversified, part-stock portfolio, but also safely sustain a much more generous level—25% more generous, in fact—of retirement expenditures than a diversified portfolio to which the "4% rule" was applied. While a 3% real TIPS yield is well above historical averages for TIPS yield, even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period.[4]

Trinity Study:
Laurence Kotlikoff, advocate of the consumption smoothing theory of retirement planning, is even less kind to the 4% rule, saying that it "has no connection to economics.... economic theory says you need to adjust your spending based on the portfolio of assets you're holding. If you invest aggressively, you need to spend defensively. Notice that the 4 percent rule has no connection to the other rule—to target 85 percent of your preretirement income. The whole thing is made up out of the blue."[3]

Just make an assumption about investment returns.

Historical and Expected Returns - Bogleheads

Stocks average return = 10% with standard deviation of 20%.
Bonds Ave return = 5%, standard deviatio 5%

Out of 1000 simulations how many times does a portfolio last 30 years. I will use excel and get back to you.

[jIM_Ohio]

I tried to find any kind of data on the "trinity study" here

Trinity study - Wikipedia, the free encyclopedia

In finance, investment advising, and retirement planning, the Trinity study is an informal name used to refer to an influential 1998 paper by three professors of finance at Trinity University.[1] It is one of a category of studies that attempt to determine "safe withdrawal rates" from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time.
Its conclusions are often encapsulated in a "4% safe withdrawal rate rule-of-thumb." It refers to one of the scenarios examined by the authors. The context is one of annual withdrawals from a retirement portfolio containing a mix of stocks and bonds. The 4% refers to the portion of the portfolio withdrawn during the first year; it's assumed that the portion withdrawn in subsequent years will increase with the CPI index to keep pace with the cost of living.

A 100% TIPs portfolio works if you save about 25% of your gross pay every year AND your spending while working and spending while retired goes down.

Here is why-
if you make 100k per year and save 25% ($25k) and spend 75k the first year you work... 24 years of 3% raises has you making 200k, saving 25% still is 50k and spending 150k.

Those first few years of working will have bonds which are beating the CPI, but not keeping pace with the raises you received 24 years later- this means either working longer, saving a higher percentage of base pay, or a combination there of.

I also question the 3% real return of TIPs, I believe its closer to 1% real return.

You can invest in TIPS and have a higher withdrawal rate

see above, article also points this out

While a 3% real TIPS yield is well above historical averages for TIPS yield, even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period.

. 1.3% real return on TIPS is not easy to come by (now they pay less than 1%).

TIPS and deflation would be one market cycle which has not been mentioned as well, the 4% guideline has inflation, deflation, recession and growth built into it.

the inefficiencies with 4% I pointed out earlier are summarized here

The Trinity study and others of its kind have been sharply criticized, e.g. by Scott et al. (2008)[2], not on their data or conclusions, but on what they see as an irrational and economically inefficient withdrawal strategy: "This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform."

The inefficiency can be minimized and taken advantage of with decent planning- the 4% rule is a starting point for planning, but not a cure all for all situations.

The TIPS quote by previous poster was in same Wikipedia reference. TIPS do not have 30 years of data on them, where as the trinity study had about 70 years, which is 40 30 year periods

The authors backtested a number of stock/bond mixes and withdrawal rates against market data compiled by Ibbotson Associates covering the period from 1925 to 1995.

The TIPS strategy has some merit- I see others using this and discussing on other boards, but it has not been proven in all market cycles (deflation) and the savings rate needed is shown above.


While we are on withdraw studies, it should be noted that Permanent Portfolio approach is another popular technique (whether done with PRPFX or with ETFs which represent same holdings).

[jIM_Ohio]

The best way to deal with the inefficient strategy of the 4% rule is to plan.

1) Know expenses
2) Know your success rates (with monte carlo simulators)
3) Know your asset allocation and volatility of that allocation

for example you might have a 4% withdraw rate at 60-40, but need a 3% rate at 40-60 on same set of assumptions. So you might decide that 4% at 40-60 makes sense because of other factors-meaning mix and match the withdraw rates and volatility factors of various allocations.

Nothing is 100%... meaning when "4%" is decided to be withdraw rate, that person is using the rate because "95%" or "75%" of the time in the past that withdraw rate with that allocation gave success a certain percent of the time. Part of planning is determining your success rate- for example if a 5% withdraw rate is successful 66% of the time and a 4% withdraw rate is successful 80% of the time for a given 40-60 portfolio with certain assumptions, the person can make a choice as to which withdraw rate they like and why based on their risk tolerance. The 4% guideline often touted is because it has such high success rates, but with those success rates also comes over saving- so there are tradeoffs made financially to get the high success rates.

another example is if you have a high amount of discretionary spending, the 95/5 style might be better (always leave 95% of assets intact, so in a down market, you decrease spending).

another example is an annuity- because in down markets the insurance company has the risk. In a high inflation environment the annuity loses significantly.

That same down market in a 40-60 portfolio would not be that bad (75% of time a 40-60 portfolio has positive returns), where as a 60-40 portfolio might lose money and trigger the 95% part of the 95/5 style.

Knowledge is power, its just up to person as to whether they choose to pursue knowledge or simplify with an annuity and take on the risks the annuity represents.

[TrunkMonkey]

100% TIPs portfolio works if you save about 25% of your gross pay every year AND your spending while working and spending while retired goes down.

Here is why-
if you make 100k per year and save 25% ($25k) and spend 75k the first year you work... 24 years of 3% raises has you making 200k, saving 25% still is 50k and spending 150k.

Those first few years of working will have bonds which are beating the CPI, but not keeping pace with the raises you received 24 years later- this means either working longer, saving a higher percentage of base pay, or a combination there of.

I also question the 3% real return of TIPs, I believe its closer to 1% real return."

This statement does not make sense.

I would question Studies or rules of thumb instead of acting like sheep.

YOU NEED A BETTER WAY OF COMMUNICATING your investment advice.

1. Why do you recommend a 4% withdrawal rate.
2. What are the alternatives - it looks like investing in TIPS is a better way of utilizing your retirement income. In addition to a lifetime annuity
3. How likely are you to run out of money.

A better strategy is to withdraw 5-6% of the total, and in times where the portfolio drops just ratchet down your withdrawal. And do not withdraw over 6% of your total portfolio.

If you look at the returns in excel the withdrawal amount is constant, but would someone really withdraw the same amount if their portfolio drops 20%.

If they are age 75 and they have 250K left in the portfolio will they still withdraw 50K? Probably not.

Add varying your withdrawals to the list.

THere are many holes in your argument.

Add varable annuity with withdrawal guarantee GMWB, to the list. You get a double your money option after 10 years in many product, and a guaranteed withdrawal rate of 5-7%.

[jIM_Ohio]

100% TIPs portfolio works if you save about 25% of your gross pay every year AND your spending while working and spending while retired goes down.

Here is why-
if you make 100k per year and save 25% ($25k) and spend 75k the first year you work... 24 years of 3% raises has you making 200k, saving 25% still is 50k and spending 150k.

Those first few years of working will have bonds which are beating the CPI, but not keeping pace with the raises you received 24 years later- this means either working longer, saving a higher percentage of base pay, or a combination there of.

I also question the 3% real return of TIPs, I believe its closer to 1% real return."

This statement does not make sense.

I would question Studies or rules of thumb instead of acting like sheep.

YOU NEED A BETTER WAY OF COMMUNICATING your investment advice.

1. Why do you recommend a 4% withdrawal rate.
2. What are the alternatives - it looks like investing in TIPS is a better way of utilizing your retirement income. In addition to a lifetime annuity
3. How likely are you to run out of money.

A better strategy is to withdraw 5-6% of the total, and in times where the portfolio drops just ratchet down your withdrawal. And do not withdraw over 6% of your total portfolio.

If you look at the returns in excel the withdrawal amount is constant, but would someone really withdraw the same amount if their portfolio drops 20%.

If they are age 75 and they have 250K left in the portfolio will they still withdraw 50K? Probably not.

Add varying your withdrawals to the list.

THere are many holes in your argument.

Add varable annuity with withdrawal guarantee GMWB, to the list. You get a double your money option after 10 years in many product, and a guaranteed withdrawal rate of 5-7%.

you need to learn to quote posts better

This statement does not make sense.

1% real return on TIPS is about right- you do know "real return" means after inflation- TIPS right now pay next to nothing in interest, their only return comes from the CPI adjustment.

I would question Studies or rules of thumb instead of acting like sheep.

YOU NEED A BETTER WAY OF COMMUNICATING your investment advice.

I am not acting like a sheep, but you are clearly not understanding (or not even reading) the details of the techniques being discussed.

The 4% technique is not as simple as save it and forget it, there is more detail to the technique. The 4% technique is a starting point, not a total solution.

A better strategy is to withdraw 5-6% of the total, and in times where the portfolio drops just ratchet down your withdrawal. And do not withdraw over 6% of your total portfolio.

Show me a Monte Carlo with this technique please- you will see it runs out of money when the 4% technique does not.

If they are age 75 and they have 250K left in the portfolio will they still withdraw 50K? Probably not.

Troll
what were the starting parameters which led to 250k being left, and how long has portfolio lasted?

Yes people aged 75 have spending decrease as their health diminished, but other costs (like health care) go up.

A better strategy is to withdraw 5-6% of the total, and in times where the portfolio drops just ratchet down your withdrawal. And do not withdraw over 6% of your total portfolio.

A 94/6 rule, please run a monte carlo on that and tell me success rates please.

If you look at the returns in excel the withdrawal amount is constant, but would someone really withdraw the same amount if their portfolio drops 20%.

You don't understand 4% to tell anyone why it does not work. The above statement is proof- withdraws are not constant in 4% technique. You clearly have not read the posts, or do not understand what you read, must be why you sell annuities- anything else is too complex for your simple mind.

THere are many holes in your argument.

Add varable annuity with withdrawal guarantee GMWB, to the list. You get a double your money option after 10 years in many product, and a guaranteed withdrawal rate of 5-7%.

You tout annuities, then tout variable annuities. Clearly you are a simple minded insurance salesman with no interest in discussing financial planning stategies.

Annuities are a product which are a tool, and might be "simple". The 4% rule is not that simple. It is not a rule of thumb, it is a technique based on extensive research and quoted in financial planning articles and magazines.

Your sales technique for the annuity is clearly to suggest to your naive clients that they will oversave to retire using 4% technique, "so buy this high commissioned product from me, because I don't want to work for a living either".

If it works for you, great, but I am too smart to fall for that sales pitch.

[disneysteve]

Yes people aged 75 have spending decrease as their health diminished, but other costs (like health care) go up.

Sometimes. Then you have people like my mother who just turned 80 last week. Last month, she took herself and 4 more people on a 7-day Bermuda cruise to celebrate her birthday. Or my 85-year-old uncle who remarried a few months ago. He and his new wife are leaving next week for a cruise to Turkey, Greece and a few other places. Why are they able to do stuff like this? Because they were good savers and lived below their means during their working years and are now enjoying the fruits of that.

[jIM_Ohio]

Sometimes. Then you have people like my mother who just turned 80 last week. Last month, she took herself and 4 more people on a 7-day Bermuda cruise to celebrate her birthday. Or my 85-year-old uncle who remarried a few months ago. He and his new wife are leaving next week for a cruise to Turkey, Greece and a few other places. Why are they able to do stuff like this? Because they were good savers and lived below their means during their working years and are now enjoying the fruits of that.

right- spending is a plan, not a one time decision- which is in effect what an annuity does (it locks you into same income stream based on a one time decision), and unless trips like above are in the budget, it is tough to use assets when you want to use them if an annuity is used, where as with the 4%, 95/5 or similar technique, the money can be used when the person wants to use the money.

[jpg7n16]

I guess you are phrasing your advice a little differently now. You should tell people the different options available.

If someone needs 30K per year for retirement, and has SS of 20K. You are advising people that they will need 25 * 40K = 750K saved based on the 4% rule.

A male age 62 needs 420K for an annuity. A male age 50 needs 500K, to generate 30K.

YOU SHOULD BE TELLING PEOPLE, if you mention the 4% rule, that you can also retire AT AGE 50 using an annuity with as little as 500K saved, this doesn't include SS, so tell the people to CUT BACK a little before they reach age 62!

I think I would rather retire at age 50 then work till age 67 and collect only 4%.

That is awful advice, what you are doing is a crime.

100% TIPs portfolio works if you save about 25% of your gross pay every year AND your spending while working and spending while retired goes down.

Here is why-
if you make 100k per year and save 25% ($25k) and spend 75k the first year you work... 24 years of 3% raises has you making 200k, saving 25% still is 50k and spending 150k.

You are really something, you know that?

You go from "people only need 30k to retire" to "if you make 100k/year"

When you argue for your low expense retirement you use really low numbers. When you argue for how easy it is to save, you give really high numbers.

When you argue against the 4% withdrawal rate, you give the family a $100k portfolio, but when they switch to your annuity strategy, they magically have $500k now.

I guess I should probably insult you for using $100k as your EXAMPLE income when the average income in this nation is between 40-50k. That's what you'd do anyways.


Looking at this through your eyes - I see a family that makes $100k, and is expected to retire on $30k. This family would only be able to save $100k if they were doing it on their own, but if they wanted an annuity, they would have 5x as much to work with.

I don't think it is comparing apples to oranges at all.

Hmmm....

It is all about 2 things risk vs benefit calculation. You assume that people are as risk adverse as you are, and the advice you give is not correct.

Benefits of Annuity:
Retiring by age 50, or some younger age, more time spent in retirement
Guaranteed stream of income
Ability to save extra cash in more risky assets
Not dropping dead before retirement

Risks:
No access to the principle
Leaving money to children or spouse
Inflation
Could underperform the market

Wow that's a new one. Annuities can keep you from dying. Wow. I didn't know they had such powers.

And I added a few risks you overlooked.

Also consider that the probability of a male age 21 dying before age 67 is about 17%.

How much of that 17% is the risk of a 21 year old dying before age 50? Say 12%? 14%? I know it's certainly not 0%. (Apparantly unless I buy an annuity. Then I'm guaranteed to live.)

I would also like to point out that even if you retire at 50, there is still the chance that you will die before 67. And your spouse will be say 65 with no money whatsoever as the principal and income stream die with you. Of course you can get a joint and 2nd to die policy, but then we're back to not getting 7% again. Which is what your strategy is all based on right?

YOU NEED A BETTER WAY OF COMMUNICATING your investment advice.

1. Why do you recommend a 4% withdrawal rate.
2. What are the alternatives - it looks like investing in TIPS is a better way of utilizing your retirement income. In addition to a lifetime annuity
3. How likely are you to run out of money.

1. Mathematically, if returns on your investments average 7% and inflation averages 3%, you will have an inflation adjusted income stream "forever"
2. Withdraw more (or less) than 4%
3. The more you have, the less likely it is that you'll run out.

At 7%+ you'll never run out.
At 6%, you'll have 43 years (retire at 65, have money through 108)
At 5%, you'll have 34 years (retire at 65, have money through 99)

These numbers account for increasing the withdrawals by 3% each year. (Which a fixed annuity would not do)

FYI - if you kept the withdrawal amount the same (like a fixed annuity), even with 4% returns, you would have 84 years before you ran out. Pretty safe bet you won't live that long.
(5%+ returns, and you'd still make money each year and would die with more than you retired with)


So since you like questions, let's check out your annuity strategy:
1) What happens to your spouse if you die early?
2) If you buy a 7% fixed annuity, what happens with inflation?
3) If you'd like your principal to go to your heirs/spouse upon your death, what kind of return can you get from an annutity?
4) How do you handle going from $100k salary to only $30k? (seeing as you won't be SS elligible yet)
5) Since your expense will have to cut way back, how is retiring an advantage? Could you afford to travel, etc.?
6) At what age are people 1st elligible for Social Security? (hint: it's not 50)

[disneysteve]

Folks, I know how aggravating it is when an insurance or annuity salesman comes around and starts touting the benefits of whole life or annuities, but please keep the conversation polite. Don't resort to name calling or personal insults. Hopefully, once the person realizes that we are all too smart to fall for that garbage, they will go away and leave us to discuss better ways to manage money.

[TrunkMonkey]

I'm not an annuity salesman but I am an Actuary, and when I hear people quote 4% rule. I think 2 things, they do not understand the real risks at retirement and instead quote misinformation out of fear or for an emotional reason.

Factually you are not correct. If you quote the 4% rule you either have to back this up with some example, or explain how it is better then the many other options available.

If you are worried about outliving your income, you should insure using an immediate annuity. For your information this is not what salespeople usually sell, those are VA's. By insuring against outliving your assets it gives you a much higher withdrawal rate.

Why you don't seem to understand is that by keeping your withdrawal artificially low, you are in effect trying to self insure against outliving your assets. And this does not work well.

I ran a monte carlo projection in excel. Is it possible to post it in the forum? A good withdrawal method is to vary your withdrawals based on how the portfolio performs. We should publish the data as a rebuttal to the Trinity Study.

I think it is at least worth mentioning that a GMWB gives you access to your money and a guaranteed withdrawal rate, that starts at 5% at age 60 and increases to 6% by age 70.

There is also a double your money feature.
The protected amount grows by a guaranteed rate of 6 or 7%.

This is better then the 4% withdrawal rate. Clearly.

I think Prudential has one of the most competitive products at the moment.