What is retirement rule of thumb

[jIM_Ohio]

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.

A monte carlo cannot be run in excel- you are basing your conclusion on 4% based on a static spreadsheet with one set of numbers. A Monte carlo gives percentages of success, not a static year by year list of spending.

Here are two monte carlo simulators (free) online which I use:
Flexible Retirement Planner
that is the best tool I use, but its complicated until you run it a few times and compare results.
FIRECalc: A different kind of retirement calculator
on the surface firecalc is simpler. Realize each tab is an option to give further detail

Here is an example I ran thru firecalc
spending 50k
portfolio 1250000
years 50
spending model (constant spending power)- this is default, but review other choices- there is an option here to test the 94/6 you suggested in an earlier post
portfolio is total market- notice you can identify the returns and deviations... realize the deviations are what a monte carlo is doing for you.


The results

FIRECalc looked at the 90 possible 50 year periods in the available data, starting with a portfolio of $1,250,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 90 cycles. The lowest and highest portfolio balance throughout your retirement was $-2,511,798 to $22,109,613, with an average of $4,884,547. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 13 cycles failed, for a success rate of 85.6%.

This means based on past 50 year rolling periods, 13 were found which failed, the rest allowed spending to be constant

Does an Actuary need to know how to read? Some of this was explained earlier in this thread, but you did not read it, or did not understand it.

4% rule and constant spending power mean this

If withdraw in year 1 is 4%- 50k in above example
year 2 it is 4%+3% (so 50k plus 3%) which is $51500 ($1500 increase is 3% and this accounts for inflation).
Year 2 it is 4% +3%+3%. This means it is $51500+3%=$53045.
fast forward to year 24 (so 24 3% increases) and the withdraw is $101,640

In year 1, $50,000 of $1,250,000 was withdrawn. In year 24 $101,640 of the initial $1,250,000 is taken (this is an 8% withdraw relative to initial value).

What is happening is the portfolio is returning some return and this return is changing every year. In general the trend should be "up". So year 1 4% is taken out and 6% is returned by the market. Year 2 4%+3% is taken out and market might return -8%, this return scheme continues until person dies (then it continues for whoever inherits the assets). The 4& initial withdraw and 3% inflation increments eventually mean the person taking money out will be taking out more than an 8% nominal makret return provides (year 24 in the example I listed).

What a monte carlo does is show you based on PAST PERFORMANCE how successful a strategy would be, and the primary output of the monte carlo is the percentage (not the spending pattern).

An annuity MIGHT be able to tell me to retire with a "7% withdraw rate" at start of retirement, but by year 24 that withdraw needs to be twice as high. By year 48 it needs to be 4 times as high (to maintain constant spending power).


The planning with the 4% rule is this-when I chose the total market option above, I probably chose something which was like 100% equities (use total stock market index). Way too much risk- but my success rate for a 50 year period was high.

I'd much prefer to have a 40-60 portfolio, so for that I use the other tool. I changed inputs and received a 67% success rate. This means I save more, change assumptions, or change spending pattern.

This is level of research needed for 4%- its not as simple as set it and forget it- spending behavior is key to planning for it, as well as knowing success rate (some people want 100% success rate, and I am happy with anything above 80%). Its about the risks we take...

For example if I change inflation from 3.5% to 2.5% my success rate goes from 69% to 89%. Inflation is the single biggest factor to success- whether with annuity or 4% rule.

[myself]

How many people need 60K in retirement? I wonder how many retirees actually spend this amount of money? You would need an income of about 100K per year to have 60K left over after 15% savings and taxes.

How many people earn >100K per year, about 10%, of that how many spend all their after tax income, maybe 1/3 of that. So Then how many people spend everything that's left over. It seems that only about 3% of the population spends >=60K.

Income inequality in the United States - Wikipedia, the free encyclopedia

Sorry your doomsday scenario is just that.

I think the median income is more like 45K, how much does that person spend after taxes and savings?

By the way, which segment of the population has the most money, yep its the old people.

So your strategy is to save all your money and then just die, bad idea.

Its a bad idea to tell retirees to withdraw 4% or else. This is wrong and a scare tactic. There is more risk that they don't spend anything and then die, a very inefficient way to utilize the income they have saved throughout their lifetime.

The most efficient way of spending money in retirement is to use an immediate annuity, at age 65 you can get a withdrawal rate of ~7%.

Much better then living in fear withdrawing 4%, its a better option for most people.

Truemonkey, I know that there is an article from someone who's been around the block for a while. His name is Scott Burns. He's been writing financial articles for decades, and he found a study that shows that if someone wants to leave something to their heirs (or make absolutely sure that they have money up until the day they die), 4.2% is the maximum to take out.
And as several others have mentioned, each person has their own needs. For instance, if I had $1M in retirement, and took out 4.2%/yr, that would amount to $42,000. Now, when I am retired, I fully anticipate my property taxes alone to be $11,000-$13,000/yr., one of the benefits of living in a high property tax state like NJ. They are currently $8,200/yr and I have That's a large chunk of the 4.2%, and while it doesn't account for Social Security, I'd rather not be completely dependent upon having that. It very well may be needed to make sure that my medi-gap costs are paid.
My father-in-law has an annuity with a reputable company. He's been taking out the MRD (minimum required distribution) for 2 years now. His annuity has averaged a mere 4.4% for the past 4 years so far. Lucky for him he didn't depend upon a 6.5%-7% withdrawal rate.

[TrunkMonkey]

Truemonkey, I know that there is an article from someone who's been around the block for a while. His name is Scott Burns. He's been writing financial articles for decades, and he found a study that shows that if someone wants to leave something to their heirs (or make absolutely sure that they have money up until the day they die), 4.2% is the maximum to take out.
And as several others have mentioned, each person has their own needs. For instance, if I had $1M in retirement, and took out 4.2%/yr, that would amount to $42,000. Now, when I am retired, I fully anticipate my property taxes alone to be $11,000-$13,000/yr., one of the benefits of living in a high property tax state like NJ. They are currently $8,200/yr and I have That's a large chunk of the 4.2%, and while it doesn't account for Social Security, I'd rather not be completely dependent upon having that. It very well may be needed to make sure that my medi-gap costs are paid.
My father-in-law has an annuity with a reputable company. He's been taking out the MRD (minimum required distribution) for 2 years now. His annuity has averaged a mere 4.4% for the past 4 years so far. Lucky for him he didn't depend upon a 6.5%-7% withdrawal rate.

But if you buy an annuity it would guarantee a withdrawal rate of 6-7% because that is what the guarantee is, such as a GMWB.

Honestly, it seems like you all don't have a very good understanding of the numbers. Monte Carlo analysis is using "brute force" to solve a problem that has no analytical solution. We run Monte Carlo analysis at work when we hedge the GMWB and GMAB contracts.

Your argument is wrong because you don't seem to grasp what the risk is. If you are so concerned about running out of money then no withdrawal rate will be low enough. Your definition of risk is incorrect and your application leads to a 4% withdrawal rate.

Do you understand the risk and are you communicating this? The answer is no. What is the basis for your "rule of thumb". A quick look at wikipedia tells me that many financial advisers do not agree with the 4% rule. It even had a withdrawal strategy using TIPS that had a higher withdrawal rate. GMWB or a lifetime annuity gives you a higher withdrawal percentage. Obviously this does not give you access to principle, and I pointed this out, but you should at least mention these options in addition to whatever rule of thumb, YOU AGREE WITH BASED ON YOUR OWN RISK TOLERANCE.

But the point is you don't seem to understand the risks because you can't back them up with anything.

The downside of 4% or lower withdrawal rate, is you risk spending a small fraction of your portfolio. Buying insurance like a GMWB or life annuity gives you a guarantee that dwarfs your withdrawal "rule of thumb".

[disneysteve]

The downside of 4% or lower withdrawal rate, is you risk spending a small fraction of your portfolio.

That isn't a risk. It is the intent. The whole point of the 4% withdrawal rate is to preserve your principal and not run out of money. When I retire, I want to have enough money to maintain my desired lifestyle and still be able to leave behind a nice inheritance for my family upon my death.

If I use my savings to buy an annuity instead, what does my family get when I die?

I am not totally opposed to annuities for the record. I think there can be value in partially annuitizing one's savings to create a guaranteed income stream and then use the remainder of the portfolio to keep growth in the picture and hedge against inflation. It can also make sense to ladder the annuity purchases since the payment rate rises as you age, so perhaps put 10% (just picking a number here) of your money into an annuity at 65. Do another 10% at 70 and another 10% at 75, or something like that.

I don't think buying an annuity and following the 4% rule are mutually exclusive. You can, and possibly should, do both. Buy the annuity with a portion of your nest egg and follow the 4% rule with the rest.

[jIM_Ohio]

Your argument is wrong because you don't seem to grasp what the risk is. If you are so concerned about running out of money then no withdrawal rate will be low enough. Your definition of risk is incorrect and your application leads to a 4% withdrawal rate.

I know what my risks are, and consider this-

for a person to accumulate the money to buy your annuity, they needed to take risks. Whether those risks were in the stock market, bond market, real estate market or owning a small business, they took on a risk at some point.

The 4% technique is about me using those same experiences I had while accumulating money, and using those risks to my advantage. Some examples of using the rules to my advantage would include Roth conversions, lowering taxes (relative to same income working), and allowing my wife and kids to spend my money after I die.

The annuity is about transferring risk to the insurance company. There are different risks when you do this, inflation is the biggest, but survivorship (beneficiaries) and interest rate/ rate of return risk is another.


I see why you cannot sell annuities and are actually a fake actuary. You can't communicate.

Don't tell me my argument is wrong- firecalc is linked to a community of about 20,000 people, all of whom swear by some derivative of the 4% technique.

Just because "many" financial planners disagree with 4% does not mean 4% is wrong. There are known inefficiencies of the 4% technique which can either be exploited or planned around.

If 33% of 3 people do something, that is not many. If 33% of 10 people do something, that might be many, if 33% of 3000 people do something, that is more than many, but still not all.

Not everyone needs to agree that 4% works for it to be the correct way to do something. To suggest other techniques trump 4%, you need to have more data than quotes from wiki to prove your point.

If you think 100% TIPs is better than 4% rule, ask yourself these questions

1) what savings rate is needed to replace 100% of spending with TIPs?
answer- its at least a 25% savings rate
problem- not all 401ks offer a TIPs option, what to do then?

2) If a person saves 25% of an income at start of career, then also saves 25% of income 35 years later when income has tripled, how is the bond purchased 35 years later going to replace that income?
answer- you need to redeem 2 bonds for every 1 year of expenses because the bonds purchased initially are not high enough in value to supplement a years worth of expenses

3) TIPs have not been seen through all market cycles- will they lose value in a deflationary environment?
answer- who knows, have not seen that happen
problem- if you have a crystal ball which tells you, please tell me when I will die so I don't have to save 25X my expenses too. That cures one of the inefficiencies from above.

However most people using 4% technique and a 40-60 portfolio (or a 60-40 portfolio) probably have most of the bond position in TIPs (or some of the bond position is in TIPS).

Some people using 4% technique also use an annuity to supplement their spending.

To suggest one way is better than the other is foolish
To suggest someone does not know what they are talking about is foolish
to suggest someone is taking on risks they do not know about is foolish

so keep coming back for more- foolish troll

[jpg7n16]

All that Guaranteed Minimum Withdraw Benefits (and Accumulation Benefits) are - are new insurance policies placed on an annuity (which is an insurance product). Which you are charged for of course.

So if you die too soon, you'll have insured your annuity - which with having your own portfolio, you wouldn't have needed.

And if you live "too long" you'll have paid to insure your early death - which didn't happen.

If you live "just right", you'll pay the GMWB fees, live for 14 years, die and lose all principal and income.


Again with your strategy, if you retire at 50 and buy a GMWB fixed immediate annuity @ 7%, you get no social security, until your GMWB runs out. (you would have received all your money back in 14.28 years, so your GMWB clause is worthless)

So if you die at 65, you still leave spouse no money, no income.
If you die at 57, your spouse will get 1/2 the principal back (as 49% will have been distributed), the income stream would stop, and he/she would be able to purchase a new annuity for 1/2 (and get new fees etc.)


The more insurance policies you buy, the more money the insurance co makes - meaning the more you lose. So I'm very skeptical when you see multiple policies wrapped into one product.


So a GMWB clause only makes sense if you expect to die early - and in that case you shouldn't get an annuity anyways, since annuities only benefit those who live a long time. GMWB makes it worse for anyone who dies in the middle.


You still haven't addressed any of my questions:

1) What happens to your spouse if you die early? (ETA: well GMWB addresses if you die super early, but not years 8-20)
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)

[jpg7n16]

That isn't a risk. It is the intent. The whole point of the 4% withdrawal rate is to preserve your principal and not run out of money. When I retire, I want to have enough money to maintain my desired lifestyle and still be able to leave behind a nice inheritance for my family upon my death.

Totally agreed.

[TrunkMonkey]

All that Guaranteed Minimum Withdraw Benefits (and Accumulation Benefits) are - are new insurance policies placed on an annuity (which is an insurance product). Which you are charged for of course.

So if you die too soon, you'll have insured your annuity - which with having your own portfolio, you wouldn't have needed.

And if you live "too long" you'll have paid to insure your early death - which didn't happen.

If you live "just right", you'll pay the GMWB fees, live for 14 years, die and lose all principal and income.


Again with your strategy, if you retire at 50 and buy a GMWB fixed immediate annuity @ 7%, you get no social security, until your GMWB runs out. (you would have received all your money back in 14.28 years, so your GMWB clause is worthless)

So if you die at 65, you still leave spouse no money, no income.
If you die at 57, your spouse will get 1/2 the principal back (as 49% will have been distributed), the income stream would stop, and he/she would be able to purchase a new annuity for 1/2 (and get new fees etc.)


The more insurance policies you buy, the more money the insurance co makes - meaning the more you lose. So I'm very skeptical when you see multiple policies wrapped into one product.


So a GMWB clause only makes sense if you expect to die early - and in that case you shouldn't get an annuity anyways, since annuities only benefit those who live a long time. GMWB makes it worse for anyone who dies in the middle.


You still haven't addressed any of my questions:

1) What happens to your spouse if you die early? (ETA: well GMWB addresses if you die super early, but not years 8-20)
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)

Good god, do you even understand what a GMWB vs. immediate annuity is? THere is no GMWB immediate annuity.

GMWB is a guarantee wrapped in a variable annuity. So a variable annuity lets you put your money in mutual funds.

THere is a fee for the GMWB usually about 1% and an M&E fee of 0.8% and an investment fee.

WIth all those fees your portfolio will be weighed down. So the investment will not grow as fast as a regular 401K.

So if you invest 500K in a GMWB when you are age 55, usually there is a guarantee that the benefit base will grow at something like 5%, sometimes there is a double your money feature after 10 years. So assuming the market tanks your benefit base will grow to 1 million by age 65. You have a guaranteed 5-6% withdrawal rate on the 1 million of benefit base.

You still have access to your portfolio, but the risk is that the fees and expenses will eat away at this.

Still it is a way to have access to your principle with a guarantee.

Anyway its getting hard to read your posts, it sounds like mindless rambling. You keep referencing studies or forums with 10K users.

Like anything else there are risks and a 4% withdrawal rate has many disadvantages, the GMWB, immediate annuity, TIPS, withdrawing 6% per year also have benefits/risks.

It doesnt seem like you are able to articulate the benefit of a 4% withdrawal rate or demonstrate what the risk is. I think this is a big problem.

If someone penny pinches their entire life, then withdraws a fraction of their portfolio out of fear, they end up oversaving without tapping into their savings. You may want to do this because you love to save or penny pinch. But this isn't for everyone. And their is no compelling reason to do this, the "4%" rule has no economic basis.

[jIM_Ohio]

Anyway its getting hard to read your posts, it sounds like mindless rambling. You keep referencing studies or forums with 10K users.

Like anything else there are risks and a 4% withdrawal rate has many disadvantages, the GMWB, immediate annuity, TIPS, withdrawing 6% per year also have benefits/risks.

It doesnt seem like you are able to articulate the benefit of a 4% withdrawal rate or demonstrate what the risk is. I think this is a big problem.

If someone penny pinches their entire life, then withdraws a fraction of their portfolio out of fear, they end up oversaving without tapping into their savings. You may want to do this because you love to save or penny pinch. But this isn't for everyone. And their is no compelling reason to do this, the "4%" rule has no economic basis.

When you put up lame arguments, and then state something was not explained, the posts get long to try and help the few simple minds like yourself which don't get it.

For a simple mind like yourself which does not like to read, I will keep this short.

You stating the 4% technique has no economic basis means you did not read the posts, or do not understand them, or worse yet means you have a simple mind and lack enough financial knowledge to even argue intelligently or see how the other side thinks. It has economic basis, it has economic implications, and is the foundation for a significant amount of financial planning. Stating otherwise shows your own ignorance (stating it again and again does not make it true).

The risk of oversaving means my kids get money I did not spend, I am perfectly OK with that. It cost me nothing to plan for 4% then give away what's left to my kids if I did not live long enough to spend it.

I explained it. 4% means its the INITIAL withdraw rate or starting withdraw rate. each year that 4% initial amount is increased by 3% for inflation. For the third year, the second year's withdraw is increased 3% per year for inflation again. This inflation increase is given to you for LIFE and the portfolio has a percentage of chance it will not run out of money (ever) and it also has a percentage chance it will run out money. If you want the algebraic equation, just ask, but if you cannot read, I would think algebra is beyond you as well.

There is still detailed planning which needs to be done before having 25X expenses saved and pulling the plug on retirement. 25X is a starting point, not a solution.


If this post was too long, I know a 1st grade reading class you can sign up for.

[TrunkMonkey]

Can you explain this:

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]

I think the "math" you are using is too simple because it does not show the likelihood that the portfolio lasts till death.

Second, YOU may want to leave money to heirs but what if a retiree doesn't? Don't make an assumption about others goals.

[myself]

But if you buy an annuity it would guarantee a withdrawal rate of 6-7% because that is what the guarantee is, such as a GMWB.

Honestly, it seems like you all don't have a very good understanding of the numbers. Monte Carlo analysis is using "brute force" to solve a problem that has no analytical solution. We run Monte Carlo analysis at work when we hedge the GMWB and GMAB contracts.

Your argument is wrong because you don't seem to grasp what the risk is. If you are so concerned about running out of money then no withdrawal rate will be low enough. Your definition of risk is incorrect and your application leads to a 4% withdrawal rate.

Do you understand the risk and are you communicating this? The answer is no. What is the basis for your "rule of thumb". A quick look at wikipedia tells me that many financial advisers do not agree with the 4% rule. It even had a withdrawal strategy using TIPS that had a higher withdrawal rate. GMWB or a lifetime annuity gives you a higher withdrawal percentage. Obviously this does not give you access to principle, and I pointed this out, but you should at least mention these options in addition to whatever rule of thumb, YOU AGREE WITH BASED ON YOUR OWN RISK TOLERANCE.

But the point is you don't seem to understand the risks because you can't back them up with anything.

The downside of 4% or lower withdrawal rate, is you risk spending a small fraction of your portfolio. Buying insurance like a GMWB or life annuity gives you a guarantee that dwarfs your withdrawal "rule of thumb".

Now, please educate me on how taking 4% out of something is more of a risk than taking 7% of that same thing? The annuity can be tracked by a 401K (or it's closest equivalents), but does by buying and selling the necessary stocks/bonds/funds.

As JimOhio said. Let's start at 4% and increase the withdrawal rate by 3%/yr, so in year 20, the rate we're withdrawing is then 7% (well, actually 7.014%). That means that the initial invesment had 20 years to grow that much more than the annuity, which would more than sustain the 401K in the long term. In year 30, we can withdraw at a rate of 9.426% and continuing to get more every year, with little-to-no effect on size of the 401K.

Add to that your statement that due to fees, the annuity will NOT be able to grow as fast as the 401K.

"THere is a fee for the GMWB usually about 1% and an M&E fee of 0.8% and an investment fee. WIth all those fees your portfolio will be weighed down. So the investment will not grow as fast as a regular 401K."

[jIM_Ohio]

Can you explain this:

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]

I think the "math" you are using is too simple because it does not show the likelihood that the portfolio lasts till death.

Second, YOU may want to leave money to heirs but what if a retiree doesn't? Don't make an assumption about others goals.

You keep missing this statement- the 4% rule involves planning.

That quote is from the wiki I believe. Just because one person said it does not make it true or false. You are being a sheep- you read something and believe it without looking for data to support your argument.

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.

The 85% rule was made up out of the blue too
sure some financial literature suggests you should target 90% of your pre-retirement income, I have seen 70% and 80% used too. You can use that and the 4% rule together. They are not exclusive. The 4% is more of an inflection point in the work/save vs retire/spend curve. The 85% guideline you are using from the wiki quote is only an estimate for spending, but does little to quantify saving or when to stop saving.

If you save money, you will need to make a decision when to stop saving and when to start spending (drawing down). This is financial independence/ retirement.

If you plan to spend 85% of pre-retirement income, there are assumptions- basically that you saved 15% of income while working, and that 85% of your income was spent. If that 85% was spend, save 25 times 85% of gross pay, and the 4% rule takes over. Whoever put that in the wiki was an idiot.

end wiki response

You still are not answering anyone's questions of you, and continue to post without reading and debate a few random points without seeing how all the dots connect. The dots are financial planning in a nutshell.

I on the other hand have provided 2 calculators, numerous examples, and your simple minded self still cannot even figure out how the 4% rule works (because you have no interest in knowing how it works).

Monte Carlo is needed for the 4% technique (it is not set it and forget it). The Monte Carlo is the math needed- the percent success is the math needed. Please read and understand before replying with gibberish. Do you understand the percent success of a monte carlo simulator?

What you called a monte carlo earlier is not the same monte carlo which is done for 4% technique, have you looked at my links, or are you dumb enough to only believe wiki and the one source you have bookmarked?

I forgot- you are a simple mind incapable of analyzing a problem, a simple mind not able to do more than simple math (7% of this number is this). You are a simple mind incapable of doing anything other than drink the kool aid you sell.

Keep drinking it, maybe the color of the sky in your world will change too.

[TrunkMonkey]

Now, please educate me on how taking 4% out of something is more of a risk than taking 7% of that same thing? The annuity can be tracked by a 401K (or it's closest equivalents), but does by buying and selling the necessary stocks/bonds/funds.

As JimOhio said. Let's start at 4% and increase the withdrawal rate by 3%/yr, so in year 20, the rate we're withdrawing is then 7% (well, actually 7.014%). That means that the initial invesment had 20 years to grow that much more than the annuity, which would more than sustain the 401K in the long term. In year 30, we can withdraw at a rate of 9.426% and continuing to get more every year, with little-to-no effect on size of the 401K.

Add to that your statement that due to fees, the annuity will NOT be able to grow as fast as the 401K.

"THere is a fee for the GMWB usually about 1% and an M&E fee of 0.8% and an investment fee. WIth all those fees your portfolio will be weighed down. So the investment will not grow as fast as a regular 401K."

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)

Now like you said assume a 4% withdrawal rate, at the begining of the year, multiply by the portfolio return. I used a macro and ran 1000 scenarios. Under this assumption the 4% withdrawal rate has a positive balance at year 30 in - 792/1000 or 79% of the scenarios.

So there is a 20% chance you would run out of money by 30 years.

2. An immediate annuity is safer because your withdrawal is guaranteed by the insurance company, and your withdrawal rate is higher, 6%. So you get more for your money, it is safer. But obviously the downside is that you do not have access to your principle. But your chances of success are 100% vs. 80%.

3. GMWB is similiar to an annuity, but the advantage is your have access to your principle, and you have more upside potential. Assume you put 200K in a GMWB when your are age 55. No matter what happens to your account value, the GMWB grows at 5% per year, and often there is a "double your money" feature that kicks in at age 65. So by age 65 your withdrawal base will be 400K and you have guaranteed withdrawals of 5-6%.

The short answer is NEVER USE YOUR ENTIRE PORTFOLIO with a "4%" withdrawal rate. Because you are self insuring. Your probability of running out of money is much higher.

The 4% withdrawal rate is putting all your eggs in one basket. Better to use an annuity or stagger your withdrawals based on market performance.

[TrunkMonkey]

Here is how you put it in excel:

Cell C4 = Stdev Stock = 0.2
Cell C5 = Mean Return Stock = 0.1
Cell C6 = DT = 1 year

Cell F4 = Stdev Bond = 0.05, F5 = Mean Return Bond = 0.05

Cell G8 = Lump Sum = 1,000,000, G9 = Withdrawal Rate = 0.04, G10 = Inflation = 0.03

Column B14:B35 = Time
Column C14:C35 = NormInv(Rand(),0,1) = random normal cdf
Column D14:d35 = Stock Return = from formula above "=EXP( C15*$C$4*SQRT($C$6)+ ($C$5-$C$4*$C$4/2) * $C$6) - 1"

Column E14:E35 = Bond Return = =EXP( C15*$F$4*SQRT($C$6)+ ($F$5-$F$4*$F$4/2) * $C$6) - 1

Column F14:F35 = Total Return = =0.6*D15+0.4*E15

Column H = withdrawal = =$G$8*$G$9*(1+$G$10)^(B15-1)

End of period portfolio =(G15-H15)*(1+F15)

Hit "alt-11" and paste this in the Module
Sub main()

Dim x As Integer
Dim i As Integer
Dim sm As Double

For i = 1 To 1000

Calculate
sm = sm + Range("J9").Value

Next i

MsgBox sm

End Sub

Then set Cell J9 = (Cell with 30th year >0)*1

Then run and you can get your answer.

[jIM_Ohio]

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)

Now like you said assume a 4% withdrawal rate, at the begining of the year, multiply by the portfolio return. I used a macro and ran 1000 scenarios. Under this assumption the 4% withdrawal rate has a positive balance at year 30 in - 792/1000 or 79% of the scenarios.

So there is a 20% chance you would run out of money by 30 years.

2. An immediate annuity is safer because your withdrawal is guaranteed by the insurance company, and your withdrawal rate is higher, 6%. So you get more for your money, it is safer. But obviously the downside is that you do not have access to your principle. But your chances of success are 100% vs. 80%.

3. GMWB is similiar to an annuity, but the advantage is your have access to your principle, and you have more upside potential. Assume you put 200K in a GMWB when your are age 55. No matter what happens to your account value, the GMWB grows at 5% per year, and often there is a "double your money" feature that kicks in at age 65. So by age 65 your withdrawal base will be 400K and you have guaranteed withdrawals of 5-6%.

The short answer is NEVER USE YOUR ENTIRE PORTFOLIO with a "4%" withdrawal rate. Because you are self insuring. Your probability of running out of money is much higher.

The 4% withdrawal rate is putting all your eggs in one basket. Better to use an annuity or stagger your withdrawals based on market performance.

One error in that equation is it does not have inflation. The 4% technique will have a higher withdraw at year 10 than year 1, and a higher withdraw at year 20 than year 10, and higher at year 30 than year 20. With the annuity the "withdraws" are really PAYMENTS and those payments will have a fixed value relative to when annuity was taken. If the withdraws change, you PAY for that (up front) and the "return" of 7% is lower than 7% because of the costs of the riders to get inflation adjustments.

Realize the annuity salesman with a simple mind will compare the value of annuity payout in year 1 of the annuity and compare that year 1 value to the year 1 withdraw from the 4% technique. Ask for a comparison of withdraws at year 10-20-30-40 and that is the value of the 4% technique.

With proper planning and a proper Monte Carlo analysis, the 4% technique will have income which lasts your whole lifetime AND possibly leave an inheritance for others (including spouse). It is possible with 4% technique to end up with more than you started with. If you use an annuity, that possibility goes away.

For an annuity to do everthing 4% technique does, make sure you compare these features (4% does all of these)

1) If person which holds annuity dies, 100% of assets transfer to spouse, kids or another beneficiary. This transfer needs to be 100% of the time in 100% of all cases without exception. It is 100% of the value of the accounts and tax favored status also gets transferred 100% of the time.
2) If initial payout of annuity is $X, it should increase Y% for inflation each year (probably 3%).
3) If you hold most of your assets in an IRA or 401k, make sure taxes are factored into all calculations. Meaning 500k in a 401k or IRA might only be $375k after taxes. Annuity can be inside an IRA or outside, the 4% technique assumes some of the withdraw pays taxes (if you use 4% technique and have 25X expenses saved, the technique assumes you owe taxes on most of the assets). If you have money in a taxable account, you probably can use a 5% technique because of the tax savings.
4) If you have a bad year, you have access to your money when you want it (for example if you have expenses of 40k and 100k of health care bills for one year, how do you deal with such a problem).


Thew annuity has 100% chance of paying out a fixed amount for rest of your life. It has a 0% chance of keeping up with inflation and a 0% chance of giving you access to large lump sums for rest of your life.

The 4% technique might have an 80% chance to succeed on some set of assumptions, but you can change those assumptions and get 100% chance to succeed and still be using the 4% technique. For example lower the volatility of portfolio, or do not take inflation adjustments if expenses do not change that year. Simple behavioral changes as you go can improve success rates of 4% technique to 100%.