Riddle me this, on retirement income...

[ua_guy]

It seems that most financial models for retirement income I've seen rely on the interest income generated from investments but not spending the principal itself. Why is that?

For example, and I don't know if this would be a real-world situation or not, but if someone arrives at 65 years old with $1,500,000 saved and it's earning 2.5% (I'd assume that is a "conservative" yield given the maturity of the funds?), that's generating $37,500 in interest per year.

If the person expects to live until 90, what are the assumptions for what happens to/ is done with the $1.5 Million principal during or after that period?

[disneysteve]

You're absolutely right. The projections all call to never run out of money. Why? Because we don't know when we're going to die. If your hypothetical 65 year old dies at 90 and times everything perfectly to be pretty much out of money by then, that's great, but what happens if he ends up living to be 94 or 97 or 103?

[ua_guy]

I guess that just doesn't make sense to me. If the goal is to leave money to heirs and/or also not run out of money, that seems manageable/achievable by setting a minimum threshold for the retirement account balance, depending on the end goal. But what about people who have account balances at the onset of retirement that are barely enough to afford a subsistence living? I don't think it would be advisable to never touch the principal.

Why is none of this calculated in virtually every one of the retirement income scenarios that I've seen? For example, why would I work an extra 5 years to minimally increase my monthly retirement income if the only benefit was that I could die with as much money as I started with?

[disneysteve]

Why is none of this calculated in virtually every one of the retirement income scenarios that I've seen?

I guess the problem is how could you possibly determine a draw down rate if you don't have a clue how long you need the money to last?

[corn18]

Try this one:

http://www.flexibleretirementplanner.com/wp/

It will let you die with no money. The trick is knowing when you're going to die.

I use that model as a best case scenario as it allows you to burn down capital. I then compare that to my 3% withdrawal model which assumes preservation of capital. Those are my two bookends. If I hit the above model's number, I have a chance of making it through retirement (the model tells you what my chances are). If I hit the bigger number defined by 3% withdrawal then I am virtually assured of making it through retirement. I like knowing both numbers.

[LivingAlmostLarge]

Honestly how many people live past 100? And how many even make 95? I ask most seriously. Me I'm from long lived stock and 90 norm and 100 easily. My grandmother is very healthy 86 and dad is 84. I am going to guess both make 90 and probably 95.

But for most people why not just assume death at 100 and budget that money hits 0 then? I ask this seriously. If people answered honestly their genetic backgrounds how long have their family members lived with honesty would most people say 90? I find a lot of my friends parents dying in their 70s and 80s. I am shocked considering that most of my family is alive and kicking into their 80s on both sides.

[disneysteve]

why not just assume death at 100 and budget that money hits 0 then?

That's probably a fair assumption. Just to be safe, don't budget to 0. Leave enough to live a couple more years.

[feh]

I would disagree that most decumulation plans don't touch the principal. The 4% rule certainly would reduce principal.

Run over to bogleheads.org and do a search. Drawdown strategies are discussed often.

[snafu]

Most financial advisers keep seniors in a 3 part allocation although it's more heavily weighted to Bond Funds than Equities. Do people really just work with 2.5% interest?

[jIM_Ohio]

It seems that most financial models for retirement income I've seen rely on the interest income generated from investments but not spending the principal itself. Why is that?

For example, and I don't know if this would be a real-world situation or not, but if someone arrives at 65 years old with $1,500,000 saved and it's earning 2.5% (I'd assume that is a "conservative" yield given the maturity of the funds?), that's generating $37,500 in interest per year.

If the person expects to live until 90, what are the assumptions for what happens to/ is done with the $1.5 Million principal during or after that period?

I think you have not looked at the math right.

Most models use the 4% rule, plus or minus, and that rule has principal eventually getting tapped.

The efficient frontier shows why using savings accounts and CDs at a 2.5% withdraw rate won't work.

[ua_guy]

I would disagree that most decumulation plans don't touch the principal. The 4% rule certainly would reduce principal.

Run over to bogleheads.org and do a search. Drawdown strategies are discussed often.

That makes sense; I need to read up on the 4% rule and similar ideas. I just haven't seen it discussed in most of the plug-and-chug type calculators.

Most financial advisers keep seniors in a 3 part allocation although it's more heavily weighted to Bond Funds than Equities. Do people really just work with 2.5% interest?

About the 2.5% - I really have no idea. I was just using it as an example of a "lower risk" yield that might be more typical of a return someone would see in retirement, but I really don't know. As a rule of thumb, what's a good return for a fully matured retirement account? Or, is that too just as variable and dependent on personal investing style (in general)?

I think you have not looked at the math right.

Most models use the 4% rule, plus or minus, and that rule has principal eventually getting tapped.

The efficient frontier shows why using savings accounts and CDs at a 2.5% withdraw rate won't work.

I probably just haven't seen the math. Whatever model is used, I think this discussion brings up a good point. Nobody wants to run out of money, but how many of us actually and realistically expect to live until 100? I know life expectancy has gone up, but what's the projection for how long Gen X/Y will live? Will we break the mold?

[corn18]

Whatever model is used, I think this discussion brings up a good point. Nobody wants to run out of money, but how many of us actually and realistically expect to live until 100? I know life expectancy has gone up, but what's the projection for how long Gen X/Y will live? Will we break the mold?

So you get to make a choice:

1. Plan to live to 100 and if you die before that, give the extra money to a charity.

2. Plan to die before 100. If you live longer than you planned, whatcha gonna do then?

I'm planning to live until I am 90. If I make it past then, I can live off my military pension. That's my plan.

[Gailete]

We have a lady in my town that just turned 109 and is still living on her own. I've heard various numbers but I think there are a couple of folks alive in the world that have reached 113-115. So unless your family tends to drop dead in their 50-60's, you could plan for the highest age you want to. If you die sooner, someone will get a small inheritance and if you die later, well then maybe it was time for the government to be paying for your living expenses anyhow after all those years you would have paid taxes.

[Zedon]

With improved technology and medicine it's likely that each generation will love longer than the last.

I hope to never run out of money whether I die after 1 year of retirement or 50.

A pension would help greatly for a long loved person.

[rennigade]

You know our society is in a sad state of affair when people are this concerned with spending every single penny they own before the last second they die. Its ok if you die and theres still money left in your accounts. If people have absolutely no one they wish to leave their money to...then you truly never lived. Congrats...your life was a complete waste.