Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
At age 71, my rule is to take no more (in dollars) than one half of what my five year average total return has been. I governed both of my late parents money this way and found that their principal grew over time. Of course, one needs an ample pool of principal for my system to work.
At age 71, my rule is to take no more (in dollars) than one half of what my five year average total return has been. I governed both of my late parents money this way and found that their principal grew over time. Of course, one needs an ample pool of principal for my system to work.
This would be under the assumption that you want to leave a substantial amount to heirs. Certainly not the case for everybody. Many don't have that luxury.
The correctness and applicability of the 4% drawdown rule is situational dependent. What is the asset allocation distribution? What is the expected future annual returns? How solid is the economy? An endless array of questions and uncertainties exist.
When uncertainties exist, Monte Carlo codes rise to the top of candidate tools to explore these uncertainties. Given my earlier posts, this suggestion likely surprises no one. Here is a Link that identifies 3 candidate Monte Carlo codes that are available on the Internet:
The author rated 3 codes as best from the many he tested. He highlights the pros and cons of each code.
You get to pick the tool that you find most attractive for your purposes. These tools are all fast, free, and easy to use. Give them a try. What-if scenarios are easy to do, and will yield insights into what uncertainties greatly influence successful outcomes. Good luck to all.
“This would be under the assumption that you want to leave a substantial amount to heirs. Certainly not the case for everybody. Many don't have that luxury.”
@JoJo26, Your comment makes sense on the surface. In fact, there’s an old cliche to the effect: “I want my money to run out on the day I die.“ I suspect that kind of thinking may relate to the popularity of annuities.
But on a different note, I agree more with Ol’Skeet. I’ve always felt my invested assets did me a lot more good left intact than spent. It doesn’t have much to do with providing for heirs. Just a matter of personal comfort and thinking we don’t know what types of adverse contingencies might be coming down the road. Better to die wealthy, I suggest, than to run out of money a year or two early.
Of course, as you suggest, some haven’t saved enough or don’t have other sources of income to sustain them. In that case, they should spend their limited resources.
I’ve always felt my invested assets did me a lot more good left intact than spent. It doesn’t have much to do with providing for heirs. Just a matter of personal comfort and thinking we don’t know what types of adverse contingencies might be coming down the road. Better to die wealthy, I suggest, than to run out of money a year or two early.
Perhaps better, spend a little money to ensure that you don't run out, so that you're free to spend more and not die wealthy.
Not for everyone (e.g. as you wrote, not for those without additional resources), but insuring that you have enough for necessities late in life can free up some assets for spending. Which is why I think that longevity insurance is that rare bird - a genuinely beneficial financial innovation.
@msf- Yes, it's definitely a theoretically decent alternative approach. To me, though, the weakness lies in the statement (from your article):
"secure in knowing that all payments beyond that point will be covered by the longevity annuity and backed by the longevity insurance company."
I may be unduly cynical, but I have very limited faith in the desire of insurance companies to stay in any business if things go wrong and the future doesn't unfold according to their expectations. The fact that our long-term health care insurance, originally carried by General Electric, has been sold several times because GE and subsequent carriers didn't see enough profit potential makes me very uneasy about any insurance companies long-term annuity promises.
ADD:
I continued to read the article (it's pretty lengthy) after posting the above comments, and can recommend that it's well worth your time to do so. It gives a fairly balanced and quite interesting analysis of various alternative retirement schemes, and honestly concedes that in some cases an equity-based retirement approach may give superior long-term results.
What's with this statement: Of course, that changes once RMDs become mandatory. By age 71, 60% of retirees were taking withdrawals, and this percentage increased with age. Would it not be closer to 100% Derf
Not sure where you're finding that statement, I don't see it. There's only one "Of course" that I can find, and it reads:
"Of course, the reality is that this 65-year-old couple could have simply purchased a single premium immediate annuity with inflation-adjusting payments to cover their lifetime guaranteed income goal as well, simply starting at age 65 when they retired."
Based strictly on what I'm reading here, all I can do is guess at the context - perhaps that by age 71, when RMDs are mandatory, 60% of people are actually spending that cash. (RMDs are a tax event, not a spend/disinvest requirement.)
Regarding insurance company risk - there's a big difference between LTC insurance and annuities. The latter are just the flip side of life insurance. For both forms of insurance, what matters is the life insurer's basic soundness and its knowledge of mortality tables and risks. These companies have been in the business for over a century. They've had a lot of practice and learning about how to set rates to remain viable.
What they are quoting above is from Ted's original link, about the fourth paragraph down; and not from your link. This is the statement: "Of course, that changes once RMDs become mandatory. By age 71, 60% of retirees were taking withdrawals, and this percentage increased with age. However, there is ample evidence to suggest that the distributions were taken to comply with the law rather than out of necessity. How do we know? "
I agree that the bold is confusing and likely not proofread by the author. He's mixing RMD's and suggesting then, only 60% of retirees were taking RMD's. Reads like the thoughts were there, but became mixed among sentence structure.
Ok, I'm away to b-ball. Have a pleasant remainder. Catch
The paper cited in the article is talking about all Personal Retirement Assets (PRAs), which it says "include[s] 401(k)s, IRAs, Keoghs, and similar plans." So while RMDs begin at age 70½, withdrawals are not required for Roth IRAs and 401(k)s and 403(b)s at your current employer.
From that paper:
Figure 5-1 pools data on households of various ages in all cohorts to summarize the average patterns of withdrawals at different ages. It shows that the average percentage of households who own a PRA who make a withdrawal increases from 11.4 percent at age 60 to 24.8 percent by age 69. This percentage jumps to over 60 percent by age 71, when the age of the household head exceeds the age at which RMDs must begin.
Yes, thanks @Catch22- I just went nuts searching for that in the Kitces article, of course to no avail. I was beginning to question my sanity until I considered that Derf had also seen it. (Of course, that didn't eliminate the possibility that both Derf and I had lost it.)
I too recognized the article's publication date. It was a long time ago and indeed the information could be stale and no longer relevant. I did consider that possibility and rejected it. Old does not immediately mean bad and outdated. A great example is The Intelligent Investor book by Benjamin Graham. It was published in 1949. It's insights remain as valid today as when it was originally offered to the public.
As you are likely aware, I strongly recommend that investors consider using Monte Carlo analyses when making uncertain investment decisions. I do and I believe it helps. The referenced article supports my position. I simply took advantage of that added endorsement.
Thanks for reading my post.
ADDED just a few minutes later:
I am certainly not unique in recognizing the value (it has shortcomings too) of Monte Carlo when making uncertain investment decisions. Here is a Link to yet another advocate:
I understand the point you make. It is true in many instances, but false in others. The auto example that you selected as an illustration is terrible. Today’s cars are much improved over those of a few years ago. Some things change rapidly, others do not. The laws of physics don’t change whatsoever; they are time invariant. There are no laws of investment, but rather accepted good policy and rules.
The rules for profitable investing tend to approach the the laws of physics, although I admit they are not cast in stone. Some have changed, but only sloooowly. Investing is sensitive to circumstances. Also, each investor has his own rule set. Those differing rule sets are what make a dynamic marketplace.
I am sure I am preaching to the choir now. I believe you are an experienced, knowledgeable investor. Do you take exception to the advice offered in the referenced document? I did not. It was OK, but not great. If you do not take exception to some of the comments made in the reference, this discussion is not worth pursuing.
Yes, a great deal depends on one's circumstances, prospects and specific desires as to what to actually DO with retirement income. I could forget about Medicare and live like a king in The Philippines, even after needing to buy an insurance policy over there which covers my long list of prescriptions and doctor/hospital care. (Wife is from there.) But the food and the climate in The Philippines both really suck. I could, as an Irish citizen, move there, too. But the health insurance system is not as good as some others within the EU. I do know for certain specifically that diabetes needs are covered 100%, totally free, in Ireland. And I'd first have to establish residency in Ireland for long enough to be able to fill out a form which transfers my health coverage to a different country within the EU which I actually want to live in--- maybe the south of Portugal, where it's sunny and warm for more of the year.
But as long as my wife remains 19 years younger than I am, there is a very reasonable expectation for as long as I live that at least one full-time income can be depended upon, between the two of us. That's like an "ace in the hole." My income-producing mutual funds only continue to grow, too. So, we can afford to leave the principal behind me, so that she will get it after my passing. Which I hope will be many years away. Our Will provides the specific destinations for various percentages of what we will both leave behind, once that happens. It is satisfying to be able to do this, emotionally and spiritually. But I worry about my son's prospects re: retirement. Nothing like my own case. He's 25. ... Re: healthcare, just imagine how much easier and stress-free everything would be if we could provide decent healthcare to everyone, globally?! ...It would require some very stoopid countries to get smart, though. I'm talking about IQ as well as putting POLITICAL stoopid-ity behind them!
@MJG, you really present as a windy dimwit sometimes. You posted an article with the hed the 3 Best Free Retirement Calculators and subheds Final Three and Conclusion. It is six years old and out of date and likely superseded and updated and the methods and sophistication of the data usage. One specific criticism charged within it is probably fixed. Who knows? You did not dive into each program and check for the latest state of play. You did not survey the field to see what is new. And now you just go off about asking me whether I think the rules still apply. Wrong question! What is wrong with you that you would miss the obvious and simple point and then still argue about it?? It is the programs we are talking about and historical databases. The car analogy was hasty but is fully apt. Would you accept from anyone an article that says these are the best cars today and stopped at 2011 models? Please just sometimes think before posting one of your automatic windy responses. Who said anything about taking exception to the advice? Find a latest-state-of-play article to post instead. When someone points out foolishness on your part, you come back with wait, wait, what about the content? I mean, the old cars still roll and work and have wheels and follow the laws of gravity. Jeez, man.
Well, I seemed to have hit a nerve. That was never my goal. In my closing remarks I did attempt to praise you: quote “I believe you are an experienced, knowledgeable investor.” I meant it. I hope that you didn’t consider that I was a “windy dimwit” when I made that observation.
It’s good to know that I’m only sometimes a windy dimwit. By your analysis, I sometimes manage to escape that classification. I hope to improve and extend those non-dimwit periods. I’ll keep working the problem, and with help from the MFOers perhaps I will succeed.
Regardless, your post gave me (and probably a host of other MFOers) some insights into your thinking and evaluation process. Name calling is a Loser’s game.
I still wish you success in your investing and other decisions. Differences in analyses and decisions indeed make the marketplace work better.
If I'm told that sometimes I act like an idiot (as I likely am by interjecting in this nonsense), I take that as a comment on my actions, not my mental acuity.
ISTM that "Here is a Link that identifies 3 candidate Monte Carlo codes that are available on the Internet" is an example of a statement that falls into the dimwitted category. The referenced page doesn't laud Monte Carlo simulators per se.
Rather, it states unambiguously that not all three "codes" use Monte Carlo simulation. It goes out of its way to make that point:
Two of the finalists have this [Monte Carlo or backcast capability], but one doesn’t, by design. ... The Ultimate Retirement Calculator from Todd Tresidder ... [has] is no Monte Carlo or historical simulation, so the calculator won’t tell you the probabilities for failure of your scenario. (Understand that is by design: Todd believes probabilistic retirement planning is fundamentally flawed.)
On another page, the same writer critiques those calculators from the referenced page that actually do perform Monte Carlo simulations:
Somehigher-fidelity calculators try to model the fluctuations of the markets by incorporating Monte Carlo algorithms into their calculations. You input statistical measures of the range of possible values for important parameters like inflation and investment returns. The calculator then picks random values from those ranges, combining them into hundreds, thousands, even millions, of variations. It sounds very comprehensive, but it turns out that markets aren’t actually completely random. And the randomness they do exhibit is not the kind of randomness most often used in Monte Carlo calculators.
It's really hard to believe that after all these years we're still exchanging insults over Monte Carlo (or, evidently, "alleged" Monte Carlo) simulations. This poor horse has been dead for a long time now. How about a decent burial?
We're seeing posts from various people where it seems the poster tosses something up without reading it for substance. That's the poor horse. It would be nice if it were dead.
Here we've got a misrepresentation of the cited material. Maybe the page just wasn't read and the poster simply assumed that any list of "best" calculators naturally must identify only ones using Monte Carlo simulations. Likewise, the poster may simply have assumed that the page was current without checking.
The first excerpt shows that it would have been hard for someone who had read the page to have missed the fact that one calculator was not a MC simulator.
The second excerpt was not so much critical of using a Monte Carlo approach as it was of the models used in those simulations. The writer gave a list of "best" calculators, but he qualified it, saying effectively: "those are the best free calculators, but ..."
There's more. One of the two MC simulators in the "best three" list relies on historical data and not standard distributions for its model. (Check out the Vanguard calculator - follow the "What is Monte Carlo Simulation" on its page.)
You want to run a calculator that takes a standard distribution and average market return and runs simulations based on them? Fine, go ahead. My point is that two out of the three "best" calculators don't do that. Despite the way they were represented here.
Comments
The correctness and applicability of the 4% drawdown rule is situational dependent. What is the asset allocation distribution? What is the expected future annual returns? How solid is the economy? An endless array of questions and uncertainties exist.
When uncertainties exist, Monte Carlo codes rise to the top of candidate tools to explore these uncertainties. Given my earlier posts, this suggestion likely surprises no one. Here is a Link that identifies 3 candidate Monte Carlo codes that are available on the Internet:
https://www.caniretireyet.com/the-3-best-free-retirement-calculators/
The author rated 3 codes as best from the many he tested. He highlights the pros and cons of each code.
You get to pick the tool that you find most attractive for your purposes. These tools are all fast, free, and easy to use. Give them a try. What-if scenarios are easy to do, and will yield insights into what uncertainties greatly influence successful outcomes. Good luck to all.
Best Wishes
But on a different note, I agree more with Ol’Skeet. I’ve always felt my invested assets did me a lot more good left intact than spent. It doesn’t have much to do with providing for heirs. Just a matter of personal comfort and thinking we don’t know what types of adverse contingencies might be coming down the road. Better to die wealthy, I suggest, than to run out of money a year or two early.
Of course, as you suggest, some haven’t saved enough or don’t have other sources of income to sustain them. In that case, they should spend their limited resources.
Not for everyone (e.g. as you wrote, not for those without additional resources), but insuring that you have enough for necessities late in life can free up some assets for spending. Which is why I think that longevity insurance is that rare bird - a genuinely beneficial financial innovation.
https://www.kitces.com/blog/calculating-longevity-insurance-rates-a-longevity-annuity-comparison-to-stock-and-bond-returns/
"secure in knowing that all payments beyond that point will be covered by the longevity annuity and backed by the longevity insurance company."
I may be unduly cynical, but I have very limited faith in the desire of insurance companies to stay in any business if things go wrong and the future doesn't unfold according to their expectations. The fact that our long-term health care insurance, originally carried by General Electric, has been sold several times because GE and subsequent carriers didn't see enough profit potential makes me very uneasy about any insurance companies long-term annuity promises.
ADD:
I continued to read the article (it's pretty lengthy) after posting the above comments, and can recommend that it's well worth your time to do so. It gives a fairly balanced and quite interesting analysis of various alternative retirement schemes, and honestly concedes that in some cases an equity-based retirement approach may give superior long-term results.
Of course, that changes once RMDs become mandatory. By age 71, 60% of retirees were taking withdrawals, and this percentage increased with age.
Would it not be closer to 100%
Derf
"Of course, the reality is that this 65-year-old couple could have simply purchased a single premium immediate annuity with inflation-adjusting payments to cover their lifetime guaranteed income goal as well, simply starting at age 65 when they retired."
Based strictly on what I'm reading here, all I can do is guess at the context - perhaps that by age 71, when RMDs are mandatory, 60% of people are actually spending that cash. (RMDs are a tax event, not a spend/disinvest requirement.)
Regarding insurance company risk - there's a big difference between LTC insurance and annuities. The latter are just the flip side of life insurance. For both forms of insurance, what matters is the life insurer's basic soundness and its knowledge of mortality tables and risks. These companies have been in the business for over a century. They've had a lot of practice and learning about how to set rates to remain viable.
Oldest modern life insurance company in the US, dating from 1842, inspired this:
What they are quoting above is from Ted's original link, about the fourth paragraph down; and not from your link.
This is the statement: "Of course, that changes once RMDs become mandatory. By age 71, 60% of retirees were taking withdrawals, and this percentage increased with age. However, there is ample evidence to suggest that the distributions were taken to comply with the law rather than out of necessity. How do we know? "
I agree that the bold is confusing and likely not proofread by the author. He's mixing RMD's and suggesting then, only 60% of retirees were taking RMD's. Reads like the thoughts were there, but became mixed among sentence structure.
Ok, I'm away to b-ball.
Have a pleasant remainder.
Catch
The paper cited in the article is talking about all Personal Retirement Assets (PRAs), which it says "include[s] 401(k)s, IRAs, Keoghs, and similar plans." So while RMDs begin at age 70½, withdrawals are not required for Roth IRAs and 401(k)s and 403(b)s at your current employer.
From that paper:
Derf
That analytical article you posted about is 6 years old.
I too recognized the article's publication date. It was a long time ago and indeed the information could be stale and no longer relevant. I did consider that possibility and rejected it. Old does not immediately mean bad and outdated. A great example is The Intelligent Investor book by Benjamin Graham. It was published in 1949. It's insights remain as valid today as when it was originally offered to the public.
As you are likely aware, I strongly recommend that investors consider using Monte Carlo analyses when making uncertain investment decisions. I do and I believe it helps. The referenced article supports my position. I simply took advantage of that added endorsement.
Thanks for reading my post.
ADDED just a few minutes later:
I am certainly not unique in recognizing the value (it has shortcomings too) of Monte Carlo when making uncertain investment decisions. Here is a Link to yet another advocate:
https://www.investopedia.com/articles/investing/112514/monte-carlo-simulation-basics.asp
Best Wishes
like the best three cars right now, all from 2010
I understand the point you make. It is true in many instances, but false in others. The auto example that you selected as an illustration is terrible. Today’s cars are much improved over those of a few years ago. Some things change rapidly, others do not. The laws of physics don’t change whatsoever; they are time invariant. There are no laws of investment, but rather accepted good policy and rules.
The rules for profitable investing tend to approach the the laws of physics, although I admit they are not cast in stone. Some have changed, but only sloooowly. Investing is sensitive to circumstances. Also, each investor has his own rule set. Those differing rule sets are what make a dynamic marketplace.
I am sure I am preaching to the choir now. I believe you are an experienced, knowledgeable investor. Do you take exception to the advice offered in the referenced document? I did not. It was OK, but not great. If you do not take exception to some of the comments made in the reference, this discussion is not worth pursuing.
Thank you for taking time to reply.
Best Wishes (I mean that)
But as long as my wife remains 19 years younger than I am, there is a very reasonable expectation for as long as I live that at least one full-time income can be depended upon, between the two of us. That's like an "ace in the hole." My income-producing mutual funds only continue to grow, too. So, we can afford to leave the principal behind me, so that she will get it after my passing. Which I hope will be many years away. Our Will provides the specific destinations for various percentages of what we will both leave behind, once that happens. It is satisfying to be able to do this, emotionally and spiritually. But I worry about my son's prospects re: retirement. Nothing like my own case. He's 25. ... Re: healthcare, just imagine how much easier and stress-free everything would be if we could provide decent healthcare to everyone, globally?! ...It would require some very stoopid countries to get smart, though. I'm talking about IQ as well as putting POLITICAL stoopid-ity behind them!
Please just sometimes think before posting one of your automatic windy responses. Who said anything about taking exception to the advice? Find a latest-state-of-play article to post instead.
When someone points out foolishness on your part, you come back with wait, wait, what about the content? I mean, the old cars still roll and work and have wheels and follow the laws of gravity. Jeez, man.
Well, I seemed to have hit a nerve. That was never my goal. In my closing remarks I did attempt to praise you: quote “I believe you are an experienced, knowledgeable investor.” I meant it. I hope that you didn’t consider that I was a “windy dimwit” when I made that observation.
It’s good to know that I’m only sometimes a windy dimwit. By your analysis, I sometimes manage to escape that classification. I hope to improve and extend those non-dimwit periods. I’ll keep working the problem, and with help from the MFOers perhaps I will succeed.
Regardless, your post gave me (and probably a host of other MFOers) some insights into your thinking and evaluation process. Name calling is a Loser’s game.
I still wish you success in your investing and other decisions. Differences in analyses and decisions indeed make the marketplace work better.
Best Wishes
Is it really impossible for you to say 'Ah, I see the point now, oops, my bad for posting something unrepresentative of the state of affairs'?
Evidently.
ISTM that "Here is a Link that identifies 3 candidate Monte Carlo codes that are available on the Internet" is an example of a statement that falls into the dimwitted category. The referenced page doesn't laud Monte Carlo simulators per se.
Rather, it states unambiguously that not all three "codes" use Monte Carlo simulation. It goes out of its way to make that point: On another page, the same writer critiques those calculators from the referenced page that actually do perform Monte Carlo simulations:
Regards,
Ted
Here we've got a misrepresentation of the cited material. Maybe the page just wasn't read and the poster simply assumed that any list of "best" calculators naturally must identify only ones using Monte Carlo simulations. Likewise, the poster may simply have assumed that the page was current without checking.
The first excerpt shows that it would have been hard for someone who had read the page to have missed the fact that one calculator was not a MC simulator.
The second excerpt was not so much critical of using a Monte Carlo approach as it was of the models used in those simulations. The writer gave a list of "best" calculators, but he qualified it, saying effectively: "those are the best free calculators, but ..."
There's more. One of the two MC simulators in the "best three" list relies on historical data and not standard distributions for its model. (Check out the Vanguard calculator - follow the "What is Monte Carlo Simulation" on its page.)
You want to run a calculator that takes a standard distribution and average market return and runs simulations based on them? Fine, go ahead. My point is that two out of the three "best" calculators don't do that. Despite the way they were represented here.