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Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire!
Retirement is really post WWII concept that people still believe is possible for them. But if you are 30 or under prepare for living on the street or in the boondocks (read up on BLM land) in your 60s.
Thank you for paying your SS taxes - I'll be enjoying them.
With the lack and disappearance of "steady" job prospects, ( compared to the boomer generation ) innovation in alpha producing investments, and lack of planning help available to young investor, they will have to be more DYI going forward. Robo advisors, buy and hold index investing, and 60 / 40 "glidepath" funds won't help in the accumulation of the millions of dollars needed for survival either. One of the best steps that a young investor can take, is the opening and funding a ROTH IRA, and then investing in small cap value * . Applying a quantitative tactical model to a portfolio of small cap value, long bond fund and cash equivalents has taken a smaller investment stake and produced risk alpha above the buy and hold of small cap value **.
With the lack and disappearance of "steady" job prospects, ( compared to the boomer generation ) innovation in alpha producing investments, and lack of planning help available to young investor, they will have to be more DYI going forward. Robo advisors, buy and hold index investing, and 60 / 40 "glidepath" funds won't help in the accumulation of the millions of dollars needed for survival either. One of the best steps that a young investor can take, is the opening and funding a ROTH IRA, and then investing in small cap value * . Applying a quantitative tactical model to a portfolio of small cap value, long bond fund and cash equivalents has taken a smaller investment stake and produced risk alpha above the buy and hold of small cap value **.
True dat! As to small cap value info. Is it saying 100% into SCV? If so I would lean more to the old allocation of 100-age = stocks and remainder into bonds.
Using a 4-5% withdrawal rate, the 100-age allocation could be very problematic, as it always has been. Unless there is simply more savings/investments than will ever be used, folks could find they are eating up principal much faster than their longevity will allow. Of course, not having a mortgage when retiring is a game changer, as is receiving a public pension. No mortgage AND a pension are huge. There is no 'rule of thumb' that should be applied here. It is very individualistic, and each household should spend a good amount of time planning just what 'retirement' looks like, both in terms of cash flow and life activity.
"Many clients are spending a minimum of $3,000 a month once they stop working on basic necessities such as property tax, car payments and federal taxes, Ulin said." - move someplace cheaper
"What you can control is saving early and often ..." - all that really needed to be said
$2 million is a ridiculous number and trying to save $20,000-30,000 a year on the average Americans take home income of $35,000 has me wondering just who this article was written for.
Using a 4-5% withdrawal rate, the 100-age allocation could be very problematic, as it always has been. Unless there is simply more savings/investments than will ever be used, folks could find they are eating up principal much faster than their longevity will allow. Of course, not having a mortgage when retiring is a game changer, as is receiving a public pension. No mortgage AND a pension are huge. There is no 'rule of thumb' that should be applied here. It is very individualistic, and each household should spend a good amount of time planning just what 'retirement' looks like, both in terms of cash flow and life activity.
Anything to back that up or is it from your life experience?
Simple heuristics (rules-of-thumb) are fine when making common everyday decisions like buying a hamburger or not, but are totally inadequate when making complex, significant decisions like those about retirement.
The retirement when, where, how much do I need, drawdown rate, portfolio size and placements seem hopelessly intertwined to permit a comfortable and confident decision. But a financial tool is readily accessible that significantly attenuates doubt, and it’s not rule-of-thumb based.
I’ve proposed this approach many times on MFO, but I don’t hesitate to do so once again. That tool is Monte Carlo simulation analyses. I do not apologize for being a broken record in this instance.
Many such tools are easily accessible for free on the Internet. Two such codes that I have previously recommended are the PortfolioVisualizer and the MoneyChimp codes. Here are direct Links to these Monte Carlo simulators:
Please give them a few tries. The inputs are self-explanatory, and the codes are fast. Many scenarios can be explored over a short commitment of time. Endless what-if scenarios can be examined with end portfolio average value and portfolio survival likelihoods as their primary outputs. Thousands of cases are randomly constructed for the projected market returns.
The PortfolioVisualizer tool has more user options, but the MoneyChimp version also does yeomen work. Since these are Monte Carlo-based codes, each time a simulation is made, expect slightly changed predictions. That somewhat captures the fragile nature of the uncertain future.
Retirement decisions will be dramatically improved by application of these simulators. Imperfect analyses (even estimating the range of possible market returns is risky business) almost always beats poorly informed guesstimates. Before making a retirement decision, give the Monte Carlo codes a test ride. They are powerful stuff for everyone.
And for normal circumstances and drawdown rates, a 2 million dollar portfolio is not necessary for a portfolio with some equity holdings. Do the analyses to challenge the robustness of that statement.
Simple heuristics (rules-of-thumb) are fine when making common everyday decisions like buying a hamburger or not, but are totally inadequate when making complex, significant decisions like those about retirement.
If there is one thing that rules of thumb work best - it is retirement planning especially when you are young:
- know how to budget - track your spending - pay yourself first - spend less then you earn - invest 100 (or 110) - age to stocks, rest to bonds - understand cash flow thrown off by your investments and your retirement needs
Those simple rules of thumb and maybe a few others are the foundation for financial retirement planning.
While those calculators are interesting ( I've experimented) with them, they are useless without the basics.
Financial planners and stock salesmen like those calculators because they make retirement planning complicated and retirement a nearly impossible goal.
I agree with you MJG. The Monte Carlo analysis is the first step in determining how much money do you need to retire at your living expense expectation and how confident do I want to be in that assessment. Everything else mentioned above are ways to make it happen. But if you don't know where you are going your journey and method are guess work .
You provide a fine list of glittering generalities. These are such motherhood concepts and values that they are typically acknowledged without careful scrutiny. They appeal to the emotions, but are they actionable in terms of retirement planning or a retirement decision?
My answer is a definite No. They are kindness and goodness, but are far too vague for decision making. It’s the kind of stuff we get from politicians. It sounds good and is even generically correct, but is it enough? No. We need hard numbers for the retirement process.
Your list provides soft (and admirable) guidelines. But they don’t come close to suggesting an answer to the quantity of needed savings. Suppose a worker saved one thousand dollars a year and invested with modest success for 40 years. Is that enough?
Likely not. Early Monte Carlo runs would inform that worker that he needs a more aggressive savings plan. A later Monte Carlo simulation might suggest that a longer work period is needed for a healthy retirement portfolio survival likelihood. That’s not pleasant news, but it helps for better decision making.
Why the reluctance to use accessible tools that will enhance the probability of a successful retirement? These “calculators” do not “make retirement complicated”. They put meat on the bones. They add numerical substance to pure guesswork and gross approximations.
I do not understand your position that more information will somehow damage the preparation for retirement and a final retirement decision. Monte Carlo simulations add scale to a retirement roadmap.
- know how to budget - track your spending - pay yourself first - spend less then you earn
>>>If the person can not be involved with or control any of these, there will be no need for anything related to the Monte Carol machine.
Probably more so today than with my generation, there is a high likelihood that a college graduate today, or anyone employed has not a clue as to where they will find their arse on retirement day. But, one thing is written; in that if the 4 items in the list above can not be properly controlled, the retirement roadmap will not exist to any value.
I know from 2015 the same type of budget information I know from 1970; as to how much and where monies travel in the broad budget categories. Tis not difficult to track.
You provide a fine list of glittering generalities.
What? - Very specific to anyone who reads it.
I do not understand your position that more information will somehow damage the preparation for retirement and a final retirement decision. Monte Carlo simulations add scale to a retirement roadmap.
Best Wishes.
Without what I wrote no need for a Monte Carlo - you probably won't have $.
Yes, what I wrote is obvious and simple - most great ideas are.
Monte Carlo is ok to get a broad overview of the probability of maintaining the lifestyle you want until you die. For many people, however, the use of Monte Carlo is not so great. The majority of folks (not on this board) have never saved for retirement, or if so, have done a bare minimum. They spend a lot more than they make. And they approach retirement with more baggage than will fit in their assigned overhead bin. I still maintain that starting retirement with no mortgage and no credit card debt is huge, something a lot of people should work to achieve. There are a lot of basic principles that people should use, but two of the most important are 1) spend less than you earn and 2) pay yourself first - meaning have a goal of maxing out your retirement plan contributions.
Thanks for your commentary. Perhaps from this dialectic exchange a useful synergy will emerge. That often happens.
I take no issue with the general rules that you both advocate. I too use them. But they are motherhood and apple pie. If your mother and father did not lecture them as a practical gospel before teenage, your parents were delinquent. That advice is accepted wisdom; it just does not go far enough for retirement planning purposes.
Those guidelines simply do not yield a yardstick to measure retirement planning progress against, and do not help in a final retirement decision. Some metrics are needed. A Monte Carlo approach is a perfect tool given the uncertain nature of future portfolio performance. Monte Carlo methods were specifically developed during World War II to address uncertainty, especially when a boatload of data are accessible.
Napoleon said: “Nothing is more difficult, and therefore more precious, than to be able to decide”. Information gathering, data interpretation, hypotheses testing, and flexibility to adjust are essential elements in any ongoing retirement planning process.
Without numbers and expectation estimates, a potential retiree is lost at sea. Without credible estimates any retirement consultant is similarly lost at sea, and is not providing a full service. Convenient, easy to use, and fast Monte Carlo simulations fill many of the gaps, at least in a probabilistic sense. That’s as good as it gets.
For example, use the PortfolioVisualizer Monte Carlo tool. In a few minutes it runs 1000 random cases for the input parameters. Those input parameters are easily changed to explore what-if scenarios. Those what-if scenarios test the robustness of any assumptions. Time span is changed with a single input.
Output includes a likely median end wealth portfolio value, a portfolio survivable probability, and the 25 and 75 percentile portfolio value likelihoods. All this is good stuff and informs both the sagacity of the ongoing savings process and any final retirement date decision. These outputs can be updated over time, and yield retirement guidance. And it’s all free for the doing.
Note that the Monte Carlo simulators that I recommend do not operate in a vacuum. They are just one tool in a retirement planning toolkit. Adopting that tool does NOT preemptively require discarding all the other elements discussed in these exchanges. These are not mutually exclusive planning devices. They should be used in tandem.
Monte Carlo simulators have become a more or less standard tool in financial planning circles. An early version was developed by Nobel Laureate Bill Sharpe. He still runs that service as part of his Financial Engines website. Like all tools, the everyday American wisdom is to “use it or lose it”. I’m at a loss to construct an alternate way to generate any meaningful projections for the survivability of any retirement war-kiddy.
Thanks for your commentary. Perhaps from this dialectic exchange a useful synergy will emerge. That often happens.
Best Wishes.
We probably don't differ as much as you might think. The difference is probably where you put the emphasis. The items I mentioned are the meat of the issue.
The monte carlo is a tool for evaluation and planning - but not high on my list.
If I were to expand upon my list: - know how to budget - track your spending - pay yourself first - spend less then you earn
I would add - understand cash flow in retirement investment planning: - investment income - pension - SS - 401K distribution requirements and taxes - 'near cash' investments to cover stock/bond downturn periods
After that you can use the monte carlo to model you options.
Totally agree, MJG and Dex. The one thing I would add to any list of retirement planning scenarios, to-dos, best practices is to start retirement as debt-free as possible. As I have experienced on every occasion, no debt (especially no mortgage) in retirement is simply huge. For most middle-income folks, it is THE factor that allows them to have a positive lifetime cash flow experience.
Comments
Regards,
Ted
One of the best steps that a young investor can take, is the opening and funding a ROTH IRA, and then investing in small cap value * . Applying a quantitative tactical model to a portfolio of small cap value, long bond fund and cash equivalents has taken a smaller investment stake and produced risk alpha above the buy and hold of small cap value **.
* https://docs.google.com/document/d/1kToqLWLISRk4n4YnSzv1hT5kBN54l5CvhwGgDwJKPJI/edit?usp=sharing
** https://docs.google.com/presentation/d/1pQuBfbPd18ca0G-KiZc5FIWNMx0pNa87INgsLjEwuzY/edit?usp=sharing
https://docs.google.com/presentation/d/1C37CJypoxHWHB09e3g25ewOGjP83wDZhj5j6tlrLJoA/edit?usp=sharing
As to small cap value info. Is it saying 100% into SCV? If so I would lean more to the old allocation of 100-age = stocks and remainder into bonds.
- move someplace cheaper
"What you can control is saving early and often ..."
- all that really needed to be said
$2 million is a ridiculous number and trying to save $20,000-30,000 a year on the average Americans take home income of $35,000 has me wondering just who this article was written for.
more + signs a winner!
Simple heuristics (rules-of-thumb) are fine when making common everyday decisions like buying a hamburger or not, but are totally inadequate when making complex, significant decisions like those about retirement.
The retirement when, where, how much do I need, drawdown rate, portfolio size and placements seem hopelessly intertwined to permit a comfortable and confident decision. But a financial tool is readily accessible that significantly attenuates doubt, and it’s not rule-of-thumb based.
I’ve proposed this approach many times on MFO, but I don’t hesitate to do so once again. That tool is Monte Carlo simulation analyses. I do not apologize for being a broken record in this instance.
Many such tools are easily accessible for free on the Internet. Two such codes that I have previously recommended are the PortfolioVisualizer and the MoneyChimp codes. Here are direct Links to these Monte Carlo simulators:
https://www.portfoliovisualizer.com/monte-carlo-simulation
http://www.moneychimp.com/articles/volatility/montecarlo.htm
Please give them a few tries. The inputs are self-explanatory, and the codes are fast. Many scenarios can be explored over a short commitment of time. Endless what-if scenarios can be examined with end portfolio average value and portfolio survival likelihoods as their primary outputs. Thousands of cases are randomly constructed for the projected market returns.
The PortfolioVisualizer tool has more user options, but the MoneyChimp version also does yeomen work. Since these are Monte Carlo-based codes, each time a simulation is made, expect slightly changed predictions. That somewhat captures the fragile nature of the uncertain future.
Retirement decisions will be dramatically improved by application of these simulators. Imperfect analyses (even estimating the range of possible market returns is risky business) almost always beats poorly informed guesstimates. Before making a retirement decision, give the Monte Carlo codes a test ride. They are powerful stuff for everyone.
And for normal circumstances and drawdown rates, a 2 million dollar portfolio is not necessary for a portfolio with some equity holdings. Do the analyses to challenge the robustness of that statement.
Best Wishes.
- know how to budget
- track your spending
- pay yourself first
- spend less then you earn
- invest 100 (or 110) - age to stocks, rest to bonds
- understand cash flow thrown off by your investments and your retirement needs
Those simple rules of thumb and maybe a few others are the foundation for financial retirement planning.
While those calculators are interesting ( I've experimented) with them, they are useless without the basics.
Financial planners and stock salesmen like those calculators because they make retirement planning complicated and retirement a nearly impossible goal.
MikeM is exactly on-target.
You provide a fine list of glittering generalities. These are such motherhood concepts and values that they are typically acknowledged without careful scrutiny. They appeal to the emotions, but are they actionable in terms of retirement planning or a retirement decision?
My answer is a definite No. They are kindness and goodness, but are far too vague for decision making. It’s the kind of stuff we get from politicians. It sounds good and is even generically correct, but is it enough? No. We need hard numbers for the retirement process.
Your list provides soft (and admirable) guidelines. But they don’t come close to suggesting an answer to the quantity of needed savings. Suppose a worker saved one thousand dollars a year and invested with modest success for 40 years. Is that enough?
Likely not. Early Monte Carlo runs would inform that worker that he needs a more aggressive savings plan. A later Monte Carlo simulation might suggest that a longer work period is needed for a healthy retirement portfolio survival likelihood. That’s not pleasant news, but it helps for better decision making.
Why the reluctance to use accessible tools that will enhance the probability of a successful retirement? These “calculators” do not “make retirement complicated”. They put meat on the bones. They add numerical substance to pure guesswork and gross approximations.
I do not understand your position that more information will somehow damage the preparation for retirement and a final retirement decision. Monte Carlo simulations add scale to a retirement roadmap.
Best Wishes.
As noted by Dex.....these first four
- know how to budget
- track your spending
- pay yourself first
- spend less then you earn
>>>If the person can not be involved with or control any of these, there will be no need for anything related to the Monte Carol machine.
Probably more so today than with my generation, there is a high likelihood that a college graduate today, or anyone employed has not a clue as to where they will find their arse on retirement day.
But, one thing is written; in that if the 4 items in the list above can not be properly controlled, the retirement roadmap will not exist to any value.
I know from 2015 the same type of budget information I know from 1970; as to how much and where monies travel in the broad budget categories. Tis not difficult to track.
Catch
Yes, what I wrote is obvious and simple - most great ideas are.
Thanks for your commentary. Perhaps from this dialectic exchange a useful synergy will emerge. That often happens.
I take no issue with the general rules that you both advocate. I too use them. But they are motherhood and apple pie. If your mother and father did not lecture them as a practical gospel before teenage, your parents were delinquent. That advice is accepted wisdom; it just does not go far enough for retirement planning purposes.
Those guidelines simply do not yield a yardstick to measure retirement planning progress against, and do not help in a final retirement decision. Some metrics are needed. A Monte Carlo approach is a perfect tool given the uncertain nature of future portfolio performance. Monte Carlo methods were specifically developed during World War II to address uncertainty, especially when a boatload of data are accessible.
Napoleon said: “Nothing is more difficult, and therefore more precious, than to be able to decide”. Information gathering, data interpretation, hypotheses testing, and flexibility to adjust are essential elements in any ongoing retirement planning process.
Without numbers and expectation estimates, a potential retiree is lost at sea. Without credible estimates any retirement consultant is similarly lost at sea, and is not providing a full service. Convenient, easy to use, and fast Monte Carlo simulations fill many of the gaps, at least in a probabilistic sense. That’s as good as it gets.
For example, use the PortfolioVisualizer Monte Carlo tool. In a few minutes it runs 1000 random cases for the input parameters. Those input parameters are easily changed to explore what-if scenarios. Those what-if scenarios test the robustness of any assumptions. Time span is changed with a single input.
Output includes a likely median end wealth portfolio value, a portfolio survivable probability, and the 25 and 75 percentile portfolio value likelihoods. All this is good stuff and informs both the sagacity of the ongoing savings process and any final retirement date decision. These outputs can be updated over time, and yield retirement guidance. And it’s all free for the doing.
Note that the Monte Carlo simulators that I recommend do not operate in a vacuum. They are just one tool in a retirement planning toolkit. Adopting that tool does NOT preemptively require discarding all the other elements discussed in these exchanges. These are not mutually exclusive planning devices. They should be used in tandem.
Monte Carlo simulators have become a more or less standard tool in financial planning circles. An early version was developed by Nobel Laureate Bill Sharpe. He still runs that service as part of his Financial Engines website. Like all tools, the everyday American wisdom is to “use it or lose it”. I’m at a loss to construct an alternate way to generate any meaningful projections for the survivability of any retirement war-kiddy.
Your suggestions are welcomed and encouraged.
Best Wishes.
The monte carlo is a tool for evaluation and planning - but not high on my list.
If I were to expand upon my list:
- know how to budget
- track your spending
- pay yourself first
- spend less then you earn
I would add - understand cash flow in retirement investment planning:
- investment income
- pension
- SS
- 401K distribution requirements and taxes
- 'near cash' investments to cover stock/bond downturn periods
After that you can use the monte carlo to model you options.