Go go years
Go slow years
No go years
Oh oh! years
As long as one recognizes that having a bond ladder in the first place is a result of managing the portfolio …
That should give one paws.
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One thing I keep coming back to is that all of these retirement strategies assume you’re investing in market index ETFs and bond funds.
But…This is The Motley Fool, right? We’ve been out to beat the market for decades, and many of us (most of us probably) have done so, and done so over long investment periods. So, why are we stopping now and just buying SPY?
I’m not. I’m continuing apply the same investment strategies I’ve been applying for decades. Sure, since I have much less new money coming in, I’m keeping larger safety/emergency/down-market survival funds, but I still have most of my money in active investments. And that changes the math underlying all these retirement models.
Part of the problem has always been the “sage advice” that you can’t consistently beat the market, and what’s given as proof is that actively managed funds rarely beat the market over a period of a decade or longer. But, as individual investors we’re different than these funds. We don’t charge ourselves fees. We don’t have hard and fast limits like “no stock is ever more than 10% of the portfolio.” We don’t force ourselves into benchmarks against which we “under-weight” or “over-weight” stocks, and we don’t force ourselves to own all the stocks in that benchmark.
I’m not the best investor. Plenty of people on TMF do far better than I have, and probably will continue to do so. But, I beat the market over any reasonably long enough time period. So, a strategy based on market performance doesn’t apply to me. Even if I assume the next 30 years will see me beating the market less than I’ve beaten it the last 30.
So, what are my fellow Fools doing about this?
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The 4% rule doesn’t know the future–including future rates of return–or anything about your personal situation such as tax rates, SS income, upcoming windfalls or large expenses, etc. You have to plan for all that yourself.
If you believe your personal rate of return will be higher than historic S&P returns that is an easy adjustment to make. You can do it with one click of a mouse in cFIREsim.
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Two reasons.
- About 95% of professional money managers (and probably 98% of the amateurs) under perform the S&P 500. Investing in a low-fee index fund one of few “free lunches” in finance.
If you told me that there was a way that I could get an income and net worth at least equal to all but the top 5% of my engineering school classmates without attending a class or cracking a textbook, I’d be signing up for it.
- When amateurs buy and sell stocks, the stock they just bought more often than not underperforms what they sold.
That’s certainly been my experience. I retired in 1994 on a portfolio of about 20 stocks, mostly tech and drugs. Once I found that when I sold a part of a winning position to “diversify”, what I bought tended to under perform, it was long-term buy & hold from then on. And over the years, low cost index funds became a larger and larger part of my portfolio. The only thing that prevents me from switching everything to index funds is the 7-figure capital gains tax I’d be paying.
intercst
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If I recall correctly, you gained your life-altering riches at a young age from Dell and Merck(?). So to be fair, was it not that individual stocks windfall that enabled you to later comfortably ride the broader market?
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We don’t need to beat the market. At our ages, 71 and 70 respectively, already retired for 8 years, able to live well enough on Social Security, pension and dividend checks, we are playing defense now. Ironically we did beat the U.S. markets last year because the assets we switched to international equities last year significantly outperformed our U.S. equities.
TMF did give me the courage to drop the expensive professional advisor a couple of decades ago which benefited us greatly.
I probably should just stop posting here given that I have nothing to offer on the stock picking front.
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It was DELL and Pfizer, and now 30 years later, Eli Lilly and Corning are my 2 largest LTB&H positions. And my stock portfolio didn’t take off until after I retired. Prior to retirement, I only beat the S&P 500 by about 1.5% per annum over the previous 13 years.
But the point is, that I’d still be incredibly wealthy (with little or no effort) if I’d simply held the S&P 500 (plus the proper mix of fixed income for my drawdown (4% withdrawal or 1% or less) . You don’t need to gamble with individual stock selection to get wealthy, merely holding an index fund will do it for you.
intercst
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Well, for one I think you are overly optimistic about how many fools are beating the indices. I am sure that there are a fair number of fools who have good years they remember and bad years they forget that would be surprised if you showed them where they would be if they had merely invested the same money in an index. To be sure, the most verbal ones are probably doing OK, but they are not all of fooldom.
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So, I took a look at that page, and here’s the top of the table:
Can you explain how for a 10 year pay-out period, one can only withdraw 8.35% of the portfolio the first year?
I guess it assumes you don’t even keep pace with inflation, eh??
It assumes nothing. It’s just the withdrawal rate that would have survived all the 10-year payout periods from 1871 to 2000. It could be high inflation, or poor investment returns for that worst 10-year period.
Note: this isn’t a Monte Carlo simulation or someone’s guess at future returns or inflation rates. It’s simply the historical data for that 10-year period as collected by Nobel Laureate Robert Shiller.
intercst
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It’s pretty clear that they don’t understand what “SWR” means in that case. SWR means the inflation-adjusted withdrawal rate that a 60/40 portfolio would survive every 30 year period of market-recorded history. It is purely a calculated value, and it is not a “guesstimate”. The two worst 30-year periods begin with the great depression (1928-29) and the great stagflation (1966-67 IIRC).
What that person means to say is that, a 6% withdrawal rate (WR) for X years, followed by 7% for Y years, followed by 10% after age 80 is safe in their opinion. But WR is much different than SWR.
That’s absolutely not true at all. The word “ensuring” is absolutely wrong. The correct statement would be - in ~80 of the 30-year periods, you will die rich, in ~20 of the 30-year periods you will die with sufficient assets remaining, and in ~5 of the 30-year periods you will die with minimal assets, and in 2 of the 30-year periods you will run out of money before you die.
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My in-laws just moved into an independent living facility a couple of months ago. It costs about $7,500 a month for the two of them. It includes 2 good meals a day and transportation to doctor appointments and shopping areas as necessary. They still have their car and use it regularly. It’s a nice place. There is also an assisted living section and I presume that costs more.
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I’m sure that’s true for some, perhaps many, but there’s a hefty slice where it’s not true at all. Mrs. Goofy and I are among them, and we have friends with similar tastes and spending habits.
Mrs. Goofy now travels 3-6 times a year, staying at AirBnBs or wherever. (This did not happen pre-retirement). Add plane fare, meals, etc. and it’s a chunk. I travel once or twice a year, add in. We go to Broadway once a year and usually see 5-7 shows in a week. NYC hotel, food, and $250 per seat x 2 x 6 and you’re talking decent money. Oh, and airfare.
This past weekend we dropped $36k on a new driveway, it will be followed in a couple weeks with a new garage door, probably $10k, and new interior shades as the old ones are kind of shabby.
Now we’re not supporting kids or college tuitions, it’s true, but our medical is higher than it’s ever been, even not including the “extraordinary” surgeries and whatnot that have come with advancing age. And, as an old boss once said to me, “Once you have money you start appreciating a finer cut of steak”, meaning our grocery bills are higher than ever, even without including inflation. And oh yes, inflation. Less McDonald’s, more Ruth’s Chris, if you follow the “steak” metaphor.
We’ve bought 3 new cars in the past 2 years, and, well, you get the idea. Lots of spending going on. We are trying to singlehandedly support the economy so our President doesn’t get blamed for a bad one. Ha ha, I make a joke.
Now I read the analyses that say the Top 20% is doing the spending while the bottom 80% are squeezed (I think that overstates it, I’d guess the Top 20% are spending a lot, the middle 50% are not desperate, but not happy, and the bottom 30% are desperate, but I have no data to back that up.) I also have no way to fix that except to advocate for higher taxes on the truly wealthy, lower taxes on the less wealthy, and better support for the truly indigent - and I vote that way, but then I lose. I also advocate more money for education and other programs which don’t benefit us directly, but I lose there as well.
So what to do? Complain on a message board, I guess. Contribute to the candidates I like, vote my one tiny sliver of a vote, and to back to bed. I remain on the curmudgeon train, a powerless bystander, but with money banked and money gotten from investments. Life is good for me. Not so good for others, huh.
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Just to be clear, what we were talking about is not pre vs post retirement spending, but different post retirement spending, where retirees typically spend less in their 80’s than they did in their 60’s. That’s obviously not true for every retiree, though.
It assumes that the future will not be different than the past.
It assumes that the stock and bond markets will not return differently than they have in the past.
It assumes you’re investing in such a way that your returns are limited to the overall stock and bond market return extremes of the past.
I could go on with the assumptions it makes.
This is an interesting video on long term care in retirement:
For instance, 52% of people at age 65 will never need paid long term care.
12% will spend under $30k lifetime.
18%-20% will spend between $30k and $300k lifetime.
14%-15% will spend over $300k. So this is the group we’re talking about in terms of potentially spending more later in retirement than earlier in retirement.
Yes, it assumes that investment returns are no worse than the extremes of the past, that we still have a functioning Gov’t and Rule of Law, and that the Sun hasn’t consumed the Earth.
There are a lot of things that can happen that don’t have a financial planning solution.
On long-term care. There is a fairly narrow window of networth where buying a LTC policy has any chance of making sense. When I looked at this 30 years ago, the consensus was a networth of $500k to $1.5 MM. Below a retirement nest egg of $500K, the premiums would consume too much of your income, above $1,5 MM, you can afford to self insure (or as the insurance pros call it, “retain the risk”.)
Inflation has about doubled those values, so maybe $1 MM to $3 MM today.
I agree that LTC risk is relatively low. The insurance industry has really pumped up the fear over the past 40 years to sell oldsters expensive and often useless policies.
intercst
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I don’t believe it ‘assumes’ anything. It is merely a statement of fact that if you withdrew at 4% over a variety of periods IN THE PAST; that your outcomes would have been X. You are free to draw any conclusions you wish as to your own personal financial situation. If you don’t think the sun is going to go nova tomorrow, you are free to plan your life for the day after.
JimA
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And it is not a rule. Its a guideline or reference point. Use it accordingly. And of course as circumstances change you have much opportunity to adjust. Your investments and spending are not cast in concrete.
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