Preparing for a 50-year long period of withdrawals in retirement

Retirement FIRE Wannabees
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{{ As longevity increases, it’s becoming more common that a client retiring at 65 has a parent or parents also in retirement in their late 80s.

And scientists say it’s just a small, dystopian leap to see that a little further into the future, medical advances could result in three generations retired in a single family—one at 65, one at 85 and one at 105. All mobile, all healthy. }}

file:///C:/Users/hd986/Downloads/Is%20Our%20Industry%20Prepared%20for%20Retirees’%20Longer%20Lifespans_.pdf

intercst

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It helps a lot if those investments you choose preform as well as you hoped–ideally better than you expected. Then you have resources to deal with the unexpected.

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On the other hand, if they perform worse than your plan, then you might be out of luck.

AJ

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That’s the beauty of the 4% rule. It assumes the worst case sequence of returns, so any surprises are to the upside, more often, “way up”. That’s what people miss about the SWR arithmetic. It’s not based on average performance.

Using a 3% or 2% withdrawal rate doesn’t add that much safety. It just balloons the already sizeable terminal value of the portfolio – and makes it more likely that your “retirement failure” will be an event that doesn’t have a financial planning solution, like nuclear war, a deadly pandemic, or violent political revolution.

intercst

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Here is the repaired version of the link -

https://www.fa-mag.com/news/retirements-lasting-60-years--possible--and-terrifying-81544.html?print

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Actually I think it’s quite a large dystopian leap, and while possible will be pretty rare. It’s true that “life expectancy” has ballooned in the 20th century/21st, but the great majority of that is due to the elimination of death in childbirth and in children - which dramatically tips the chart upwards once eliminated.

In fact, from 1940 through 2000, the life expectancy for men who make it to age 65 has increased by only 4 years, women by 5.5. We only “care” about people between the ages of 20 and ~65, i.e. those who pay in - and take out of the SS system, right? (And pensions, savings, etc. of course.)

https://www.ssa.gov/OACT/TR/TR02/lr5A3-h.html

(You can compare that with “total” life expectancy during the same period, which increased by 15 years. That’s 10 years of “children not dying and 5 years of “actual added life thanks to medical improvements”)

That means that in 60 years the “improvement” averaged less than 5 years (male & female), and the rate of improvement seems to be asymptotically slowing toward the x-axis, not accelerating. (See linked chart).

While there are implications for Social Security in this (each year of improvement costs another 1/15th more, not another 1/70th) it’s unlikely that this will be the factor that breaks the system. And indeed, if across the entire lifetime of the people now entering adulthood the improvement continues at more or less the same pace, then they will have another 2-4 years to plan for (or not), and I suspect the 4% rule would not change.

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It assumes the worst historical sequence of returns. That doesn’t mean that there won’t be a sequence of returns that’s even worse than has already occurred in history, because things work - until they don’t. Which would mean that they would perform worse than the plan.

Besides, I didn’t see anything about the 4% rule in what I was responding to, which was:

‘Hoping’ to get a performance doesn’t seem to fit with the 4% rule.

AJ

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But 4% is not cast in concrete. You can adjust spending for current trends. Perhaps do extras in good years and trim expenses if your investments don’t meet you goals.

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I did the opposite. I doubled my spending and took a lot of cruises and did quite a bit of international travel when everything was “on sale” due to the 2008 market crash. Once the market recovered, and travel prices returned to more normal levels, I found I didn’t have much of an appetite to go on a cruise.

intercst

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That’s right! That’s why the “4% rule” is very likely to leave you comfortable, if not fairly wealthy, at the end of the 30-year payout period.

When I did the arithmetic on it 30 years ago it was a revelation.

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The fact that the 4% rule works doesn’t negate that someone who is ‘hoping’ for performance returns probably isn’t using the 4% rule. And it also doesn’t negate the fact that if that ‘hope’ doesn’t work, they are going to be out of luck.

AJ

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Of course. As has been said many times, no portfolio strategy will offset a poor starting condition.

That condition is money. And enough of it!

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This is LITERALLY a big part of what all the Safe Withdrawal Studies … studied. Those studies took all possible 30 year periods, with various combinations of typical portfolios, and then ran them through 30 years to see which ones even hit zero. Then, their “result” was the percentage withdrawal that avoided EVER hitting zero. Hitting zero was noted to happen only twice over all the 30 year periods studied, once if you started around 1928/29 (“The Great Depression”), and once if you started around 1966 (“The Great Stagflation”). So the results of those studies can be roughly stated as follows - If you withdraw 4% inflation adjusted, from a typical 60/40 portfolio, and the sequence of the 30 years of your withdrawals are not worse than The Great Depression or The Great Stagflation, then you will not run out of money over your 30 year period. Similarly the studies continued, using different periods, different investment mix, etc. You can see the results of those studies in various places.

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The “4% rule” is kind of like the “Waiting until age 70 maxes out your SS benefit rule”. People think that they’re smarter than the arithmetic – and then make sub optimal choices.

Waiting until you’ve saved enough money to support a 3% withdrawal or a 2% withdrawal doesn’t add much, if anything to safety. It just gives you a much larger pile of unused cash at the end of 30 years.

https://www.investmentnews.com/retirement-planning/retirees-lose-34-trillion-by-claiming-social-security-too-early/80190#:~:text=Current%20retirees%20will%20collectively%20lose%20an%20estimated,Social%20Security%20benefits%20early%20at%20age%2062.

Nobel Prize winning economist Daniel Kahneman wrote a book on the subject.

https://www.weforum.org/stories/2024/03/what-we-learned-from-nobel-winner-daniel-kahneman/

Just because you’re comfortable with your decision (System 1 – gut instinct), doesn’t change the arithmetic on the “rational analysis” performed by insurance actuaries and those that understand the math involved (System 2)

intercst

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