Six Reasons I Don’t Care That 3% Is The New 4%

I am having a bit of a disagreement with a recent article Larry Swedroe wrote.  Now Larry is a smart guy, so anytime I find myself on the opposite side of an argument, I get a little uncomfortable.  Especially when he has a powerful ally on his side, retirement researcher Wade Pfau, who I had the pleasure of meeting recently at a Bogleheads meeting.  It isn’t so much the data that I have a problem with, but more the conclusions taken from the data by far too many people.  First, the data.

The 4% Rule

I’ve written before about the 4% rule.  It came into existence back in the 1990s with the publication of the Trinity Study and has recently been updated with later data.  It was written to counteract the claim by many advisors that you could withdraw 6, 8, or even 10% of your portfolio each year since that’s what the portfolio made on average.  The problem is the sequence of returns issue.  If your portfolio gets poor returns in the early years, then your plan to withdraw your portfolio’s average return will lead to early portfolio demise, especially when considering the effects of inflation.  The overall conclusion drawn from the Trinity Study was that you could withdraw 4% a year, adjusted for inflation, of a 50/50 portfolio and have a 96% chance of it lasting 30 years.  The data from this study comes from investment returns from 1927 to 2009.  They took rolling 30 year periods, withdrew 4% a year adjusted for inflation, and determined if the portfolio survived or not.  Even a casual glance at the data reveals that a 10% withdrawal strategy only has a 44% chance of lasting 15 years, and a 0% chance of lasting 30.

Monte Carlo Simulations And Current Valuations

Larry Swedroe argued in a recent column (and he’s not the first to do so) that 3% (at best) is the new 4%.  Basically, he takes current stock valuations, as measured by the PE10 methodology, and current bond valuations, as measured by their current historically low yields, and runs it through a Monte Carlo Simulator (MCS).  A MCS is handicapped by the classic, “garbage-in, garbage-out” problem, since you have to make a certain set of assumptions to use it.  Swedroe explains the methodology this way:

[With a MCS] the expected final wealth distributions are determined by two numbers: 1) the average annual return (which should be based on current valuations/yields, not historic ones); 2) the standard deviation of the average annual return. The Monte Carlo simulator will randomly select a return for each year and calculate the wealth values over the expected retirement period. This process is repeated thousands of times in order to calculate the likelihood of possible outcomes.

Larry, along with others doing similar things with various assumptions, is then led to the conclusion that 4% really isn’t safe at all, and the safe withdrawal rate (SWR) is now 3% at best.  Some conservative folks (like most good savers) add a little extra margin of safety, and knock their withdrawal rate down to 2.5% in response to data like that.

The Problem With A 3% Withdrawal Rate

Using 3% instead of 4% isn’t just some academic discussion.  It has very dramatic real world effects.  Using the 4% rule, if you need $100,000 in portfolio income in retirement, you need to have a $2.5M portfolio on the eve of retirement.  If you then change the number to 3%, all of a sudden you need $3.33M.  If your original plan was to save $50,000 per year and earn 5% annualized returns to get to $2.5M in 25 years, then you’re now left with a dilemma.  You can either save another $17K per year, you can work an extra 5 years, or you can spend 25% less in retirement, none of which are particularly attractive.

I’m actually very concerned about making my portfolio last a long time in retirement.  These studies usually discuss a thirty year retirement, but my portfolio will probably need to last even longer.  I’m in relatively good health and plan to stay that way.  I also anticipate an early retirement.  To make matters worse, my spouse is 3 years younger than me.  According to IRS tables, I’m expected to die in 2053.  My wife, however, isn’t expected to die until 2060.  Plus she eats better than I do.  So if I retire at age 55 in 2030, there’s a reasonable chance we may need that portfolio to last 40 or more years, not just 30.

However, rather than arguing endlessly about whether the Trinity Study’s methodology based on past returns or the newer methodologies based on valuations and MCSs is more accurate, I’d rather point out 6 reasons why I don’t care if 3% is the new methodology.

1) Nobody Uses A Strict SWR Approach In Retirement

I know lots of retirees, but I don’t know any of them using what I would call a “strict SWR approach” to their retirement distributions.  In practice, nobody multiplies their initial portfolio value by a certain percentage, adjusted for inflation, and then blindly withdraws and spends that exact amount year after year.  Just like during the accumulation stage, the retirees I know adjust as they go.  If the portfolio is doing well, they take a few more trips, spend more on the grandkids, and give more to charity.  If it is doing poorly, they hunker down and spend less.  It isn’t rocket science.  People did it for years before the Trinity Study ever came out (not to mention that most retirees have no idea what the Trinity Study is.)  If you really look at the data, the median outcome using a 3-4% withdrawal rate shows the retiree dying with a portfolio LARGER than the one they started with.  Being overly cautious and mechanical has consequences too- i.e. spending too little.  You can’t take it with you.

2) There Are Two Probabilities To Deal With

Too many people forget that they probably won’t need their portfolio to last 40 years.  There are really two probabilities in play here.  First, the probability that you outlast your money due to poor investment returns.  Second, the probability that your money outlasts you due to poor health.  If the probability that your money doesn’t last 30 years is 5%, and the probability of you living longer than 30 years is 20%, the real risk that you personally will run out of money is 5%*20%, or 1%.  I don’t know about you, but that’s a risk I’m more than willing to run.  Remember that for portfolio failure you need to encounter not one, but two “bad” outcomes- poor returns AND a long life.

3) The Risks You’re Not Thinking About

William Bernstein, in his famous Retirement Calculator From Hell, figures there’s about a 20% chance of something really bad happening in the next 40 years.  He includes outcomes such as hyperinflation, local military action, political failures or confiscation, and nuclear war.  There’s no point in planning a portfolio that will have a 97% chance of lasting through 40 years of poor market returns if it only has an 80% chance of surviving 40 years of political, economic, and military events.

4) Remember What The Trinity Study Included

While future returns seem grim given current valuations, keep in mind the events the data in the Trinity Study already include.  They include the Great Depression, World War II, the Stagflation of the 70s, the Cold War, the Dot-Com Bubble, and the Great Recession of 2008.  If you could go through all that and 4% STILL worked, well, how much worse do you really expect it to get?

5) Don’t Forget Guaranteed Income

My general recommendation for retirees is that they use guaranteed income sources for their necessities, and portfolio income/withdrawals for their wants.  Guaranteed income sources include Social Security, pensions, and immediate annuities.  If you need a minimum of $50,000 in income for your necessities, and Social Security and any pensions provide $25,000, then you should annuitize a sufficient amount of assets to provide the other $25,000 of income.  Even at today’s historically low rates, a 60 year old gets 6.41% on an immediate annuity and a 70 year old gets 8.12%.  Even if you buy the annuity on two 60 year olds, it still pays 5.61%.  You can also buy inflation-adjusted immediate annuities, or simply annuitize in multiple steps in order to keep up with inflation.  At any rate, if you’re willing to eliminate the possibility of leaving it to your heirs, you can get a completely safe withdrawal rate that is much higher than 4%, much less 3%.  Since your necessities are covered by guaranteed income, you can afford to take a lot more risk with the remainder of the portfolio, increasing expected returns.

6) It Isn’t The End Of The World If Your Portfolio Dies Before You Do

Too many advocates for super-conservative withdrawal rates treat running out of money as a catastrophic outcome.  Although everyone is in a different situation, it probably isn’t catastrophic for you.  First, aside from the obvious solution of monitoring your portfolio and annuitizing more of it if the dreaded poor early returns materialize, there are other solutions available besides eating Alpo.

First, most retirees own their home.  In fact, most Americans have far more wealth in their home than their retirement accounts.  This home equity can be accessed and spent in retirement by purchasing either a reverse mortgage, or if you’d prefer to avoid the fees, making one yourself by moving out, selling the home, and annuitizing the proceeds.

Second, the retirement plan for centuries has been to go live with your kids.  Most readers of this blog are also teaching their children how to work hard, get good jobs, save money, and invest it wisely.  If you treat them well, it seems unlikely that they will abandon you in your old age.

Last, even if you end up in a nursing home completely destitute with some time still on the clock, Medicaid will step in and pay for it.  Millions of Americans retire on Social Security and a 5 figure portfolio and I don’t see very many of them living in cardboard boxes eating Alpo.

3% might be the new 4%, but that’s no reason to impoverish yourself unnecessarily in retirement, or to work longer than you wish to.  Make reasonable withdrawals, monitor your portfolio performance, guarantee some of your income, and treat your children well instead.



Six Reasons I Don’t Care That 3% Is The New 4% — 42 Comments

  1. Great article.

    I got stuck on this though: “I had the pleasure of meeting recently at a Bogleheads meeting”

    I see two scenarios

    1) A bunch of middle aged white dudes with “Captain Picard” like hair style getting really excited to go to financial motivation speeches with break out classes covering back door Roth IRA’s
    2) A much more somber AA like experience… “Hi, I’m WCI. I’ve poorly financed in the past. This is my first BH meeting”

    So which is it?

    • It’s definitely 1. :) I’ve been to two of them and enjoyed them both. But if you think CME conferences are Nerdfests, you ain’t seen nothing yet. :) I’ll have a write-up on it coming up soon. There’s definitely a certain type of people who would enjoy something like that.

  2. Thanks for the well written post. It is great advice for those that are heavily invested in paper assets. For those of us who invest in real estate, we tend to look at retirement differently. We look to develop cash-flow streams of income that exceed our earned income. At that point we can live off the monthly cash-flow while never having to touch our net worth. This allows us to leave a legacy for our children who receive the benefit on a stepped up basis.

    • That approach certainly works, but you’re likely to spend far less in retirement by using an income approach than by using a total return approach. That’s like buying stocks and bonds but only spending the dividends. You’re likely to leave behind a nest egg you might have preferred to spend yourself on earlier retirement, on a higher standard of living in retirement, or on gifts to charity or heirs during your lifetime.

      • That’s not actually true, because over almost any 20 year period in the United States real estate has doubled in nominal price. We as real estate investors add new property to our portfolios regularly thereby increasing our cash flows (through inflation and additional units). In doing this we do not have to guess when our date of death is, so we never worry about running out of money and trying to divine how much of our portfolio to sacrifice every month and year.

        We can also refinance our property and pull out the $$ tax free if we every needed a large infusion of capital, so we still own the cash flowing asset and got tax free money (sweet!).

        This is perfect tax planning for future generations or to leave a legacy for charity, where as paper assets (unless they have a very healthy dividend payout ratio) are always subject to market whim to determine their value.

        • Because over almost any 20 year period stocks have MORE than doubled in nominal price. In fact, on average, they’ve increased by about 6 times over 20 years.

          Real estate is also subject to market whim to determine its value.

          Real estate can also be tricky in estate planning and require significant liquidity depending on your estate planning needs.

          You simply cannot spend as much money when you’re only spending income than if you spend both income and principle. A real estate investor who never sells a property by definition will not spend as much in retirement as he could.

          I’m not anti real estate by any means. I think it’s a great asset class and certainly a reasonable way to invest. But it’s not magic by any means and certainly requires more time, effort, and expertise than simply buying and holding a handful of index funds.

          • Let me answer a few things that people tend to miss about real estate:

            “Because over almost any 20 year period stocks have MORE than doubled in nominal price. In fact, on average, they’ve increased by about 6 times over 20 years.” –

            Real estate is leveragable, so the increase in nominal price of the asset is alot higher than the amount you have invested in the property. Simple math here – 100K asset that I put 10K down for in 20 years will be worth at least 200k on my initial 10K, while a tenant paid down the debt and the taxes and insurance, and I received depreciation tax breaks while writing off those same taxes and insurance and expenses, and received positive cash flow that averaged around a 40% rate of return as well (not going to count rental rate inflation to make the math clean assume $400 a month net cash flow). So the total return numbers are well north of what stocks return.

            “Real estate is also subject to market whim to determine its value.” –

            This is a fallacy, the market determines the nominal price in the short term, value is determined by the cash flow that the asset produces, this is why hedge funds (although they are getting their clocked cleaned right now) are buying up single family homes in droves. The value cannot be less than the input costs to build it, the price can, not the value. And if you purchase for cash flow like we do, we don’t care about the nominal price, we care about the cash yield that our investment basis determines. When cash flows falter, then you know when it is time to sell. (which usually happens when there is a bubble because renters become homeowners and that is when we can actually get our highest nominal prices because everyone is now trying to buy).

            “Real estate can also be tricky in estate planning and require significant liquidity depending on your estate planning needs.”

            If you hold your property in an LLC or other such structure like a trust, it makes estate planning super easy. In the case of an LLC, you can always add heirs as members over time, once you pass on, they will get the asset at their new stepped up tax basis. Also because real estate is an annuity stream, it will provide cash flow and tax benefits without having to pay high fees or disappear upon death like many annuities being sold to high income earners.

            “You simply cannot spend as much money when you’re only spending income than if you spend both income and principle. A real estate investor who never sells a property by definition will not spend as much in retirement as he could.”

            – This is just a philosophical difference here, I believe the goose and golden egg theory of investing, you just keep collecting geese from an early age and never sell. You can do what is called a 1031 exchange where you roll your capital gains into a larger property tax free thereby increasing your cash flows, that way the equity is never touched, or if you want an immediate infusion of capital to spend, you just refinance. I plan on leaving a legacy to charity, so my plan is to not try and figure out when I am going to die and then attempt to manage with a crystal ball how much I can spend yearly so as to not run out of money, it just seems crazy to me. I have more in passive income at age 37 then my colleagues who are 20 years my senior, they will be scrambling to find yield on their “nest egg” for retirement because of the federal reserve policies.

            • Yes, in the short term the market is a voting machine, both in stocks and in real estate. In the long-term, it is a weighing machine, both in stocks and real estate. You seem to be arguing that this only applies to real estate, and not businesses. I am arguing it applies to both.

              Real estate isn’t an annuity stream. It might be like an annuity stream in that both provide income, but real estate has no guarantees. There is no guarantee there will be a tenant there paying rent.

              I agree that some investors don’t like to spend principal. That is a philosophical difference and I can respect a decision to do that. You certainly will never run out of money if you never spend principal. What I am arguing is that assuming investments grow at the same rate, an investor who dies with $0 can spend more than one who dies with some number higher than $0. If you’re willing to spend principal, you can spend more in retirement. That’s not a philosophical difference, that’s just math. Real estate and stocks are not fundamentally different in this respect. Rent are similar to dividends. If you just live on stock dividends, you will also never run out of money, but you’ll die with lots of money. If that’s what you want to do, that’s fine. You can do it with stocks, and you can do it with real estate. It is a little easier to do with real estate, since the yield portion of the total return is higher. If the total return is 10% on both assets, and the yield of the stocks is 2% and the yield of the real estate is 8%, then if you’re only spending the income in retirement, you’ll have more to spend as a real estate investor.

          • I appreciate the fact that you are not anti-real estate. But to argue that real estate and paper assets over the long term are equivalent in terms of investment value is just not true dollar for dollar or in terms of total returns.

            Financial wealth is measured in time, not money. The amount of time a person can maintain their current and future standard of living and not touch the equity/principle. Spending principle is consumption, not investment.

            “What I am arguing is that assuming investments grow at the same rate, an investor who dies with $0 can spend more than one who dies with some number higher than $0.”

            For the average investor investments in real estate grow at a much faster rate than paper assets, and that is because the total returns (equity build up, cash flow, tax advantages) return more invest-able dollars to the holder than paper assets. Unless you are in Mortgage REITS (annaly, agnc etc..) paper assets dividends cannot touch the leveraged cash returns of real estate. Then couple that with tax free equity transfers to larger property with higher cash flows, there is no way paper assets can compete with that because there is not a mechanism to roll capital gains tax free into a leveraged vehicle with higher values and higher cash flows in the paper asset universe. It all has to be put in by the investor without leverage (I do not count margin borrowing as leverage).

            Yes, it takes acquiring knowledge in an unfamiliar arena to learn to do this or learn to evaluate investment firms who know how to do this , but no where near the knowledge that it took to acquire our medical degrees. This stuff is not rocket science, it is counter intuitive though.

            • I understand you believe that average real estate returns will be higher than average stock market (paper asset) returns. I’m not convinced that is the case, but there is plenty of room there for a difference of opinion. I’m in an argument on another thread with a whole life insurance agent who is arguing that whole life insurance has higher returns than real estate. I see no room there for a difference of opinion.

              You may measure financial wealth any way you please. But your opinion does not define a term. If someone else would rather measure financial wealth as “net worth” I see that as perfectly valid. I agree that spending principal is consumption, not investment. Spending income is also consumption, not investment.

              I really don’t think we have much of a disagreement about anything substantial here other than you invest a larger portion of your portfolio in real estate than I do because you believe returns on real estate will be higher than I do. That’s perfectly reasonable. You might be wrong, I might be wrong, but it’s unlikely that either of us will be wrong enough that it will affect us financially.

          • I do not think the returns are going to be higher, I know for a fact that they are. I have invested in both, one wins hands down.

            I do not like to count net worth as wealth, I like to count how much your net worth generates in income as a true measure of wealth. But using your definition, real estate allowed me to become a net worth millionaire as a primary care physician making no where near 500K a year practicing medicine and still having over 80K in medical school loans. And I have only been out of residency 6 years.

            So from a pure return basis, and cash flow basis, had I put the same amount of money that I invested in real estate in any index fund you wanted to choose, I would not be a net worth millionaire at my age.

            • That’s wonderful. Congratulations. Did you subtract out the value of your time? Working two jobs is also a great way to become wealthy. :) Why don’t you send me a guest post showing how you did it, I think readers would enjoy it.

          • Again, I am a passive investor I don’t spend 80 hours working 2 jobs. I spend at most 45 hours a week between investing and medicine, I made a conscious choice to limit my medicine hours to 28 hours a week because I understand that it is very difficult to build wealth being self employed or employed by an entity unless you work on Wall Street.

            If you give me the outline of what you would like a guest post to convey to your readers and a word limit I would be more than happy to explain how we make our investment decisions.

            • I understand you’re passive and aren’t spending a ton of time on it. But you are spending much more time than you’d have to spend on maintaining a portfolio of index funds. That time is valuable. It could be used instead to run evening hours at your clinic or for recreation. Any calculation of your rate of return needs to incorporate it.

          • I am not sure how you are trying to go about valuing my time.

            I am already working less than the average American and far less than the average physician, so in reference to people who would be reading this site
            I already have more free time then most (my wife gets on me about this, idle hands they say)

            If I were working 60 hour weeks, then I might understand your argument that I am displacing leisure time to pursue this, but I have set my whole life up to acquire as much time as possible.

            You see, time is the only asset that we cannot buy, with time we can build wealth, health or whatever else we choose. So I use my time, to buy my time, so that I can increase my income and wealth. So working extra hours at night defeats the purpose. The point is to increase one’s earning (cash flow) without a concomitant increase in ones labor.

            So for kick and giggles lets take my extra 5 hours a month (anything over 40 hours a week we will assume somehow needs to be “valued), I could moonlight at around $100/hr as an Internist somewhere.

            (I am employed in the practice where I work, so me working extra evening hours will not increase my salary, that is exactly why I chose to be employed and not “own” a practice, the very time issue we are speaking of)

            So that is $500 a month, or $6000 a year that I am “missing” out on by running a real estate portfolio.

            The funny thing is, I average between $400-500 a month in most of my single family homes. So it is actually a wash except for that, they are additive and for that same amount of “extra” time I can add more to the portfolio. (again we are not counting the capital gains captured or any of the other benefits).

            I would love to write a guest post, please send me your parameters.

            • I disagree that time isn’t an asset we can buy. Time absolutely can be bought for many physicians. My income is directly proportionate to the time I spend at work. If I were to work two extra shifts a month, after a year I could take the money from that and buy a $250K house with 20% down which would then provide income. Time = money and money = time. If you’re willing to live on less money, you can have more time. For many doctors, they’re better off working a little more or improving the efficiency of their practice and investing their money completely passively rather than working a little less in the practice and investing in real estate, which is generally part active and part passive. All can be good options.

              Here are the guest post guidelines:

          • You miss my philosophical point, you cannot buy more hours in a day, all humans get is 24, that is what I was getting at.

            Of course I believe what you said, that is how I have designed my life.
            To use my time as I see fit, not others, I cannot do that investing in index funds.

            As for passive real estate investing vs active real estate investing, I am all for it!

            I set up my Investment Firm to allow my physician colleagues to invest passively with us, I went to business school while in medical school for healthcare management and entrepreneurship and I saw the writing on the wall for what was going to happen in healthcare (single payer, bundled payments) and I knew that my specialist colleagues were going to get the knife big time.

            And since I know where these guys live and their spending habits, I knew they would need to turn their investment portfolio into an income stream, to maintain the standard of living they were accustomed to.

            So even though we are having our friendly discussion in the abstract, I live this everyday when I am analyzing whether one of our Funds is suitable for my highly paid colleagues. You would be shocked (maybe not) by how many of these guys have spent most of what they have made, and will have a hard time retiring.

            So my passion is singing the gospel of passive income, because I know that when you know how to create it, and can do it for others, you never have to worry about living a constricted or limited life financially, and you never fear the future. You can understand and control your own financial destiny because you understand the underlying reasons why you are making a profit and you are receiving that profit on a monthly or quarterly basis.

            • Of course you can’t get more than 24 hours in a day and you really can’t add years to your life in any meaningful way. I didn’t think that was a point that needed to be argued.

              I’m not sure why you think I’d be surprised by the financial habits of physicians. I assure you I am not given that 35K of them come by my website each month, often leaving comments and sending emails. Just last night I was chatting with a colleague who decided to get out of the military after 13 years, figuring he would save enough money with his higher civilian salary to make up for that lost military pension he would have gotten at 20 years. Well, he didn’t save anything, then lost half of it in a divorce. If he had stayed, he would now be at 20 years and have that pension. Instead, he’s starting over.

              The disagreement I have with you is that you somehow (and perhaps it is your financial conflict of interest keeping you from seeing this) don’t see that owning stocks also allows for passive income and financial freedom. Stocks (invested in through index funds) also provide a completely passive income stream on a monthly or quarterly basis, just like real estate. You can argue that your returns in real estate are higher than your returns on stocks, and that’s fine. Thus far in my life my returns on stocks have been higher than my returns on real estate, but I can easily see how that might be reversed, especially for a skillful or lucky real estate investor. You can invest in both in a passive manner, although as a general rule, most real estate investors are not completely passive. You note that you spend 5 hours a month on real estate when not acquiring property. Most of us have bought a home, and are quite familiar with the time requirements for buying a property. Those are requirements that a portfolio of index funds doesn’t have. I would also argue that real estate investing requires more education and expertise to do well than stock investing. Let’s use you for an example. You went to business school, learned about health care management, learned about entrepreneurship, and set up your own investment firm. That’s quite different from what a typical physician is looking to do with his investments. Rather than “looking at the writing on the wall” the typical doctor actually wants to practice medicine and also live the good life. He’s not looking to get out of medicine at the earliest opportunity by replacing his income stream at age 40. But if he is, the easiest way to do so is to live well below his means and funnel his money into investments that can support his lifestyle. Stocks and real estate are great options for those investments. One provides more income and less capital gains, the other provides for more capital gains and less income. But money doesn’t care where it came from. Capital gains spend just as easily as income.

          • I agree that most physician don’t want to do what I did.

            In all honesty, I don’t have a conflict of interest in this because I would make WAY more money if I decided to invest clients money in paper assets, because I would just charge a % of assets under management and whether I made money or lost money for my clients, I would still get paid. Also it is way easier to obtain clients if you invest in paper assets than real estate.

            Also, I just have always had a philosophical problem with management fees that were tied to the amount of money under management. So we invest our own money alongside our clients and only make money if everyone makes money.

            The benefit of having gone to business school is that I have looked at all of the ways that wealth is created or made in a capitalist economy, and by far the biggest store and generator of wealth is real estate. The next is taking a company public (wealth for the original owners)that is why I would like to be a stock seller not buyer.

            But if I were to invest and manage paper assets, it would be under the same premise of allocating to value (cash flows). I would sell put options on category leading companies that have strong cash flows, low debt levels and increasing dividends or share buy backs over time. The put options would generate immediate income and we would set the strike price at no more than 10x forward earnings, so just in case we are put the stock (have to own it) we are not paying too much for it. (same basic process in real estate). Once we owned the stock I would then sell calls against it at what I considered to be an expensive (over bought) stock price so that we can again continue to generate income. If the stock is a called away (sold) it is because the valuation has gotten too rich for my liking and we would have still made money on the difference between what we bought it for and the price at which it was called away.

            But doing what I just outlined is VERY time consuming and when the market moves against you violently you may not be able to get out in time, so that is why I do not do it for my own or clients money. I like practicing medicine, I do not want another job watching the market all the time.

            As for investing in index funds, the dividend yield on the S&P 500 is around 2% a year. The amount of money that you would need to save to generate even a 200K a year income is 10 million dollars (and that is pre-tax). I know you talk about spending principle as needed as well, but then that decreases the amount that can compound over time, so I just don’t see the math as to how even the average physician can become financially free at an early age doing it that way. The math just doesn’t work.

            The only thing that I hope that you take into account is that just because you did not have the success in real estate that I am talking about, that it does not work. And I say this with all sincerity, people think that you can just jump out there and buy property and find a tenant, and it all works out, it is not like that. But learning the correct way to do it, is not hard either, I actually think it is MUCH harder to make money in paper assets than it is in real estate, and I have been trained in both.

            I also want to make the point that real estate allows you to expand your means, not live below them, to reach the financial freedom point where you can make decisions about how and when you are going to continue working.

            So maybe that is the post that I will write for you, how to evaluate single family homes for investment purposes to show your readers how to evaluate the market, create a team, (the key to it being passive and can be done relatively easily) and understand the value metrics that makes one property better than another.

  3. Good article. I don’t think you are necessarily disagreeing with Larry. You are really just saying your actual situation might allow you more flexibility thus you don’t need to more to 3% withdrawals (for example if you can reduce spending in down markets or tap equity in your house). I think both are accurate (the situation as Larry presented and the possibilities you presented). A couple of items you might want to clarify for beginning readers. The annuity percentage is a payout – not a rate of return. Using the estimates from Income Solutions it looked like a 60 year old male could only get a payout of 5.194%. With an average life expectancy of 22.5 years that’s a compound return to life expectancy of 1.14%. I know this the popular thing to do these days, but I still think I would rather buy a bond ladder generating the income. I think when they run monte carlo simulations it isn’t accurate to assume the insurance company will always be there with no volatility.

    • You’re correct that it is a payout, not a return. The actual return depends on when you die. Live long and prosper.

      I like for estimating immediate annuity payouts. That’s where my numbers come from. I see 6.41% for a 60 year old male. So if you’re getting $534 a month, then if you die at 70, you get a return of -8% per year. If you die at 80, you get a return of 3% per year. At your life expectancy of 83, it’s 3.7%. If you die at 90, you get a return of 5% per year. If you die at 100, you get a return of 6% a year. Yea, the returns aren’t great, but guarantees aren’t free.

      I think just about everyone ought to consider a SPIA for some portion of their assets. There’s no reason you can’t do a bond ladder and a SPIA at the same time, or use a ladder until you hit a certain age and then annuitize that money etc. They’re both useful tools.

      • Thanks for the new annuity rate link. That one is quicker and easier than what I’ve been using. I knew that you know that difference in payout rate, just wanted to make sure readers understood:)
        I can’t believe you will annuitize someday. Like you would let someone else have all the fun of managing your portfolio!

        • When I talk about annuitizing, I’m talking about something like 10-20% at 65, 10-20% at 70 and another 10-20% at 75. I doubt I’d ever have more than half annuitized. Keep in mind that at a certain point, I may not have the capacity to manage a portfolio. Or I could be dead. My wife certainly isn’t going to be managing a 12 asset class portfolio at 75 I assure you.

      • I’ve heard of a CD ladder but not a bond ladder. All my bonds are in mutual funds so I am unsure of how one “ladders” bonds.

  4. I cannot help but wonder what the motivation would be for financial advisors who generally make their money as a PERCENTAGE of your assets coming up with new forumulas suggesting that no matter what– you don’t have enough assets. MMM?

  5. Article seems shortsighted based upon the recent trend towards low interest rates.

    What if I get a little good fortune and build up my assets now during a low interest environment, then when i’m 50 we’re back to the 80’s interest rates and I can get like 8% on a CD?

    Recency bias dictates far too many things in life.. almost sounds like those commercials on CNBC Radio on XM “Buy and hold is dead! The market has changed!”

    • while i agree that recency bias is likely in effect, im not sure its to the extent of those commercials you refer to. The rule was sort of put in place to cover almost all scenarios and at the time the current scenario was considered unlikely. Im not sure i can still feel that way but i do recognize recency bias in my thought process.

  6. You can add one more reason. You will very likely be spending less (in real terms) 20 years in than the year you retired. Almost all the SWR research assumes constant spending. They have to assume some path and that is the simple default. There is evidence that folks voluntarily cut back on spending late in life.

    • (Sorry that it’s a comment on an old post). But you are right spending peaks at ages 45-54 at $62k the by 75 drops to $33k. So you’d spend a lot more in your active years during retirement. WCI/Jim, what do you think 95% rule advocated here:

      • I like FireCalc. I’m not quite sure what you mean by the 95% rule. Are you talking about needing to replace 95% of pre-retirement income or making sure the chance of your portfolio surviving 30 years is at least 95%?

        • It’s the 4%/95% rule. Basically, unlike the usual SWR you take 4% off your portfolio yearly. You will obviously never run out of money and to temper spending cuts if your protfolio drops you simply withdraw 95% of last years amount.

          So you are generally able to sustaining your spending amount, not run out of money, and when your portfolio is doing well take even more money out (which I suspect people do already).

          • Interesting 95% aspect. Haven’t heard that.

            As far as your 4% of portfolio (rather than original portfolio + inflation index as used in the Trinity study) you could use 90% too and never run out of money! Of course, your withdrawals would drop dramatically! If you’re going to use current portfolio value, I bet you could get away with a higher number, like 5%.

  7. The probability of govt confiscation of retirement funds in the next 10 years is likely much higher than 20%. We may not have to have a 30 year plan.

      • He’s does have a point, it is the Argentinian model,

        when Argentina had one of their many currency collapses (drives up borrowing rates) the government nationalized all of the retirement accounts and stated that investors had to buy government bonds.

        That is the reason why some people speculate they lifted the income caps on Roth IRA conversions, much easier to get the money when you know exactly where a large percentage of it is.

        This is the reason why, although we do not think they will have a way of making real estate investors liquidate their holdings to participate in such a scheme, we have been diversifying our and our investor’s real estate holdings abroad, specifically in Belize for just this eventuality.

          • I am in the process of rebalancing our real estate holdings as we speak. We are developing a resort from the ground up on Ambergris Caye, so cash flows are not expected until Q2 of 2014.

            As we get a record of those cash flows, I will very likely liquidate some of my holdings here in Houston and roll those capital gains to Belize.

            Ultimately, the premise never changes, allocate to value (cash flows) in hard assets and then diversify WITHIN this asset class across product types and geographic regions.

  8. I read an interesting quote recently, that explains money and political opinion, it goes something like; ‘when your deepest held beliefs are challenged by contradictory evidence/facts, your beliefs get deeper’

    I want to keep that in mind, in a discussion like this.

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