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Is $1 Million Enough to Cover the Average American's Expenses in Retirement?
Just getting ready to walk out the door and go hiking and you start another one. I've always thought you need to be debt free (no mortgage, no rent, etc.) For a single retiree over age 65, $2,000,000 should do the trick and $3,000,000 for a couple. That's assuming your only income is Social Security and you don't live in some ultra expensive region of the country. It's also based on never making another penny in the market and conversely never losing another penny. Albeit I would hope your account can still compound, even if ever so slightly over those retirement years. Not a popular concept here, but you can control your losses in the market. On the other hand, I know many retirees who don't have even $100,000 but because of generous pensions and SS are living the good life. Dex, you are the master of interesting threads where there is never a right or wrong answer. Check in later this evening.
Just getting ready to walk out the door and go hiking and you start another one. I've always thought you need to be debt free (no mortgage, no rent, etc.) For a single retiree over age 65, $2,000,000 should do the trick and $3,000,000 for a couple. That's assuming your only income is Social Security and you don't live in some ultra expensive region of the country.
Just a few quick thoughts and then I will return to edit later.
Housing - might be fairly accurate if utilities are included. Transportation - a quick and dirty calculation at $2.50/gallon of regular buys one about 2700 gallons. In seven years of commuting to work with a Silverado pickup I've used 5100 gallons. The articles estimate seems high but may include airfare etc. that I am not accounting for. Food - $102/week for groceries is more than twice what I spend on average. I'm not sure if dining out is included here or in the Entertainment category. Apparel - I don't spend that much in 10 years. Sandals and shorts aren't that expensive.
That healthcare number seemed low to me. That could be premiums only and is not including out of pocket expenses including the deductible.
Edit: Additionally, the food number may not be counting eating out. Entertainment is a broad category but in this case I don't think eating out is in that number. I agree with Maurice in that $100 a week is a fair number. It doesn't take much anymore to ring that up in a supermarket.
Maurice - You might be right about vehicle payments. Also maybe repairs and maintenance.
I eat a pretty normal, balanced diet. A little bit of everything basically except cooked mushrooms or liver. Breakfast - eggs & bacon or oatmeal,fruit and/or yogurt Lunch - meat or tuna sandwich or soup, fruit, raw veggies, cheese Dinner - meat or fish, noodles, rice or potatoes, salad, fruit and veggies.
Just your average fare. I buy what's in season and try to generally shop the sales. I clip and use coupons.
Healthcare - Medicare is deducted from my SS. As a disabled Vietnam vet I have access to the VA hospital for most of my medical care but I do make co-payments.
The table shows $42,557 for a single person. If you are debt free that housing figure would be drastically lower. But also, you have to buy a new vehicle (or newer used one if you are really frugal) every 8 years or so and not sure that is computed anywhere in the table. The healthcare figure also seems a bit higher than medicare plus a 100% supplemental policy. Most of the debt free singles in my area that are retired and over age 65 get by on an average of $36,000 annually (some a tad higher/lower) If they only receive SS and get the average there ($1294 monthly) that means they have out of pocket expenses of around $20,500 annually. So if they have an investment nest egg of $2,000,000 they can live off their principal only if needed without the need of that Monte Carlo mumbo jumbo. If anything they better begin ramping up their retirement spending ala travel, a summer vacation rental, and the like unless they want to leave a lot to their heirs.
Junkster has solved the aging boomer problem for America. Only the top 10% of boomers without generous pensions can retire. Oops, now who will step up to the plate and solve the aging boomer jobs problem?
You ask a very open-ended question that is poorly timed if it specifically applies to your situation. From your earlier postings, I recall that you jumped into the retirement stream a few years ago. If so, you are probably an unhappy camper these days that prompted the question. Fortunately, reassessments, recoveries, and reversals are often possible.
A million dollars is a nice nest-egg. But, like in most instances, it depends. It depends very much on the particulars of the situation such as age, wealth, health, partner relationships, preferences, location, and a host of other tangibles and intangibles.
A single answer isn’t appropriate in this forum even for a specific person since the relevant circumstances are dynamic and in constant flux. It is especially not appropriate from the MFO membership given our incomplete and imperfect understanding of your circumstances.
But we can offer generic guidelines and some useful references that will permit candidate retirees to make more informed decisions.
A limitless array of planning tools and aids are easily accessible for anyone willing to do the work. I retired over two decades ago, and even in those prehistoric days, the literature was overwhelming. I selectively used it. Today, given the Internet capabilities, it is a still easier task, but requires some careful screening. All advice is not equal.
I purchased a retirement planning tool generated by an outfit called Educational Technologies, Inc. It included tapes and written documentation. Major sections in it incorporated psychological adjustment, financial planning, investment, heath issues, estate planning, and financial benefit units. I supplemented the financial planning section with independent Monte Carlo simulations.
The retirement decision is multi-dimensional. It is complex with many interacting, dynamic parts. Given that complexity, I doubt that well-meaning MFOers can provide definitive answers beyond some incomplete hints and references. As Reagan said: “Trust, but verify”.
A million dollars might service you very comfortably, but might be totally inadequate for me. In the end, it depends. In the end, the candidate retiree must do the heavy lifting himself. Do the necessary homework. There are no magic wands to simplify the task that MFOers can honestly offer.
I remain consistent in my response to similar questions that you asked on earlier submittals. Explore the usefulness of Monte Carlo simulations. Ignore uniformed judgments by individuals who never used the tool, or even read the literature on the subject.
Experience is a great teacher, but is a time consuming and costly educator. Monte Carlo simulators provide a shortcut learning tool that permits its users to examine a plethora of what-if scenarios tailored to your specific situation. I’ve identified many Internet accessible Monte Carlo codes on earlier interchanges. You can only fully trust your own work.
>> Ignore uniformed judgments by individuals who never used the tool, or even read the literature on the subject.<<
Because I am a bit slow and IQ challenged, please explain to me why a single individual over age 65, debt free, and in need of $20,000 to 25,000 annually (or even $30,000) in out of pocket expenses (after SS and pensions) and with a $2,000,000+ nest egg needs to learn anything about Monte Carlo simulations?? I have known a few lucky investors and traders in this situation who over the years have been in the right place at the right time. They seemed to have done quite well being blissfully ignorant of your beloved mumbo jumbo Monte Carlo and other assorted worthless statistics.
Edit: From reading many of your recent posts and vitriolic exchanges with other members, it appears you enjoy being a troll.
Thank you for reading my post. It’s nice to know that I engage, and perhaps sometimes enrage, your interests. Disagreements and disparate opinions among investors is commonplace.
We agree that a Two Million Dollar Man need not access a Monte Carlo tool if he spends at the rates you specified.
But your Two Million Dollar Man is likely an artificial, unrealistic strawman who mostly exists in your fertile imagination. There are not many such individuals in the US.
According to a 2012 CNN Money report, using data from an IRS 2007 survey, about 1.8 million Americans had wealth in excess of the 2 million dollar threshold. I know you stated that you don’t read my references, but, nevertheless, here is the Link:
The number of citizens that fit your strawman description is miniscule. It is certainly not mandatory that such a unique character consult any Monte Carlo simulators.
But it still might be a worthwhile project for him. Given his wealthy status, he might want to explore how much he could expand his subsistence lifestyle without compromising his portfolio survival likelihoods. A few Monte Carlo runs would yield some useful guidelines.
Your postulated Two Million Dollar Man is surely atypical for the bulk of MFO visitors. The median accumulated wealth for US citizens is well under one million dollars. Given that reality, a retirement decision is not easy for most Americans.
Uncertainties cause fear, and fear causes decision paralysis. Monte Carlo analyses can relieve, not totally cure, the uncertainty and the subsequent paralysis. It’s only a tool, but it’s a nice addition to an investor’s toolbox.
Best Wishes.
EDIT in Reply to Junkster's edit: Your internet troll charges directed at me are speculative and groundless. On both FundAlarm and on MFO, I have been a persistent advocate for a deeper understanding of statistics, for Monte Carlo analyses, and for relevant references. That may not make you happy, but that is my honest purpose.
If by your standards that qualifies me as a troll, so be it. I stand by my positions on these matters, and I am satisfied that MFO participants will fairly judge the merits and shortcomings of them.
You ask a very open-ended question that is poorly timed if it specifically applies to your situation. From your earlier postings, I recall that you jumped into the retirement stream a few years ago. If so, you are probably an unhappy camper these days that prompted the question. Fortunately, reassessments, recoveries, and reversals are often possible.
Good luck on your reassessment project.
Best Wishes.
Too many assumptions to go into there. Monte Carlo and others are like many rule of thumb (e.g. 4% rule) estimators - good for generalities but not good for the specific situations. Generally, a bottoms up approach is better i.e. budget, net worth, pension, SS etc.
This is my 2015 budget own home, no debt, single person
Basic Living House 2,117 RE Tax 2,556 HOA 489 Electric 928 Insurance 300 Misc Purchases 133 Mail Box 6,522 Subtotal House Car 138 AAA 744 Routine Mtc. 1,164 Insurance 82 Registration 1,800 Gas 3,929 Subtotal Car Personal Expenses 327 Income Taxes 1,200 Cash 360 Medical 340 Cell Phone 3,300 Food 600 Wine 59 Misc 396 Internet Access 300 Dining Out/Entertainment 4,029 Health Ins. 300 Clothes - Driving Lic 11,211 Subtotal Personal Expenses 21,661 Total Basic Living
Incremental Living - 1 91 Travel Trailer Reg 492 Storage Good Sam 583
Incremental Living - 2 6,256 Travel/Education/Etc Misc Hobbies 6,256 6,839 Total Discretionary
28,500 Total Basic + Incremental
Let's assume I don't have any pension or SS, and no inflation for now. What do I need?
$114,000 in near cash for 4 years of expenses - this is ride out market (bond & stock downturns. $407,143 earning 7% to get to 28,500/year expenses $100,000 to 150,000 contingency money, if wanted, earning ??? $621,143 to 671,143 total excluding house
Does a person need all that money? Maybe not if the person will collect SS. The closer they are to collecting SS would affect that - e.g. if they are within 2 years they could have less money in near cash.
This is not meant to be a perfect example.
Now let's use Junkster's info on SS $1294 monthly - 15,528/yr
$28,500 Total Basic + Incremental -$15,528 SS $12,972 to be funded
$51,888 in near cash for 4 years of expenses - this is ride out market (bond & stock downturns. $185,143 earning 7% to get to 12,972/year expenses to be funded $100,000 to 150,000 contingency money, if wanted, earning ??? $337,031 to 357,031 total excluding house
Both of these examples are better than monte carlo and top down rule of thumb.
There are two reasons I can think of that the top down method is the most discussed:
1. Advisors use them to scare people into buying their services
2. Budgeting is boring and most don't people don't have one nor do most know where they spend their money.
The big unanswerable Q for middle class prospective retirement is: will you or your spouse require LTC -- particularly "Memory Care" -- current name for dementia care. If so, it can be devastating to finances, and will become more so if current trends continue. In the past 7-8 years I have seen this situation play out for 3 family members, all different situations in terms of savings ("wealth"), pensions, and family support. I just recently spent the better part of a year accompanying a relative through an endless succession of visits to living facilities with provisions for "memory care", as well as conferences with a nationally known eldercare lawyer. I learned a great deal about costs, about how facilities determine charges and whether the applicant has "ability to pay", about LTC insurance policies and rates (which BTW will certainly go up substantially in the very near future -- plus a substantial differential for females -ahem). We also observed the interesting fact that deluxe retirement facilities are not only being bought up by corporate entities, but many new ones are under construction by these corporations everywhere as well. Since the supply of those with unlimited resources is finite and the for-profits don't take Medicaid when you run out, I assume that the intended clientile is uppermiddle-to-lower-upper, and if and when you are picked clean, you end up moving to wherever they take Medicaid.
This is an extremely complicated subject, and I am no professional observer, merely one who has been a bystander to the struggles of others, and I can only point out here one of the issues which sooner or later many of us will have to face. None of us knows the future, but this possibility is not one that many of us think about when we plan, and the possibilities for financial catastrophy, particularly for a surviving spouse, do exist.
In summary, my point is that there are possibilities that may arise in our retirement that we do not wish to contemplate; that we should consider, and that we simply cannot guarantee, but should be aware of.
To those who pursue this post to the closing paragraph -- I wish you well, hope that you do not ever have to contemplate such an issue in your own lives, but that you maintain awareness, not only for yourselves, but for others (aka, our society as a whole), and wish you well....
Some thoughts. I'd be a little worried about a swoon that lasts longer than 4 years and how it would put pressure on your near cash invested assets. A lost decade? Sound possible?
Would it be worth breaking out your invested reserves into smaller pots of money and explore different ways of securing yearly income according to risk (from risk-less to highly risky). How would you expose your reserves to risk-less investments on up and how much would each pot require?
Also, what could you do with your non-liquid assets (house, condo, trailer, etc.) to help your income. How could you make these resources work for you? For example, I own a home that has the potential to add on an in-law apartment. I could rent the main house or the in-law space. This would reduce housing costs without dedicating any additional resources.
Finally, isn't wine a fruit and therefore a food cost?
Some thoughts. I'd be a little worried about a swoon that lasts longer than 4 years and how it would put pressure on your near cash invested assets. A lost decade? Sound possible?
In the example, I didn't give an asset allocation. Look at the examples again, I was conservative e.g. I didn't give any income towards the 4 year near cash or the contingency money. But, a bond, dividend focused portfolio should not be that stressed. So, even in your 10 year example, you may have to cut back on expenses or dip into your principle. The key to the example, are the key things to look at in the evaluation process.
Would it be worth breaking out your invested reserves into smaller pots of money and explore different ways of securing yearly income according to risk (from risk-less to highly risky). How would you expose your reserves to risk-less investments on up and how much would each pot require?
I'm not sure what you mean.
Also, what could you do with your non-liquid assets (house, condo, trailer, etc.) to help your income. How could you make these resources work for you? For example, I own a home that has the potential to add on an in-law apartment. I could rent the main house or the in-law space. This would reduce housing costs without dedicating any additional resources.
Definately, I could rent out my house, but I don't have the need.
Finally, isn't wine a fruit and therefore a food cost?
It appears that you have made a decision that is comfortable for your circumstances. Good!
I wish you well and hope that your plan is successful. You were very wise to include safety factors in your wealth component breakout with the inclusion of “near cash” and “contingency” funding.
I surely do not want to rain on your parade, but I did a few exploratory Monte Carlo simulations for a 30-year retirement period to test the robustness of your analysis that included Social Security benefits. Warning red flags went flying.
I did the analyses using your postulated 7% annual return. I examined return standard deviations that ranged between 10% to 18%. Results were disastrous for the 185K investment portfolio by itself. Projected survival rates were at lower mud levels. There is an extremely high probability that you will need to heavily dip into your near cash and contingency components.
Even assuming a $350,000 dollar portfolio earning a 7% annual average return rate, the survival odds never reach an 80% level. That’s a risky route by my compass.
Given the meager market returns in recent years, an assumed 7% annual return rate seems a bit bushytailed. I briefly examined a 6% annual average return; not surprisingly, the estimated survival likelihoods went even further South.
Obviously, you will follow your analytical results and your gut feelings. I proffer only a caution, Take a little time to more fully evaluate your circumstances. You might want to reassess your analysis including portfolio return’s variability as a major element in that rework.
Whatever action you finally implement, I do wish you a relaxed, happy, and trouble-free retirement that permits you to complete any bucket list that inspires you.
"Generally, a bottoms up approach is better i.e. budget, net worth, pension, SS etc."
@Dex: You've done it now. I prescribed something similar many years ago, based upon my personal experience. Since it didn't involve elaborate financial engineering and theories, but rather common sense based upon life experience, our would-be master of the financial universe regarded that as inherently inferior to his vaunted Monte Carlo approach. He is under the misapprehension that I denigrate Monte Carlo, which is in fact inaccurate. Because he is evidently incapable of contemplating that anything he believes may not be factual, it has led to the present acrimonious exchange of opinion. You may be in danger of joining me in that category.
First, the planning and accumulation of data: I designed a worksheet which divided our expenses into various categories, including those which were optional and those which were absolutely required. I didn't buy into the "oh, once you're retired you're expenses will be lower" theme which was so popular at the time.
Once a month we tabulated all of our expenses, and filled out that worksheet. After three or four years we had a pretty good idea of our spending patterns. Assuming (yes, MJG, an assumption!, indicating of course a lesser intellect than you obviously possess) that that pattern was a reasonable model for the future, I then spent many, many hours designing a spreadsheet that could consider our net worth, lack of debt, anticipated incomes from pensions, investments and SS, ongoing expenses, and special expenses.
It allowed the entry and consideration of variables for inflation, investment income according to various asset allocation percentages (cash/bonds/equity), special expenses, and major financial disasters, a la 2008, which could be inserted at any desired year. It allowed for two expense modes: one allowed variable optional expenses each year (travel and so forth), and an alternative mode which held the expenses to the mandatory for one year, but allowed for additional optional expenses the second year, and so forth alternating every other year. Being a pessimist by nature, every facet of the calculations was designed to utilize the least favorable case. For instance, it assumed that cash would generate less interest than actual inflation, that bond income would merely break even, and that equity income would be in a variable input range from 3 to 5% above inflation.
For income source and expenses it generated a series of compounding tables which ran out for forty years, starting at age 60, which would have taken us to 100 years of age. From all of the subsidiary tables (each of which, using compounding calculations, took about one page of the spreadsheet) it generated a master table showing the remaining investment assets year-by-year.
It was prescient, in that 2008 struck at the least favorable possible time in our case: a few years after we retired. Because of the deliberate pessimistic bias of the calculations, we've weathered that disaster, and are still in excellent financial condition.
If you want a solid substantial approach based upon known variables, rather than Monte Carlo assumptions, I can recommend the spreadsheet approach, based upon personal experience.
I surely do not want to rain on your parade, but I did a few exploratory Monte Carlo simulations for a 30-year retirement period to test the robustness of your analysis that included Social Security benefits. Warning red flags went flying.
What investment and amounts did you enter in the simulator?
"Generally, a bottoms up approach is better i.e. budget, net worth, pension, SS etc."
First, the planning and accumulation of data: I designed a worksheet which divided our expenses into various categories, including those which were optional and those which were absolutely required. I didn't buy into the "oh, once you're retired you're expenses will be lower" theme which was so popular at the time.
I did the same thing as my budget shows.
Once a month we tabulated all of our expenses, and filled out that worksheet. After three or four years we had a pretty good idea of our spending patterns. Assuming (yes, MJG, an assumption!, indicating of course a lesser intellect than you obviously possess) that that pattern was a reasonable model for the future, I then spent many, many hours designing a spreadsheet that could consider our net worth, lack of debt, anticipated incomes from pensions, investments and SS, ongoing expenses, and special expenses.
See the link above for the people who retired early on $500K
Basically, we both did the same thing and came to the same conclusion.
Your contribution is a first-rate submittal that nicely details your applied procedure when making your retirement decision. Thank you for your excellent effort.
That procedure includes many elements that are embedded in a Monte Carlo analysis.
The question that was asked many years ago, and even today remains unanswered is: How were the yearly annual return estimates entered into the various equity/fixed income/cash inputs as a function of Spreadsheet time?
You were making many future uncertain estimates. For example, how were return’s variability handled for each year in your hand-executed Spreadsheet? History matters in determining a portfolio’s survival likelihood.
Monte Carlo does this arduous, challenging task with a random number input routine controlled by various statistical formats.
Old Joe, you continue to assert that I claim some superior intellect. In your recent post you said when referring to yourself: “yes, MJG, an assumption!, indicating of course a lesser intellect than you obviously possess”. Sarcasm that doesn’t work.
That’s just plain wrong! I have never claimed and will never claim a superior intellect. Your false charges are Trojan Horses designed to denigrate and to distract. Please address the substance of my posts instead of personal attacks. Your campaign is failing. Seasoned MFOers recognize who is initiating this wasteful activity.
@Dex, The number that jumped out at me was the 4 years of cash for expenses. Isn't the general consensus calling for 18 months to 2 years? 4 years seems high to me and could be a drag on your portfolio.
In general, these types of questions are hard to answer due to all the variables and the unknown future expenses. While some here discredit the Monte Carlo calculators, I find them worthwhile as a confirmation tool. In these important decision making processes, it is better to use all the tools available.
"How were the yearly annual return estimates entered into the various equity/fixed income/cash inputs as a function of Spreadsheet time?"
The answer is given above, if you care to read it. The allocation ratios between cash, bonds, and equity were variable. Each of those components was automatically calculated on a compounding basis via forty year tables. You vary the input ratios and income assumptions for each income class, the tables automatically ran that via compounding for forty years. I again note your snide description of, as you dismissively term it, a "hand-executed Spreadsheet".
With respect to your comment on "initiating this wasteful activity", I suggest that a word count of your continuing rants and diatribes might be illuminating. Mostly Just Gas.
@Dex, The number that jumped out at me was the 4 years of cash for expenses. Isn't the general consensus calling for 18 months to 2 years? 4 years seems high to me and could be a drag on your portfolio.
That depends upon your comfort level - 4 would cover many downturns.
@Dex, The number that jumped out at me was the 4 years of cash for expenses. Isn't the general consensus calling for 18 months to 2 years? 4 years seems high to me and could be a drag on your portfolio.
That depends upon your comfort level - 4 would cover many downturns. Also, not 'cash' near cash - short term investments - you could ladder treasury bonds.
@Dex, Agree on that. Each person develops their own answer. There is not one set figure or style for everyone.
The markets do look vulnerable here. a big downturn in retirement would be crippling. The recovery rate of the investments in the portfolio could easily double that four years into eight years. Of course, we all adapt our portfolios and our spending habits if such a downturn comes. Top Ramen is still inexpensive.
Comments
Housing - might be fairly accurate if utilities are included.
Transportation - a quick and dirty calculation at $2.50/gallon of regular buys one about 2700 gallons. In seven years of commuting to work with a Silverado pickup I've used 5100 gallons. The articles estimate seems high but may include airfare etc. that I am not accounting for.
Food - $102/week for groceries is more than twice what I spend on average. I'm not sure if dining out is included here or in the Entertainment category.
Apparel - I don't spend that much in 10 years. Sandals and shorts aren't that expensive.
>> debt free (no mortgage, no rent, etc.)
not me
>> and $3,000,000 for a couple.
whoa, less that half that
>> That's assuming your only income is Social Security
yup
>> and you don't live in some ultra expensive region of the country.
not me, one of the very most expensive places.
Edit: Additionally, the food number may not be counting eating out. Entertainment is a broad category but in this case I don't think eating out is in that number. I agree with Maurice in that $100 a week is a fair number. It doesn't take much anymore to ring that up in a supermarket.
You might be right about vehicle payments. Also maybe repairs and maintenance.
I eat a pretty normal, balanced diet. A little bit of everything basically except cooked mushrooms or liver.
Breakfast - eggs & bacon or oatmeal,fruit and/or yogurt
Lunch - meat or tuna sandwich or soup, fruit, raw veggies, cheese
Dinner - meat or fish, noodles, rice or potatoes, salad, fruit and veggies.
Just your average fare. I buy what's in season and try to generally shop the sales. I clip and use coupons.
Healthcare - Medicare is deducted from my SS. As a disabled Vietnam vet I have access to the VA hospital for most of my medical care but I do make co-payments.
Perhaps a compromise model like FIRECalc?
You ask a very open-ended question that is poorly timed if it specifically applies to your situation. From your earlier postings, I recall that you jumped into the retirement stream a few years ago. If so, you are probably an unhappy camper these days that prompted the question. Fortunately, reassessments, recoveries, and reversals are often possible.
A million dollars is a nice nest-egg. But, like in most instances, it depends. It depends very much on the particulars of the situation such as age, wealth, health, partner relationships, preferences, location, and a host of other tangibles and intangibles.
A single answer isn’t appropriate in this forum even for a specific person since the relevant circumstances are dynamic and in constant flux. It is especially not appropriate from the MFO membership given our incomplete and imperfect understanding of your circumstances.
But we can offer generic guidelines and some useful references that will permit candidate retirees to make more informed decisions.
A limitless array of planning tools and aids are easily accessible for anyone willing to do the work. I retired over two decades ago, and even in those prehistoric days, the literature was overwhelming. I selectively used it. Today, given the Internet capabilities, it is a still easier task, but requires some careful screening. All advice is not equal.
I purchased a retirement planning tool generated by an outfit called Educational Technologies, Inc. It included tapes and written documentation. Major sections in it incorporated psychological adjustment, financial planning, investment, heath issues, estate planning, and financial benefit units. I supplemented the financial planning section with independent Monte Carlo simulations.
The retirement decision is multi-dimensional. It is complex with many interacting, dynamic parts. Given that complexity, I doubt that well-meaning MFOers can provide definitive answers beyond some incomplete hints and references. As Reagan said: “Trust, but verify”.
A million dollars might service you very comfortably, but might be totally inadequate for me. In the end, it depends. In the end, the candidate retiree must do the heavy lifting himself. Do the necessary homework. There are no magic wands to simplify the task that MFOers can honestly offer.
I remain consistent in my response to similar questions that you asked on earlier submittals. Explore the usefulness of Monte Carlo simulations. Ignore uniformed judgments by individuals who never used the tool, or even read the literature on the subject.
Experience is a great teacher, but is a time consuming and costly educator. Monte Carlo simulators provide a shortcut learning tool that permits its users to examine a plethora of what-if scenarios tailored to your specific situation. I’ve identified many Internet accessible Monte Carlo codes on earlier interchanges. You can only fully trust your own work.
Good luck on your reassessment project.
Best Wishes.
Because I am a bit slow and IQ challenged, please explain to me why a single individual over age 65, debt free, and in need of $20,000 to 25,000 annually (or even $30,000) in out of pocket expenses (after SS and pensions) and with a $2,000,000+ nest egg needs to learn anything about Monte Carlo simulations?? I have known a few lucky investors and traders in this situation who over the years have been in the right place at the right time. They seemed to have done quite well being blissfully ignorant of your beloved mumbo jumbo Monte Carlo and other assorted worthless statistics.
Edit: From reading many of your recent posts and vitriolic exchanges with other members,
it appears you enjoy being a troll.
Thank you for reading my post. It’s nice to know that I engage, and perhaps sometimes enrage, your interests. Disagreements and disparate opinions among investors is commonplace.
We agree that a Two Million Dollar Man need not access a Monte Carlo tool if he spends at the rates you specified.
But your Two Million Dollar Man is likely an artificial, unrealistic strawman who mostly exists in your fertile imagination. There are not many such individuals in the US.
According to a 2012 CNN Money report, using data from an IRS 2007 survey, about 1.8 million Americans had wealth in excess of the 2 million dollar threshold. I know you stated that you don’t read my references, but, nevertheless, here is the Link:
http://money.cnn.com/2012/03/02/news/economy/wealth_in_America/
The number of citizens that fit your strawman description is miniscule. It is certainly not mandatory that such a unique character consult any Monte Carlo simulators.
But it still might be a worthwhile project for him. Given his wealthy status, he might want to explore how much he could expand his subsistence lifestyle without compromising his portfolio survival likelihoods. A few Monte Carlo runs would yield some useful guidelines.
Your postulated Two Million Dollar Man is surely atypical for the bulk of MFO visitors. The median accumulated wealth for US citizens is well under one million dollars. Given that reality, a retirement decision is not easy for most Americans.
Uncertainties cause fear, and fear causes decision paralysis. Monte Carlo analyses can relieve, not totally cure, the uncertainty and the subsequent paralysis. It’s only a tool, but it’s a nice addition to an investor’s toolbox.
Best Wishes.
EDIT in Reply to Junkster's edit: Your internet troll charges directed at me are speculative and groundless. On both FundAlarm and on MFO, I have been a persistent advocate for a deeper understanding of statistics, for Monte Carlo analyses, and for relevant references. That may not make you happy, but that is my honest purpose.
If by your standards that qualifies me as a troll, so be it. I stand by my positions on these matters, and I am satisfied that MFO participants will fairly judge the merits and shortcomings of them.
Generally, a bottoms up approach is better i.e. budget, net worth, pension, SS etc.
This is my 2015 budget own home, no debt, single person
Basic Living
House
2,117 RE Tax
2,556 HOA
489 Electric
928 Insurance
300 Misc Purchases
133 Mail Box
6,522 Subtotal House
Car
138 AAA
744 Routine Mtc.
1,164 Insurance
82 Registration
1,800 Gas
3,929 Subtotal Car
Personal Expenses
327 Income Taxes
1,200 Cash
360 Medical
340 Cell Phone
3,300 Food
600 Wine
59 Misc
396 Internet Access
300 Dining Out/Entertainment
4,029 Health Ins.
300 Clothes
- Driving Lic
11,211 Subtotal Personal Expenses
21,661 Total Basic Living
Incremental Living - 1
91 Travel Trailer Reg
492 Storage
Good Sam
583
Incremental Living - 2
6,256 Travel/Education/Etc
Misc Hobbies
6,256
6,839 Total Discretionary
28,500 Total Basic + Incremental
Let's assume I don't have any pension or SS, and no inflation for now. What do I need?
$114,000 in near cash for 4 years of expenses - this is ride out market (bond & stock downturns.
$407,143 earning 7% to get to 28,500/year expenses
$100,000 to 150,000 contingency money, if wanted, earning ???
$621,143 to 671,143 total excluding house
Does a person need all that money? Maybe not if the person will collect SS. The closer they are to collecting SS would affect that - e.g. if they are within 2 years they could have less money in near cash.
This is not meant to be a perfect example.
Now let's use Junkster's info on SS $1294 monthly - 15,528/yr
$28,500 Total Basic + Incremental
-$15,528 SS
$12,972 to be funded
$51,888 in near cash for 4 years of expenses - this is ride out market (bond & stock downturns.
$185,143 earning 7% to get to 12,972/year expenses to be funded
$100,000 to 150,000 contingency money, if wanted, earning ???
$337,031 to 357,031 total excluding house
Both of these examples are better than monte carlo and top down rule of thumb.
There are two reasons I can think of that the top down method is the most discussed:
1. Advisors use them to scare people into buying their services
2. Budgeting is boring and most don't people don't have one nor do most know where they spend their money.
This is an extremely complicated subject, and I am no professional observer, merely one who has been a bystander to the struggles of others, and I can only point out here one of the issues which sooner or later many of us will have to face. None of us knows the future, but this possibility is not one that many of us think about when we plan, and the possibilities for financial catastrophy, particularly for a surviving spouse, do exist.
In summary, my point is that there are possibilities that may arise in our retirement that we do not wish to contemplate; that we should consider, and that
we simply cannot guarantee, but should be aware of.
To those who pursue this post to the closing paragraph -- I wish you well, hope that you do not ever have to contemplate such an issue in your own lives, but that you maintain awareness, not only for yourselves, but for others (aka, our society as a whole), and wish you well....
Some thoughts. I'd be a little worried about a swoon that lasts longer than 4 years and how it would put pressure on your near cash invested assets. A lost decade? Sound possible?
Would it be worth breaking out your invested reserves into smaller pots of money and explore different ways of securing yearly income according to risk (from risk-less to highly risky). How would you expose your reserves to risk-less investments on up and how much would each pot require?
Also, what could you do with your non-liquid assets (house, condo, trailer, etc.) to help your income. How could you make these resources work for you? For example, I own a home that has the potential to add on an in-law apartment. I could rent the main house or the in-law space. This would reduce housing costs without dedicating any additional resources.
Finally, isn't wine a fruit and therefore a food cost?
It appears that you have made a decision that is comfortable for your circumstances. Good!
I wish you well and hope that your plan is successful. You were very wise to include safety factors in your wealth component breakout with the inclusion of “near cash” and “contingency” funding.
I surely do not want to rain on your parade, but I did a few exploratory Monte Carlo simulations for a 30-year retirement period to test the robustness of your analysis that included Social Security benefits. Warning red flags went flying.
I did the analyses using your postulated 7% annual return. I examined return standard deviations that ranged between 10% to 18%. Results were disastrous for the 185K investment portfolio by itself. Projected survival rates were at lower mud levels. There is an extremely high probability that you will need to heavily dip into your near cash and contingency components.
Even assuming a $350,000 dollar portfolio earning a 7% annual average return rate, the survival odds never reach an 80% level. That’s a risky route by my compass.
Given the meager market returns in recent years, an assumed 7% annual return rate seems a bit bushytailed. I briefly examined a 6% annual average return; not surprisingly, the estimated survival likelihoods went even further South.
Obviously, you will follow your analytical results and your gut feelings. I proffer only a caution, Take a little time to more fully evaluate your circumstances. You might want to reassess your analysis including portfolio return’s variability as a major element in that rework.
Whatever action you finally implement, I do wish you a relaxed, happy, and trouble-free retirement that permits you to complete any bucket list that inspires you.
Best Wishes.
@Dex: You've done it now. I prescribed something similar many years ago, based upon my personal experience. Since it didn't involve elaborate financial engineering and theories, but rather common sense based upon life experience, our would-be master of the financial universe regarded that as inherently inferior to his vaunted Monte Carlo approach. He is under the misapprehension that I denigrate Monte Carlo, which is in fact inaccurate. Because he is evidently incapable of contemplating that anything he believes may not be factual, it has led to the present acrimonious exchange of opinion. You may be in danger of joining me in that category.
First, the planning and accumulation of data: I designed a worksheet which divided our expenses into various categories, including those which were optional and those which were absolutely required. I didn't buy into the "oh, once you're retired you're expenses will be lower" theme which was so popular at the time.
Once a month we tabulated all of our expenses, and filled out that worksheet. After three or four years we had a pretty good idea of our spending patterns. Assuming (yes, MJG, an assumption!, indicating of course a lesser intellect than you obviously possess) that that pattern was a reasonable model for the future, I then spent many, many hours designing a spreadsheet that could consider our net worth, lack of debt, anticipated incomes from pensions, investments and SS, ongoing expenses, and special expenses.
It allowed the entry and consideration of variables for inflation, investment income according to various asset allocation percentages (cash/bonds/equity), special expenses, and major financial disasters, a la 2008, which could be inserted at any desired year. It allowed for two expense modes: one allowed variable optional expenses each year (travel and so forth), and an alternative mode which held the expenses to the mandatory for one year, but allowed for additional optional expenses the second year, and so forth alternating every other year. Being a pessimist by nature, every facet of the calculations was designed to utilize the least favorable case. For instance, it assumed that cash would generate less interest than actual inflation, that bond income would merely break even, and that equity income would be in a variable input range from 3 to 5% above inflation.
For income source and expenses it generated a series of compounding tables which ran out for forty years, starting at age 60, which would have taken us to 100 years of age. From all of the subsidiary tables (each of which, using compounding calculations, took about one page of the spreadsheet) it generated a master table showing the remaining investment assets year-by-year.
It was prescient, in that 2008 struck at the least favorable possible time in our case: a few years after we retired. Because of the deliberate pessimistic bias of the calculations, we've weathered that disaster, and are still in excellent financial condition.
If you want a solid substantial approach based upon known variables, rather than Monte Carlo assumptions, I can recommend the spreadsheet approach, based upon personal experience.
Regards- OJ
In 1991 we had close to $500,000 when we took this leap
http://retireearlylifestyle.com/
http://retireearlylifestyle.com/
Your contribution is a first-rate submittal that nicely details your applied procedure when making your retirement decision. Thank you for your excellent effort.
That procedure includes many elements that are embedded in a Monte Carlo analysis.
The question that was asked many years ago, and even today remains unanswered is: How were the yearly annual return estimates entered into the various equity/fixed income/cash inputs as a function of Spreadsheet time?
You were making many future uncertain estimates. For example, how were return’s variability handled for each year in your hand-executed Spreadsheet? History matters in determining a portfolio’s survival likelihood.
Monte Carlo does this arduous, challenging task with a random number input routine controlled by various statistical formats.
Old Joe, you continue to assert that I claim some superior intellect. In your recent post you said when referring to yourself: “yes, MJG, an assumption!, indicating of course a lesser intellect than you obviously possess”. Sarcasm that doesn’t work.
That’s just plain wrong! I have never claimed and will never claim a superior intellect. Your false charges are Trojan Horses designed to denigrate and to distract. Please address the substance of my posts instead of personal attacks. Your campaign is failing. Seasoned MFOers recognize who is initiating this wasteful activity.
Best Wishes.
In general, these types of questions are hard to answer due to all the variables and the unknown future expenses. While some here discredit the Monte Carlo calculators, I find them worthwhile as a confirmation tool. In these important decision making processes, it is better to use all the tools available.
The answer is given above, if you care to read it. The allocation ratios between cash, bonds, and equity were variable. Each of those components was automatically calculated on a compounding basis via forty year tables. You vary the input ratios and income assumptions for each income class, the tables automatically ran that via compounding for forty years. I again note your snide description of, as you dismissively term it, a "hand-executed Spreadsheet".
With respect to your comment on "initiating this wasteful activity", I suggest that a word count of your continuing rants and diatribes might be illuminating. Mostly Just Gas.
"Best Wishes" to you, and your Trojan Horses too.
The markets do look vulnerable here. a big downturn in retirement would be crippling. The recovery rate of the investments in the portfolio could easily double that four years into eight years. Of course, we all adapt our portfolios and our spending habits if such a downturn comes. Top Ramen is still inexpensive.