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Is $1 Million Enough to Cover the Average American's Expenses in Retirement?
@JohnChisum: Yes, that was another adjustable variable of the "
horse-drawnhand-executed spreadsheet": both the severity and the length of the downturn. Again, bias towards the Murphy factor was emphasized, even if by hand. I have to tell you, though, that 2008 resembled the worst-case of my projected downturn.
Your reply still does not explain how you made your inputs. I'm still puzzled. I'm not as smart as you claim I think I am.
Please give us a sample input for a couple of years. For example, what would be your estimated equity input for 2016, for 2017, and for 2018? How were they specifically determined on a year-by-year basis?
My replies to your insidious and continuing charges are purely defensive. I merely react; I never initiate. That's a major distinction between our actions.
Yep. It makes sense to run the numbers on a annual basis. Also having exceptionally good years can balance out the issue but that is a longer term scenario. One way is to sweep profits into a conservative investment to hold for that rainy day. That's easy if the good days come before the bad.
I once thought early retirement sounded so wonderful and that it seemed by simple compounding on a spreadsheet that it was "easily" doable. 55 was my goal. All the numbers seemed to work. Hell, my portfolio in the 90's, having no idea what I was doing investment wise, was making 10-15% a year. My wife and I would have a million dollars by age 56. Then came the great recession. A wake up call.
I'll offer my thoughts to what I think I've learned while contemplating retirement. This is just my experience - my 2cents FWIW:
- Pay special attention to life expectancy charts. Yes, you likely will live longer then you ever imagined. What do you think those biotech stocks many here invest in are working on - making you live forever, so to speak. LTC and HC will cost even more then today.
- Early retirement in foresight was a pipe dream of the baby boomers. It was based on "things are different now - we are a special generation" - "this isn't your fathers Oldsmobile". Guess what? If it wasn't good for your father or grandfather, it probably isn't good for you. The government made 65 retirement age for a reason - statistically.
- I did much of my spreadsheet work using 8% as a return on retirement investments. Why not. It was the average return of a balanced portfolio. Another pipe dream. Any calculation you make going forward, use a realistic returns number. I would suggest 6% would be on the aggressive side. More realistic, use 5-5.5% in your calculations. Hey, BobC who I highly respect has said the same in many of his posts.
- Monte Carlo software programs are absolutely a great tool to show you where you stand. Are they the beat all-end all? No, of course not. There are way too many variables in life. But I believe in probability. Yes, history repeats itself, especially in arithmetic. Throw real (conservative) numbers into these programs. If the truth hurts - pay attention - it's your future. It's math, not voodoo. The results are a guide. Not the absolute.
- And lastly, I believe fixed annuities have a place for many retirees, very much so. If only in having the piece of mind that you will be able to pay your bills in any economy, it could be worth a look. Blasphemy on this board? Maybe, but I believe a pension, either purchased or through work is very important.
Good luck to all in this journey.
One of the key variables was the amount of income desired annually, or every-other year on an alternating basis. That entry was also automatically increased going forward on a compounded basis, dependent upon the input inflation rate. The ss then calculated income from retirement and SS (reduced by income tax) going forward, and if the desired income exceeded the actual income projected, would then draw down cash, bond, and equity positions to supply the extra amount needed, and then ran the adjusted values forward. Of course, simply reducing the desired income level also had a major impact. By varying the inputs for the principal cash/bond/equity drawdown ratios, it was possible to see which combination gave the most satisfactory results.
The ss retirement section was a major ongoing investment in time, and underwent frequent revisions and modifications as new complexities presented themselves. Now, I've given you all the time on this that I intend to, and certainly more than you deserve given your many nasty comments over the years.
For those unable or unwilling to go to that much trouble, I'm sure that Monte Carlo exercises are much better than nothing.
Monte Carlo software programs are absolutely a great tool to show you where you stand... throw real (conservative) numbers into these programs. If the truth hurts - pay attention - it's your future. It's math, not voodoo. The results are a guide. Not the absolute."
(Emphasis and editing is mine)
@Mike- hello there, and thanks for your comments. You are absolutely right on. Murphy is alive and well, and will outlive all of us. I used 5%, with excellent results.
Not enough savings, no pension, SS pushed out, investing properly (whatever saving they have).
Then add into the equation that eventually we will have something like a VAT, increasing expenses over the years.
Edit: And a fine, much more extensive briefing from the Robert Wood Johnson Foundation, prior to its repeal, including the budget challenges and possible responses.
If you want to complicate things further compute and project your net worth excluding house - then deflate it for inflation.
All of my calculations excluded real estate, but both the SF & weekend house are free of mortgage. The weekend place can always be sold as a last-ditch fallback if everything else fails.
I’ll try to be succinct and reply to both your recent posts.
Dex, sorry I missed your post requesting my input data to the Monte Carlo analysis I did. Regardless, I actually answered your question in my original submittal of the Monte Carlo results that I reported.
For your convenience, I’ll repeat them here. I did 12 simulations in about 5 minutes with a $13K drawdown schedule. I did 6 cases for a 185K initial portfolio value. My baseline was a 7% average annual return with parametric standard deviations of 10%, 14%, and 18%. I repeated the same standard deviations for a 6% annual portfolio return rate. Portfolio survival rates were atrocious.
So I repeated the same return/standard deviation 6 sequence series using a composite portfolio that included all your reserves. For that series, the initial portfolio value was $350K. with the same withdrawal rate. Survival rates improved remarkably, but still never made a high of 80%. That’s a much better outcome, but still represents a not too attractive survival prospect.
I did the analysis using the Monte Carlo tool on the Portfolio Vizualizer.com website. There are better simulators accessible on the web, so don’t interpret my usage as an endorsement. It was available and easy to input.
Old Joe, sorry for the delay. Your response still misses the main thrust of my question. Allow me to rephrase the question.
As you worked down your Spreadsheet on a line-by-line (equivalent to a year-by-year set of entries) basis, annual returns for your various investments were required. What inputs did you make? Did they go up and down each year to reflect the schizophrenic nature of market annual returns?
Your response implies that you used some sort of compounding formula. Specifically, you said: “It started with the amount then available in the cash/bond/equity baskets, and merely projected forward on a compounding basis, year by year, for forty years.”
Your reply suggests that a simple compound return rate was postulated. If so, what was the assumed rate? Was it changed during the 40 year projection period? If so, how were the rate change decisions made? How were the annual investment return variabilities handled?
These are all complex issues because of return’s variability. That’s the specific area whereby Monte Carlo analysis struts its stuff. Random selections are automatically made within the guts of the code that are unbiased and reflect whatever statistics the user wants to explore.
If my question is still too vague, please advise me so and I’ll try again. The guesstimated annual portfolio return on a yearly basis is the crux of the problem. Without multiple Monte Carlo simulations as a tool to model the annual reward variability, portfolio survival prospects are likely to be overstated. A compound rate approach does not capture the wild vicissitudes of market returns.
Thank you for this exchange, but you have not answered my question. Perhaps other MFO members could reframe my question to make it clearer to you.
Best Wishes to both you guys.
The ss approach fundamentally evaluates a financial situation over a period of time anticipating that over a long period of time some sort of average will be produced. Yes, some years radically up, yes some years radically down. Can the ss identify those specific events in advance? Of course not. Over forty years, though, those ups and downs will be smoothed to some sort of a long-term performance.
By varying the values of the input variable manually, it's not all that hard to establish a performance range from pessimistic to unrealistic, and try to pick a course somewhere down the middle.
Construction of the various scenarios is up to the user of the spreadsheet. Those of us, including you and me, whose parents survived the "great depression", should have the sense to expect major financial fiascos, and condition our input parameters accordingly.
The ss also maintained a cash reserve, completely separate from the other assets, that was designed to compensate for zero income during a four year period. Now obviously, that is an improbable situation. However, over a forty year stretch, that anomaly was smoothed into the overall considerations. You evidently want me to justify my work on some sort of rigid engineering basis. It wasn't engineering at all- it was a very flexible tool that allowed me to see the results over time of a complex financial situation, by adjusting many input variables, with a reasonable chance that the results would give at least some insight to the future. It clearly suggested the spending limits that might be anticipated under a wide variety of circumstances, and for my purposes, succeeded very well. I'll leave the engineering to the designers of our new Bay Bridge section.
I sincerely hope that I have explained what I did to your satisfaction. If not, I give up.
Since we are talking about retirement, forty years should be taken as the upper limit of possible scenarios if one starts at age 60. Perhaps this is the issue as time is constrained. What is the least amount of time a spreadsheet or analysis can be trusted over? Or, maybe it is a period of market cycles?
May you and everyone here live to be 100 years old.
BTW, Warriors take the first game. I hope they go all the way. It's been a long time.
I think it has mentioned here a few times. Such saving of spreadsheet and other labor.
The amount should never be 185K alone and the 51K should be in near cash - treasury bond ladder or a short term bond fund.
So, it doesn't look as if the simulator was modeling what I wrote. Same for the $350K example there needs to be the 'near cash' aspect also.
"$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"
Some incredible numbers-crunching & analysis.
- Did anyone mention that staying healthy for as long as possible is an "investment" - and one you have a great deal more control over than stock and bond market gyrations? I'm talking about not smoking, limiting alcohol intake, lots of fruit & veggies, daily workouts, etc. Those medical bills for in-home care will kill you. Poor health will rob you of the ability to enjoy the fruits of your investments. And, if your health deteriorates to the point you can no longer manage your own finances, what good is Monte Carlo or any of this other mumbo-jumbo?
- Has anyone mentioned that investments which appreciate the most during inflationary periods might offer the best protection in retirement? The current low inflation environment may favor bonds and equities. However, the underperforming (typically "hard") assets in today's economy are precisely the ones which should outperform during periods of high inflation. So, investing for current growth may be different than buying future inflation protection. The worst thing about inflation is that prices compound in the same manner that money does. At 10% annual inflation, a $2 loaf of bread today will cost you $3.22 five years from now and about $5.20 in ten years. A new car selling for $20,000 today would "inflate" to $32,210 in five years and $51,875 in ten years. Apply the same rate of increase to insurance premiums, property taxes, medical expenses, and you've got a serious problem that - I'm afraid - few retiring today even contemplate.
- Anyone who has ever constructed a household budget in retirement knows that while income tends to remain fairly static and mostly beyond our control, the expense side is much more flexible and allows for considerable control. Small steps like driving an older vehicle an extra 5 years, cutting out one vacation a year or doing more of your own home maintenance can all have a positive impact on the bottom line.
This is not intended to be comprehensive - just some other factors that may have been overlooked in the preceding deliberations.
"Oops, now who will step up to the plate and solve the aging boomer jobs problem?"
Who wants, needs a Job....that's over for investors/savers!
IF it doesn't what would you like me to do now?...20-30 years before I could run out of money.....
post opinions on how to figure something you don't know anything about....?
Hank, intelligent and sensible posts are not allowed in this thread. But thanks anyway. And besides, I have learned it is futile to argue with he who believes to be true that which he wishes to be true. Now I am told some of my friends are figments of my imagination and all in my mind including the one I look at in the mirror each day.
I really enjoyed our current exchange. This is the way it should always be.
The planned Bay Bridge section will be a huge success and will be a lasting example of American engineering expertise for a century or more. It will be designed with gusting aerodynamic wind load modeling based on an extensive statistical data set, and likely a Monte Carlo workup of that data. Here’s what happens if dynamic wind loads are not properly assessed and integrated into a bridge design:
The same could be said of a retirement portfolio that is constructed without the aid of Monte Carlo simulations. Is it a mandatory exercise? Of course, not, especially if the planned drawdown ratio is a small single digit number like 4% or lower. Huge safety margins make decisions easy, but are costly. Heuristic rules can simplify the retirement decision, but exceptions always exist. Monte Carlo analyses can better define the danger zones.
A Monte Carlo retirement toolkit is a rather recent invention. It didn’t exist roughly 2 decades ago. Spreadsheet analysis was the only viable option in that timeframe. It can be made to work with some reservations, as in your case Old Joe. Kudos for your persistence.
The reservations are associated with the highly variable nature of stock market returns. The conventional Spreadsheet analysis will fail to capture the portfolio survival compromises caused by these huge variations and their random behavior. A Monte Carlo code, when properly implemented, is up to that task. Here is a Link to a nice graph that summarizes the significant variability in annual stock market returns:
This annual variability is tough to capture in a Spreadsheet analysis. Annual returns bounce all over the map in an erratic manner.
Old Joe, I agree that we carried this discussion far enough. As Lao Tzu said: “He who knows that enough is enough will always have enough”. I suspect we both experienced enough on several dimensions.
Permit me a last closing thought. Just as you don’t need to be an auto mechanic to drive a car well, you need not be a mathematician to usefully deploy Monte Carlo codes. These codes are both fun and easy.
Given the 12 Monte Carlo simulations that I completed, your objections to exactly how the composite 350K nest-egg presumed in the analyses was deployed is at the noise level.
The final 6 simulations I ran postulated that the total 350K was entirely invested in a portfolio earning at an annual 7% rate. That is a bounding calculation.
That bounding calculation set does project a higher portfolio survival expectation. The survival odds get much better, but a significant potential bankruptcy is still in the picture. The results were too close to the cliff for my comfort.
Many workarounds exist, like changing the annual spending profile downward after a market negative year (the wine is an attractive target). Small changes impact portfolio survival prospects. Monte Carlo analyses should never be the only input in retirement decision making.
You seem to have made your decision. You asked and didn't like my analyses outcomes. I didn't give you the confirmation encouragement that you were seeking. I certainly am not trying to dissuade you from your decision. I'm simply reporting the results of very few calculations.
I never make stock or mutual fund recommendations on MFO or anywhere else either. Do what you want to do. Just go for it. Good luck.
Just to be clear - I don't think Old Joe was referencing the entire discussion with his remark. While MJG's reference (above) is apparently to some interpersonal debate between the two, I'd like to make clear that the discussion is still open and others should feel free to contribute,
I agree. My comment was directed only to Old Joe. He closed his last entry with "out". He.was finished with his exchange with me. I did the same.
@MJG: With respect to the new Eastern tower of the Bay Bridge, it is evident that your commentary is completely divorced from reality. Construction is well past the planning stage. It has been, theoretically at least, completed, and has been in service for some time now. Ironically your comment regarding American engineering expertise may well be accurate, although perhaps not in the sense that you meant it. Here is a short list of recent articles from the San Francisco Chronicle:
• March 1, 2015 Bay Bridge leaks: Toll payers on hook for Caltrans' blunders
• March 16, 2015 Tests of Bay Bridge rods find more widespread cracking
• April 3, 2015 Anchor rod on Bay Bridge may have snapped
• April 6, 2015 Snapped anchor rod adds to Bay Bridge concerns
• April 23, 2015 Caltrans was warned of Bay Bridge leaking before span opened
• May 5, 2015 Ominous signs of problems with new Bay Bridge foundation
• May 7, 2015 Bay Bridge news gets worse: Tower rod fails key test
• May 9, 2015 Plague of problems puts Bay Bridge seismic safety in question
• May 11, 2015 Bay Bridge revelations are 'game changers,' panel chief says
• May 11, 2015 The bridge oversight panel approved spending up to $4 million in tolls to find out the extent of the Bay Bridge's problems.
Your historic footage of the Tacoma Narrows disaster is well-known, except perhaps to the current crop of engineers responsible for the Eastern span of the San Francisco Bay Bridge. At this point the ability of the new span to resist, without serious damage, the earthquake that it was allegedly designed to handle is very much in doubt. Evidently neither a spreadsheet nor Monte Carlo modeling was used by the bridge engineers.
Unfortunately, subscription to the Chronicle is required for these articles, so I haven't provided linkage. If you are interested I suspect that corroborating information is available on the internet.
Edit/Add: Thanks to later info from msf, here are some links that should work to illustrate many of the above references:
SFGate is pretty good at providing access to Chron articles.
Try here: http://www.sfgate.com/author/jaxon-van-derbeken/
(a list of recent articles by the reporter via SFGate), starting with the most recent (updated Monday):
Thanks much, msf!
I completely agree with your recommendation that the Flexible Retirement Planner would serve upcoming retirees well. I too recommend that superior tool. Thank you for your contribution.
@Junkster: my apologies. I certainly tried my best.