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Posted by on April 8, 2007, 3:15 pm
http://www.fidelityresearchinstitute.com/pdf/Beyond_Conventional_Wisdom.pdf
A study by Fidelity looks at strategies for retirement income. They
present in Exhibit 1 a simulation showing how the sustainable
inflation-adjusted withdrawal rate depends on life expectancy. For
example, for a planning horizon of 27 years, the range of sustainable
withdrawal rates is 3.93% to 5.58%, but for a horizon of 11 years the
range of withdrawal rates is 8.62% to 10.89%. As explained at the end
of the paper, the lower rate corresponds to a 90% probability of not
outliving assets, and the higher number to a 50% probability. The
paper also explains what assumptions about stock and returns are being
made.
I'd have to write my own computer program to verify their results, but
their finding that sustainable withdrawal rates depend on life
expectancy accords with common sense. People should stop advocating a
4% rule without saying what life expectancy is being assumed.
Links to other reports are at
http://www.fidelityresearchinstitute.com/insights.html
-- some look at homes as an investment.
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Posted by Elle on April 8, 2007, 4:30 pm
> People should stop advocating a
> 4% rule without saying what life expectancy is being
> assumed.
IIRC, assuming historical returns, at a 4% withdrawal rate
and invested with an allocation of xyz, it's typically
claimed one would never run out. I think it's also usually
noted that this is of course only a rough guideline.
Financial planning involves forecasting returns and
extensive assumptions, so it cannot be an exact science. (I
know you know this, BWS. The comment is for the newbies.)
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Posted by on April 8, 2007, 6:30 pm
> > People should stop advocating a
> > 4% rule without saying what life expectancy is being
> > assumed.
>
> IIRC, assuming historical returns, at a 4% withdrawal rate
> and invested with an allocation of xyz, it's typically
> claimed one would never run out. I think it's also usually
> noted that this is of course only a rough guideline.
If one is going to use a guideline like that, assuming a
perpetuity, one needs to watch it carefully, given that
we are also assuming volatile investments (what is the
typical assumption - 60/40 stock/bond? ).
Such a plan needs regular review and if it looks like
it's not going to cut it, the drawdown needs to be adjusted
or, of it's looking really bad, one might have to give
up on the idea of a perpetuity which leaves the original
assets intact (ie. for an inheritance) and instead start
to consider immediate annuities (which typically bump
up the drawdown rate because the insurance component makes
sure that you don't out live it - in exchange for leaving
nothing behind when you are done).
Here's an example scenario:
If you're 65 and have a million bucks, one might assume
that one can pull out $40k/yr indefinately (adjusted for
inflation). If after a couple of years, the asset balance
has not kept up with inflation (or gone down!), say, at
70, the balance is, rather than 1.15 million as one would
hope, given 3% inflation, instead, say it's only 950k,
either one starts taking out less - $38k is now 4%, and
given inflation, the purchasing power of that $38k is
equal to only $33k of purchasing power 5 years earlier! -
or if that $33k of purchasing power just isn't going to
be enough, the remaining 950k may be partially invested
in an immediate annuity to make up the difference. At 70,
a female (chosen because for the sake of example, payout
level will be lower) who puts 450k into an immediate
fixed annuity (no guaranteed min, no inflation adjust)
at current rates will get approx $38k/yr just from that
annuity. So the remaining $500k may continue to be
invested - the drawdown on it would need to be only
between 1 and 2% (at least in the first year) to maintain
the original purchasing power.
That's a heck of a contingency plan if the 4% perpetual
drawdown plan starts to look like it's not going to really
cut it. And without much worry about life expectancy either,
though if inflation really kicks up, the drawdown on the
invested portion may have to go up pretty fast. I didn't
see an easy online annuity quote for a plan with an
inflation adjustment.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Posted by Michael Siemon on April 8, 2007, 7:37 pm
BreadWithSpam@fractious.net wrote:
...
> That's a heck of a contingency plan if the 4% perpetual
> drawdown plan starts to look like it's not going to really
> cut it. And without much worry about life expectancy either,
> though if inflation really kicks up, the drawdown on the
> invested portion may have to go up pretty fast. I didn't
> see an easy online annuity quote for a plan with an
> inflation adjustment.
Vanguard has a page from which (following appropriate links) you can get
quotes that include inflation adjustment:
<https://flagship.vanguard.com/VGApp/hnw/accounttypes/retirement/ATSAnnui
tiesOVContent.jsp>
For the scenario you cite (70 year old female, initial $450,000
to set up the annuity [and specifying CA as the state], the annual
payout would be $28,560.
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