I think this is a good argument for why you should not depend entirely on financial market holdings for retirement. Social security or other annuitized income streams, income from part time work or sales, insurance, real estate, maintaining a strong network of friends/family
Time for flattery: I've read a lot of finance, watched a lot of talks/videos, and I have a large amount of education and career experience (meaning I think I am in a pretty good position to judge talent/ability). I understand you were a career attorney. You would have done very well too as a CFP in my estimation. Impressive. Don't change what you do - it's working.
I ABSOLUTELY LOVE THIS. THE CALCULATION, THE INFLATION ADJUSTMENT, THIS IS AWESOME. I had been calculating my retirement spend to allow inflation adjustment IF the portfolio return for the preceding year minus inflation was greater than my withdrawal amount with the adjustment. This is soo much cooler. THANK YOU ROB BERGER, YOU CRUSHED IT WITH THIS ONE.
@@encampsaround I know what I am doing. Its called . . . Educate Yourself and Stop listening to so called financial planners. Most of them are Crooks and want to Steal Your Money from my experience. Good Luck.
I retire early (at 60) in less than 2 years and also won’t need to use my retirement accounts until minimum distribution hits. Might take some out to buy a small house since we’re selling ours to go nomadic traveling. Or might tap it to upscale our world travel. My secret? I planned when I was 30 years old and now I have a very large government pension, hubby has a significant SS check 4 years after I retire and he also a tiny pension (a couple to three hundred $). If you didn’t plan your retirement when you were younger, and chose jobs with pensions, then it’s too late when you’re 50.
@@frontiermusings Yeah, I used to mock my wife -- "When are you going to get a REAL job?" -- because I made so much more than her in the private sector (Software Engineer). Now that we're both retired, her fat pension and my SS cover all the running costs and the big portfolio is for fun stuff before we're too old to do it.
Great message Rob. It all comes down to curbing your expenses in "down" years. Some doing just skipping the inflation adjustment. Inflation hurt in the last few years because it hit groceries exceptionally hard... A volleyball sized watermellon for $10...Hard to get creative with spending when its a basic necessity of life.
I read the Sunday newsletter and read the Death Spiral article and got so interested I also read his Retirement Vital Signs and created a cheatsheet. Good stuff. Keep up the good work.
Just took an initial look at FI Calc, and it appears to be much more useful than the Monte Carlo sims that so many advisors use (or perhaps overuse). Good stuff!
agreed ! nice tool I couldnt get it to go below 100% success even with my current spending while working and adding social security 5 years after retirement. Im 63 I need to retire 😀
My solution to this over the 25 years I have been retired is simple. 1. Put your money in after tax accounts. That eliminates RMDs. 2. Only withdraw income from your portfolio, i.e., don't touch principal. If you do that you will never run out of money, particularly if you don't even take out all the income income. It also helps to structure your retirement so that you live off of income from sources other than your portfolio - social security, pension, etc. So far it has worked well for me to the extent that if social security and my pensions disappeared tomorrow I would be fine for the 8-10 years I have left (~150% of life expectancy from the social security actuarial life table).
The examples of 73-75 are not quite accurate because anyone who was two years from retirement in 1973, would have had their money invested and lost money as well. This calculation implies having 1 million in 1975, but in order for that to be true you would have had to start with nearly 2 million in 1973. And if you had 2 million in 1973, your retirement would have looked a lot better.
Yup. Great video, great advice. But the basic takeaway is that if the market is up, you sell more. If down, sell less. For the first fifteen years, don't eat your seed corn. After that, you can eat a little. Nevertheless, a simple way of keeping tab on your investment balance. Add to this a cash "bucket" for those years where the market is good to you and you withdraw more than you need, and you can weather the more lean years.
If you own a house, even if you still have a mortgage your “rent” doesn’t go up with inflation. I guess the exception would be a variable rate mortgage but I assume few people in or near retirement have those. We built an energy efficient house with a large PV array that is net-positive including charging an EV. So, we’re protected from inflation in gasoline, natural gas, and electric rate inflation. When inflation goes up, the main effect for us is the price of food which isn’t a huge proportion of our living expenses.
wow, Notre Dame would have been helpful when I was 9! I'll have to pass that to my grandson 😆 Good stuff, I read the article but this explanation helped me understand it more clearly. I think its a good argument for a cash cushion if portfolio withdrawals are not adequate.
Great video, great clarity as always Rob. Sometimes these papers seem to be a bit of a solution looking for a problem. For example, my NR plan based on "real life" does indeed have my portfolio decreasing in the early years, but then Medicare followed by social security kick in and it starts to increase again. Sure, if the market tanks I might reign things in, but living by these arbitrary numbers seems weird when you can easily model many more factors of your real world situation, run Monte Carlo etc etc.
There is a fundamental flaw in this method. The order in which the returns happen (sequence or returns) will significantly affect your end balance, however for this method you just add them on the numerator and denominator and end with the same ratio.
We need to keep in mind that this is just our nest egg portion. Social Security COLA will help, paid off housing will also help keep expenses down too making high inflation times a bit easier to weather.
Hi Rob, Love the content and videos. Wanted to point out a potential flaw in the assumptions. You are assuming the portfolio would remain at 1mm....if the market went down you likley wouldn't be starting in the same place delaying 1 year or 2. You would have contributions but they would have to be at or above the decline in portfolio value. Just a thought.
That is a fundamental flaw in the two year delay argument in my mind. There is no way you will be able to retire if your portfolio drops 40% from its required value.
@@stackoverflow32 you can get the same effect if you hold one, or if you can do it, two years in cash. That is another way to avoid/delay or try to minimize the death spiral. It is painful to keep that money out of the market, but that means it does not go down and you can use that to draw for a time, avoiding pulling money out of the retirement basket until, hopefully, the negative return period is over. Doesn't help as much, I suppose in inflationary periods as it is deflating, but helps offset the bad sequence in investment markets.
You do a great job explaining things in a very understandable way. Thanks for pointing out the FI Calc tool. Not sure if I would have understood that article without you "dumbing it down" for me.
as appealing as a Bengen-like approach is for a withdrawal plan in retirement, the referenced article does make an important point that it is not without potential bad outcomes, if set on auto-pilot. the takehome point for me was that in certain circumstances (extended period of high inflation, extended period of low/negative investment returns, unexpected large expenditures), it's important to look closely at the retirement withdrawal plan to see if it's still likely to be successful over the expected remaining years of use.
That is easy. Take cruises, go to restaurants, drive corvette, give money to your working children, buy expensive wine and whiskey, go to a doctor every week just to talk, discuss politics with your younger relatives, watch TV, buy organic food. Did I forget anything?
I thought the concept of momentum was great. It also provides a way to gauge the effect of a large expenditure. If the purchase pushes you close to, or over the 100% momentum ratio, it's better to defer it.
You say to avoid a bad year if you wait to retire but you still have investments while you’re working that are going to go down. Did you factor that in in that one year differential
Good point. I thought the same thing. Started out at $1,000,000 beginning of 1973 which then dropped to under $700,000by beginning of 1974. How do you replenish that $300,000 loss a year later to begin 1975 with $1,000,000?
Between Aug 2000 and Feb 2013 there were 2 very short new highs, multiple drops of over 30% (12years of no growth) Between Dec 1972 and May 1980 there were ZERO new high and a drop of over 40% (8 years no growth) So the point is there are plenty of warning signs, now of course not everyone can say re-enter the workforce full time, however most can do some part-time work or income or serious cost cutting when the warning signs are flashing. Similarly new retirees can watch for signs of trouble 1) market dropping more than 30% 2) no new highs, 3) Use a one-year smooth moving average to signal concerns, 4) use a bucket strategy to offset flash crashes (shorth lived).
A big part of my plan is moving into part time work for a few years once we get to 75% of our goal number. Freedom and flexibility and semi retirement earlier. Plus that way I stay in a high paying field and can pivot to more work or doing part time for longer if things look grim during that time.
I read that article and found it confusing so I'm glad you are able to clarify. If I understand it, for the first 15 years we don't want the portfolio value to drop and then subsequently it can drop a certain percentage over time? This coupled with a guard rails approach in case these targets are not achieved. Of course, it's great if the portfolio never drops, but how realistic is this for the average retiree with limited resources? Certainly we are holding off taking Social Security until 70 and doing Roth conversions so the nest egg is partially spent down, with the promise of SS to come. Seems like these models don't consider SS at all.
Interesting. Have you looked at how this ratio would compare to just looking at your current portfolio value vs value at retirement? I assume there must be a reason why he created the ratio, but intuitively it seems like they should give similar indications of a poor sequence.
Rob, great video but you are oversimplifying the annual inflation adjustment. You do not have to limit yourself to yes or no. If skipping the inflation adjustment in a high inflation period is not doable, you could settle for half the inflation adjustment. Whether this works for an individual or not will depend on their specific numbers.
Hi Rob I use 1/N which starts off conservatively and work part time as I draw down and as the portfolio naturally increase I work less to maintain same overall income !! Dead easy
Those starting year retirement green or red indications are a little misleading. Unless a magic genie turned up in 1974 and dumped a pile of cash on you, you were in the market and did suffer loses in the preceding years. Either you hit your target several years earlier and already retired or you looked at your portfolio in 1974 and decided not to retire. Is there a calculator that takes this effect into account?
Again, you can only afford to skip an inflation adjustment if you have contingency in your initial drawdown amount. That is, I had saved enough money so that taking more money than I needed seemed like an achievable goal at the outset.
If you can, I think one terrific way to mitigate the sequence of returns risk is to over-save, and to plan to stop working at least 10 years before your body won’t be able to work. That way, if you have a year or two super early on that call your portfolio’s longevity into question, you can return to the workplace, save more in the rough environment, potentially get great returns on those final saved dollars, and take social security early if your portfolio just isn’t holding up. Now, I think anything below the age of 70 (67 for a spouse claiming the spousal benefit) is early.
Interesting version of dynamic withdrawal. Between simple skip inflation adjustment during down market years, and the dynamic (+/-20%) guardrails of Guyton and Klinger. A video I'd really like to see done would be looking back at a few key start years like 1973 and 1975, which of these dynamic withdrawal methods would actually have succeeded in avoiding running out of money but also which method adjusts appropriately so you don't end up with too large a bag of money.
don't think of it as division. Think of it as the number at the bottom must be > the number at the top divide by the percentage. So in this case, zero is not greater than 3 divide by 100%.
Rob- I am noticing your video content in terms of time, have been reduced substantially and I thank you for that. I found it very difficult to devote the time to your lengthy, say 45 min.+, videos often just because of time in the day or maybe even the inability to stay focused later at night. And I do realize some financial management approaches or philosophies just can’t be articulated well in a shorter clip. But breaking things down into shorter segments is to me like having a magazine put in front of me rather than a book. But all good no matter how you decide to release your insight. Just my 10 cents adjusted for inflation.
9:27 WAIT… year 1 is on top (2%), year 2 on bottom (5%)…. Them every subsequent year is added to top and every year is divided by year 2? Why doesn’t the denominator ever change?
Where's the link to the paper? Interesting way to adjust, the example is not clear. Will have to do a spreadsheet after I read the paper. Thanks for posting.
If a retiree is so worried about a death spiral then they could consider a SPIA or DIA annuity. Rob did a video a few years ago ( should update to address if interest rates have impacted the potential payouts) You give up potential growth and upside for insurance that you dont run out of money. I would limit to no greater then 25% of total and take from fixed income allocation.
Thanks Rob - brilliant youtube video - And it can easily be applied wherever your home country is (I'm UK based currently). I wonder if one can add a second filter based on market p/e ratios and inflation, i.e. future expected returns.
I think the simplification to ‚just wait a couple years‘ doesn’t take into account that the individual ‚s investments were down substantially…it could be many years of waiting while saving and hoping the portfolio recovers?
Planning for retirement does not need to be a high school science project. Do some reasonable planning and live your life. During a 25-year retirement you will come across any number of economic conditions. You deal with them and then move on . Stop worrying so much.
Thank you for bringing up this strategies, I always look up to your video for update. Things appear strange right now. The value of the dollar is declining due to inflation, but it is increasing in comparison to other currencies and commodities such as gold and real estate. People are flocking to the dollar because they believe it is safer. I'm worried that rising inflation will cause my 400k in retirement funds to lose value.I'm really happy for today. I finally got my profit of 170k with my little investment of 45k on this Stock investment with the help of Miss Clara Brandon after feeling so ecstatic and heavy minded that nothing good can come out of it
Thought for day. Husb still consults and likes it but accountant told us he prob makes too much to qualify for GIS (pension subsidy in Canada). Lesson don’t earn too much.
I'm curious if this could be a combination of "curve fitting" or possibly just a bad use case for the tool. I completely understand the reason for this type of analysis and frankly I don't have a better idea for analysis, but I fear that this type of analysis might be missing something important. Trying to gauge if 73 or 74 was a better year to start retirement based on market returns doesn't check out simply because, where was this magic $1,000,000 during the market downturn of 73 if this person waited until 74? Did this person go to cash and avoid the 73 downturn? The only way this test would work is if this million was higher in the year prior. So, they lost ~17% from 1.2 million during the 73 downturn. There are ways to mitigate sequence of returns risk, such as the 3 buckets etc. That's better IMO than this type of review. Let me know if my analysis is flawed, is certainly could be... - Cheers
While the ratio is simple enough to calculate, I believe that many retirees need an even simpler approach. In my work, I like to gauge the boundary or trigger at the original buying power of the nest egg. It can be easy to put the original value of your nest egg in an inflation calculator that you bookmark and then check the current value of nest egg against the inflation corrected initial value. This follows the concept that you want to eat the golden eggs without killing the goose. When the goose is in trouble, you can drop down to a lower SWR. Even simpler than that is scheduling out the nest egg's initial value if it grew at 3% and using that as the lower boundary or guardrail. This would produce a table that a retiree could go through and check each month before withdrawing income. It essentially accomplishes the above goal without needing to look up actual inflation while still effectively protecting against the death spiral. Rob, in a past video, you talked about splitting a SWR into a portion dedicated to needs and the rest to wants. This approach allows someone to still, with an inflation adjustment, drop their SWR to their needs with little to no SWR for wants until the market heals the nest egg and it again exceeds its initial buying power. I have graphically tested this against the RISK ZONE concept and it very good at mitigating the retirement death spiral. It also does not yield the drawback of having a plan on paper where your needs may not be met by the SWR reduction as the plan works around the SWR that is tied to needs. The trick is planning retirement around the SWR for needs and keeping it at or below 3% (in my research).
@@pensacola321 Is this in reference to the level of detail/thought that I put into my comment or the fact that I process data like the engineer that I am?
@@pensacola321 Being able to sleep at night is the goal. I want to have confidence in my retirement plan. The topic of Rob s video here is one that can be hard to recognize unless there is good plan in place to mitigate risk. For retiring in 2007, did you run into any major bumps with the housing crash? I am sure that it is a very interesting story.
At least there it was a big crash right away. 1965/66 retirees had a much more insidious sequence. Things looked relatively normal and then dropped hard about 8 years in. Long enough to be well out of the higher paying work force one would've built the skills for.
All of the projections assume you start out with the same amount. But if I just weathered a bad year, my portfolio will probably not be the same as if I had retired the year before. Unless we plan to convert 100% to TIPS for the five years before retiring?
If saving for a replacement car, where would you stash the $? If you recommend a high-yield savings account, is there a second recommendation (once the yields finally drop)? I was considering a CD but wondered if there was a better option.
Rob, I noticed that you used a default 80%/15%/5% split of stocks, bonds and cash for the illustration. I was not able to get to FICalc directly. Does it make much difference if those ratios are instead 60/40/0?
Would it make sense to simply take out 4 or 5 % each year of your portfolio balance ? That way you are automatically adjusting for positive or negative growth
You would never run out of money but you could see your spending really be impacted, as I am sure that you figured. That probably works better if you have a basket of investments, like real estate or cash that is not being exposed to that potential market volatility. Most will find that they can't adjust their spending to the really bad years and that makes this simple withdraw strategy very difficult to navigate. It is simple, so you have that going for you.
Sequence of return risk... sounds more cool and sophisticated. 2 and 3 bucket allocation approach supposedly helps eleviate the problem. Wait another year. Thats dangerous too, in another way. Is he saying withdrawals shouldn't exceed gains for 15 years? Wow. And no consideration for expenses v portfolio size. Let's say a per needs to withdrawal 2 or 3 percent of portfolio to meet expense needs? This formula doesn't make any sense.
Valuable content! Your channel never disappoints. Now I am going to check out the FI Calc tool. In my situation, we retired to the EU and on top of inflation we have the uncertainty of the strength of the mighty USD. .....it would be awesome if any of these tools could also take historic forex cycles into account .... somehow. 😮
The formula will make more sense if it was multiples, not a ratio of sums. What is the ratio of sums from the paper mean? It's difficult to give a clear answer. Only someone dethatched from math can think of strange construct like this. If after a year, taking account for all activities, your portfolio grew by 10% -> 1.1. If it dropped by 5% -> 0.95 Multiply these numbers together. The result is the overall growth of your portfolio (or decline if less than 1). You're welcome.
I have a simpler plan. Figure SS + 4% as an oversimplified starting point. Say that's 100k. My plan is to stay as far as possible under that number. In other words, it's a ceiling that I don't want to go near because "sequence of returns" and "Murphy's law" are close cousins. Looking at current market valuations, I don't see how anyone (in their right mind) is expecting decent returns for the next decade. In a nutshell, I say plan for the worst.
Good advice Haldriver. Most financial experts don’t get it. For them it’s all about maximized returns. Swing for the fence and rely on the averages. That’s too risky for me. I focus on generating retirement cash flows to augment my retirement fixed income; pensions and SS.
Legitimate question: if someone manage to live off half of the dividend income (buying more shares with the other half), there's no need to worry about the sequency of returns, right? BTW, excelent video. Keep up the good work!
You should take all of your money put it in speculative stocks and take as much risk as possible!! Then again you can live comfortably off of your dividends.
Assuming you are in relatively safe stocks with good dividend paying track records. However, even those stocks have suffered from deep dividend cuts, such as Walgreens, AT&T, and Kraft, to name a few.
@@sunchips5 Indeed. Absolutely right. But I assume we're somewhat "safer" when diversifying on 'cash flow stocks' through a reliable and time proof ETF. By doing so, we can eliminate the risk of relying on a specific company, since we have lots of them on the basket (and the fund is always changing stocks).
Most retirement plans call for adjusting your withdrawals each year by about 3% or more for inflation. If you are taking out $60,000 the first year you would take out $61,800 the next year.
To over simplify, does the ratio mean if you start the year with 1 million dollars you should end the year with 1 million or more in the first period after withdrawals? I don't think I'm getting it. What is the scenario if the portfolio dips in value below 1 million due to market conditions, pre withdrawals?
I am thinking maybe Tuesday afternoon about 2:30 or 3:00 PM.😊 Markets, inflation, recessions, and all sorts of economic conditions happen all the time! Deal with it!
Very wise man but like all other planners and experts they use history and basic math to predict the future but we are facing times that could rival the Great Depression. That’s what the planning and advice should focus on unless someone can explain to me how with the debt the BRICS and possible CBDC doesn’t cold cock everyone. I’m willing to learn. USD ceases to be the reserve currency for oil so how does that impact retirement is one question.
I never sell my stocks, I live off of dividends and capital gain distributions. plus other sources of income. for me, I will not experience any death spiral. Rental Income, Pension, Book royalties, Social Security, Stock dividends, TH-cam channel, all provide passive income that does not run out.
This is interesting, I don’t have a full grasp on the withdrawal process, but If I withdraw 4% a year, wouldn’t the rest of the nestegg continue to accrue interest? Wouldn’t that be enough to keep it going some more?
Listened twice not able to follow what does skipping inflation adjustment means ? Can some one explain please. For example - on a given year let’s say I am at 100% ratio and inflation is at 4%, how do I understand skipping of inflation?
The assumption is that expenses will increase by inflation each year in retirement. This approach is saying that, if your percentage is 100% or more, you would skip that increase in spending in those years. Hope that helps.
…correct, because in his 4-year example, only 1 year saw a gain and gains go in the denominator. The other 3 years were all losses and losses go in the numerator.
How can things in the next 5-10 years be good with a $32T national debt and $1-2Trillion annual deficits which our government will never be able to curb? Sure seems like a time that we have never seen before. We need some AI calculators with this in mind to tell us who are are retiring in the next year where to put our money. Thanks for these reviews Rob. They are very helpful.
Increasing withdrawal rate , you must consider tax consequences. Profits made annually in your portfolio, place and lock in a money market account, if loses occur, rebalance to your original allocation. Keep it simple.
A simpler solution is to annuitize a portion of your portfolio--a simple immediate annuity. Not sure why many folks are afraid to at least consider doing that.
I will never understand why people "plan to fail" in retirement. What is this "running out of money thing" ? You live on your dividends, fixed income, interest and any entitlements... SS, Pension, rent etc. Your portfolio can be used to fund long-term care later in life if needed or to leave a legacy. But having a "withdrawal strategy" and living in constant fear of running out of money sounds nuts to me.
Right. I want to draw mine down from age 60-70 on account of IRMAA and RMD's. If 401k lasts 20yrs from age 60-80, thats more than enough. Ss at 70 will cover plenty if they don't make a major cut to it.
For anyone who has followed an actual budget, based on their income at any given time, this is nothing more than an intuitive response. I can't believe it takes a "study", or a 17:00 long video, to explain that you should spend less when you "earn" less. I mean, it's logical and reasonable, but also just plain old common sense to anyone who lives in the real world...isn't it?
Skipping your inflation increase in the first year of your retirement is HUGE!, it means your real income has decreased for every year of your retirement.
When he says skipping the inflation adjustment, he’s not referring to income. He’s referring to not increasing your spending during down years; not adjusting your expenses for inflation.
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I think this is a good argument for why you should not depend entirely on financial market holdings for retirement. Social security or other annuitized income streams, income from part time work or sales, insurance, real estate, maintaining a strong network of friends/family
Agree100%.
Time for flattery: I've read a lot of finance, watched a lot of talks/videos, and I have a large amount of education and career experience (meaning I think I am in a pretty good position to judge talent/ability). I understand you were a career attorney. You would have done very well too as a CFP in my estimation. Impressive. Don't change what you do - it's working.
I ABSOLUTELY LOVE THIS. THE CALCULATION, THE INFLATION ADJUSTMENT, THIS IS AWESOME. I had been calculating my retirement spend to allow inflation adjustment IF the portfolio return for the preceding year minus inflation was greater than my withdrawal amount with the adjustment. This is soo much cooler. THANK YOU ROB BERGER, YOU CRUSHED IT WITH THIS ONE.
I have been retired for 2 years and have not needed any of my retirement money.
Same here after 25 years of retirement.
Details ?
@@encampsaround I know what I am doing. Its called . . . Educate Yourself and Stop listening to so called financial planners. Most of them are Crooks and want to Steal Your Money from my experience. Good Luck.
I retire early (at 60) in less than 2 years and also won’t need to use my retirement accounts until minimum distribution hits. Might take some out to buy a small house since we’re selling ours to go nomadic traveling. Or might tap it to upscale our world travel.
My secret? I planned when I was 30 years old and now I have a very large government pension, hubby has a significant SS check 4 years after I retire and he also a tiny pension (a couple to three hundred $).
If you didn’t plan your retirement when you were younger, and chose jobs with pensions, then it’s too late when you’re 50.
@@frontiermusings Yeah, I used to mock my wife -- "When are you going to get a REAL job?" -- because I made so much more than her in the private sector (Software Engineer). Now that we're both retired, her fat pension and my SS cover all the running costs and the big portfolio is for fun stuff before we're too old to do it.
Great message Rob.
It all comes down to curbing your expenses in "down" years. Some doing just skipping the inflation adjustment.
Inflation hurt in the last few years because it hit groceries exceptionally hard... A volleyball sized watermellon for $10...Hard to get creative with spending when its a basic necessity of life.
I read the Sunday newsletter and read the Death Spiral article and got so interested I also read his Retirement Vital Signs and created a cheatsheet. Good stuff. Keep up the good work.
Just took an initial look at FI Calc, and it appears to be much more useful than the Monte Carlo sims that so many advisors use (or perhaps overuse). Good stuff!
Rob, doing his thing, teaching us important things. Thanks Rob
That FI Calc tool is awesome.
agreed ! nice tool I couldnt get it to go below 100% success even with my current spending while working and adding social security 5 years after retirement. Im 63 I need to retire 😀
@@00tich yeah hurry up and retire then
My solution to this over the 25 years I have been retired is simple. 1. Put your money in after tax accounts. That eliminates RMDs. 2. Only withdraw income from your portfolio, i.e., don't touch principal. If you do that you will never run out of money, particularly if you don't even take out all the income income. It also helps to structure your retirement so that you live off of income from sources other than your portfolio - social security, pension, etc. So far it has worked well for me to the extent that if social security and my pensions disappeared tomorrow I would be fine for the 8-10 years I have left (~150% of life expectancy from the social security actuarial life table).
The examples of 73-75 are not quite accurate because anyone who was two years from retirement in 1973, would have had their money invested and lost money as well. This calculation implies having 1 million in 1975, but in order for that to be true you would have had to start with nearly 2 million in 1973. And if you had 2 million in 1973, your retirement would have looked a lot better.
Basically, if you have less money, spend less. If you have more money, you can spend more.
Yup. Great video, great advice. But the basic takeaway is that if the market is up, you sell more. If down, sell less. For the first fifteen years, don't eat your seed corn. After that, you can eat a little. Nevertheless, a simple way of keeping tab on your investment balance. Add to this a cash "bucket" for those years where the market is good to you and you withdraw more than you need, and you can weather the more lean years.
It's super nice to have tools help you figure out how much less or more to spend tho
If you own a house, even if you still have a mortgage your “rent” doesn’t go up with inflation. I guess the exception would be a variable rate mortgage but I assume few people in or near retirement have those. We built an energy efficient house with a large PV array that is net-positive including charging an EV. So, we’re protected from inflation in gasoline, natural gas, and electric rate inflation. When inflation goes up, the main effect for us is the price of food which isn’t a huge proportion of our living expenses.
wow, Notre Dame would have been helpful when I was 9! I'll have to pass that to my grandson 😆 Good stuff, I read the article but this explanation helped me understand it more clearly. I think its a good argument for a cash cushion if portfolio withdrawals are not adequate.
Great video, great clarity as always Rob. Sometimes these papers seem to be a bit of a solution looking for a problem. For example, my NR plan based on "real life" does indeed have my portfolio decreasing in the early years, but then Medicare followed by social security kick in and it starts to increase again. Sure, if the market tanks I might reign things in, but living by these arbitrary numbers seems weird when you can easily model many more factors of your real world situation, run Monte Carlo etc etc.
There is a fundamental flaw in this method. The order in which the returns happen (sequence or returns) will significantly affect your end balance, however for this method you just add them on the numerator and denominator and end with the same ratio.
That is why there are higher percentages in the later years, to account for early hits to the portfolio.
We need to keep in mind that this is just our nest egg portion. Social Security COLA will help, paid off housing will also help keep expenses down too making high inflation times a bit easier to weather.
Hi Rob, Love the content and videos. Wanted to point out a potential flaw in the assumptions. You are assuming the portfolio would remain at 1mm....if the market went down you likley wouldn't be starting in the same place delaying 1 year or 2. You would have contributions but they would have to be at or above the decline in portfolio value. Just a thought.
That is a fundamental flaw in the two year delay argument in my mind. There is no way you will be able to retire if your portfolio drops 40% from its required value.
@@stackoverflow32 you can get the same effect if you hold one, or if you can do it, two years in cash. That is another way to avoid/delay or try to minimize the death spiral. It is painful to keep that money out of the market, but that means it does not go down and you can use that to draw for a time, avoiding pulling money out of the retirement basket until, hopefully, the negative return period is over. Doesn't help as much, I suppose in inflationary periods as it is deflating, but helps offset the bad sequence in investment markets.
You do a great job explaining things in a very understandable way. Thanks for pointing out the FI Calc tool. Not sure if I would have understood that article without you "dumbing it down" for me.
as appealing as a Bengen-like approach is for a withdrawal plan in retirement, the referenced article does make an important point that it is not without potential bad outcomes, if set on auto-pilot. the takehome point for me was that in certain circumstances (extended period of high inflation, extended period of low/negative investment returns, unexpected large expenditures), it's important to look closely at the retirement withdrawal plan to see if it's still likely to be successful over the expected remaining years of use.
Good stuff Rob. Thanks!
That is easy. Take cruises, go to restaurants, drive corvette, give money to your working children, buy expensive wine and whiskey, go to a doctor every week just to talk, discuss politics with your younger relatives, watch TV, buy organic food. Did I forget anything?
Divorce??
I’m not giving my Corvette or the whiskey 😂😂😂😂
You must spend 60 hours a week doing these calculations before you can enjoy retirement.
@@emphyrio Its cheaper to keep her! lol
Exercise 4-5 days per week.
I thought the concept of momentum was great. It also provides a way to gauge the effect of a large expenditure. If the purchase pushes you close to, or over the 100% momentum ratio, it's better to defer it.
You say to avoid a bad year if you wait to retire but you still have investments while you’re working that are going to go down. Did you factor that in in that one year differential
Yeah. It’s not “wait a year”, because it will take five or ten years to get things back to parity. I mean, thats better than just living with it.
Good point. I thought the same thing. Started out at $1,000,000 beginning of 1973 which then dropped to under $700,000by beginning of 1974. How do you replenish that $300,000 loss a year later to begin 1975 with $1,000,000?
Between Aug 2000 and Feb 2013 there were 2 very short new highs, multiple drops of over 30% (12years of no growth)
Between Dec 1972 and May 1980 there were ZERO new high and a drop of over 40% (8 years no growth)
So the point is there are plenty of warning signs, now of course not everyone can say re-enter the workforce full time, however most can do some part-time work or income or serious cost cutting when the warning signs are flashing.
Similarly new retirees can watch for signs of trouble 1) market dropping more than 30% 2) no new highs, 3) Use a one-year smooth moving average to signal concerns, 4) use a bucket strategy to offset flash crashes (shorth lived).
A big part of my plan is moving into part time work for a few years once we get to 75% of our goal number. Freedom and flexibility and semi retirement earlier. Plus that way I stay in a high paying field and can pivot to more work or doing part time for longer if things look grim during that time.
I read that article and found it confusing so I'm glad you are able to clarify. If I understand it, for the first 15 years we don't want the portfolio value to drop and then subsequently it can drop a certain percentage over time? This coupled with a guard rails approach in case these targets are not achieved. Of course, it's great if the portfolio never drops, but how realistic is this for the average retiree with limited resources? Certainly we are holding off taking Social Security until 70 and doing Roth conversions so the nest egg is partially spent down, with the promise of SS to come. Seems like these models don't consider SS at all.
Interesting. Have you looked at how this ratio would compare to just looking at your current portfolio value vs value at retirement? I assume there must be a reason why he created the ratio, but intuitively it seems like they should give similar indications of a poor sequence.
Thanks Rob.... as always excellent and relevant content.
good info. I don't want to death spiral. thanks for sharing your knowledge
Rob, great video but you are oversimplifying the annual inflation adjustment. You do not have to limit yourself to yes or no. If skipping the inflation adjustment in a high inflation period is not doable, you could settle for half the inflation adjustment. Whether this works for an individual or not will depend on their specific numbers.
Hi Rob
I use 1/N which starts off conservatively and work part time as I draw down and as the portfolio naturally increase I work less to maintain same overall income !! Dead easy
Those starting year retirement green or red indications are a little misleading. Unless a magic genie turned up in 1974 and dumped a pile of cash on you, you were in the market and did suffer loses in the preceding years. Either you hit your target several years earlier and already retired or you looked at your portfolio in 1974 and decided not to retire. Is there a calculator that takes this effect into account?
Again, you can only afford to skip an inflation adjustment if you have contingency in your initial drawdown amount. That is, I had saved enough money so that taking more money than I needed seemed like an achievable goal at the outset.
If you can, I think one terrific way to mitigate the sequence of returns risk is to over-save, and to plan to stop working at least 10 years before your body won’t be able to work. That way, if you have a year or two super early on that call your portfolio’s longevity into question, you can return to the workplace, save more in the rough environment, potentially get great returns on those final saved dollars, and take social security early if your portfolio just isn’t holding up. Now, I think anything below the age of 70 (67 for a spouse claiming the spousal benefit) is early.
CDs or annuities.. There
Interesting version of dynamic withdrawal. Between simple skip inflation adjustment during down market years, and the dynamic (+/-20%) guardrails of Guyton and Klinger. A video I'd really like to see done would be looking back at a few key start years like 1973 and 1975, which of these dynamic withdrawal methods would actually have succeeded in avoiding running out of money but also which method adjusts appropriately so you don't end up with too large a bag of money.
don't think of it as division. Think of it as the number at the bottom must be > the number at the top divide by the percentage. So in this case, zero is not greater than 3 divide by 100%.
Coming up on 40, I'm just trying to get my needed withdrawal rate as low as possible. Currently moving towards 1%
Rob- I am noticing your video content in terms of time, have been reduced substantially and I thank you for that. I found it very difficult to devote the time to your lengthy, say 45 min.+, videos often just because of time in the day or maybe even the inability to stay focused later at night. And I do realize some financial management approaches or philosophies just can’t be articulated well in a shorter clip. But breaking things down into shorter segments is to me like having a magazine put in front of me rather than a book. But all good no matter how you decide to release your insight. Just my 10 cents adjusted for inflation.
9:27 WAIT… year 1 is on top (2%), year 2 on bottom (5%)…. Them every subsequent year is added to top and every year is divided by year 2? Why doesn’t the denominator ever change?
…no. The negative years are on top and the positive are on bottom.
That 1973, 1975 comparison was crazy. I think just being careful and having a cash bucket can help a lot for those first few years of retirement.
But delaying retirement by one year wouldn’t really mean success. Your portfolio would still have taken the 1973 hit.
@@JasonSmith-zs1he correct. But not having to withdraw from a reduced amount of investments for a few years May help.
Great video Rob! Should I count future social security in today’s dollar as part of the portfolio or just actual totals.
Where's the link to the paper? Interesting way to adjust, the example is not clear. Will have to do a spreadsheet after I read the paper. Thanks for posting.
If a retiree is so worried about a death spiral then they could consider a SPIA or DIA annuity. Rob did a video a few years ago ( should update to address if interest rates have impacted the potential payouts) You give up potential growth and upside for insurance that you dont run out of money. I would limit to no greater then 25% of total and take from fixed income allocation.
I think you can add SS into the tool in the “add income” section.
Thanks Rob - brilliant youtube video - And it can easily be applied wherever your home country is (I'm UK based currently). I wonder if one can add a second filter based on market p/e ratios and inflation, i.e. future expected returns.
I think the simplification to ‚just wait a couple years‘ doesn’t take into account that the individual ‚s investments were down substantially…it could be many years of waiting while saving and hoping the portfolio recovers?
Planning for retirement does not need to be a high school science project.
Do some reasonable planning and live your life.
During a 25-year retirement you will come across any number of economic conditions. You deal with them and then move on . Stop worrying so much.
Good advice, are you retired?
…needs to be a doctoral dissertation and peer reviewed by 3 financial industry journals. 🤪
Thank you for bringing up this strategies, I always look up to your video for update. Things appear strange right now. The value of the dollar is declining due to inflation, but it is increasing in comparison to other currencies and commodities such as gold and real estate. People are flocking to the dollar because they believe it is safer. I'm worried that rising inflation will cause my 400k in retirement funds to lose value.I'm really happy for today. I finally got my profit of 170k with my little investment of 45k on this Stock investment with the help of Miss Clara Brandon after feeling so ecstatic and heavy minded that nothing good can come out of it
you should have created a table of values to input into the ratio. it would make more sense.
Aren't dynamic withdrawal techniques already to prevent this?
Hey Rob, Great info here! Where can I find the article? Thx!
Great video Rob!
I'm just going to work until I die so I can't go into a death spiral.
Problem solved.
😂😂😂
Thought for day. Husb still consults and likes it but accountant told us he prob makes too much to qualify for GIS (pension subsidy in Canada). Lesson don’t earn too much.
you are in a death spiral the moment you are born😂
Seems to be the only solution.
Almost sounds like using Gaurdrails?
I'm curious if this could be a combination of "curve fitting" or possibly just a bad use case for the tool. I completely understand the reason for this type of analysis and frankly I don't have a better idea for analysis, but I fear that this type of analysis might be missing something important.
Trying to gauge if 73 or 74 was a better year to start retirement based on market returns doesn't check out simply because, where was this magic $1,000,000 during the market downturn of 73 if this person waited until 74? Did this person go to cash and avoid the 73 downturn? The only way this test would work is if this million was higher in the year prior. So, they lost ~17% from 1.2 million during the 73 downturn.
There are ways to mitigate sequence of returns risk, such as the 3 buckets etc. That's better IMO than this type of review.
Let me know if my analysis is flawed, is certainly could be...
- Cheers
While the ratio is simple enough to calculate, I believe that many retirees need an even simpler approach. In my work, I like to gauge the boundary or trigger at the original buying power of the nest egg.
It can be easy to put the original value of your nest egg in an inflation calculator that you bookmark and then check the current value of nest egg against the inflation corrected initial value. This follows the concept that you want to eat the golden eggs without killing the goose. When the goose is in trouble, you can drop down to a lower SWR.
Even simpler than that is scheduling out the nest egg's initial value if it grew at 3% and using that as the lower boundary or guardrail. This would produce a table that a retiree could go through and check each month before withdrawing income. It essentially accomplishes the above goal without needing to look up actual inflation while still effectively protecting against the death spiral.
Rob, in a past video, you talked about splitting a SWR into a portion dedicated to needs and the rest to wants. This approach allows someone to still, with an inflation adjustment, drop their SWR to their needs with little to no SWR for wants until the market heals the nest egg and it again exceeds its initial buying power.
I have graphically tested this against the RISK ZONE concept and it very good at mitigating the retirement death spiral. It also does not yield the drawback of having a plan on paper where your needs may not be met by the SWR reduction as the plan works around the SWR that is tied to needs. The trick is planning retirement around the SWR for needs and keeping it at or below 3% (in my research).
got a link to a good one?
WTF? Are you retiring or planning to build a rocket ship to fly to Mars
@@pensacola321 Is this in reference to the level of detail/thought that I put into my comment or the fact that I process data like the engineer that I am?
@@hopefilledfinancial I retired at age 57 in 2007. IMHO, you are way over thinking this.
But you need to do what makes you sleep at night.
@@pensacola321 Being able to sleep at night is the goal. I want to have confidence in my retirement plan. The topic of Rob
s video here is one that can be hard to recognize unless there is good plan in place to mitigate risk. For retiring in 2007, did you run into any major bumps with the housing crash? I am sure that it is a very interesting story.
I use this tool way too often lol. Man, the mid 60s and 70s were SO bad.
set the duration to 20 years and check out how hairy the periods beginning 1999-2001 are.
@@davidperry2725right, and we made it through those!
At least there it was a big crash right away.
1965/66 retirees had a much more insidious sequence. Things looked relatively normal and then dropped hard about 8 years in. Long enough to be well out of the higher paying work force one would've built the skills for.
All of the projections assume you start out with the same amount. But if I just weathered a bad year, my portfolio will probably not be the same as if I had retired the year before.
Unless we plan to convert 100% to TIPS for the five years before retiring?
Just have enough cash, stable investments or income (ssc) to not withdraw any money for as long as the bad years last.
If saving for a replacement car, where would you stash the $? If you recommend a high-yield savings account, is there a second recommendation (once the yields finally drop)? I was considering a CD but wondered if there was a better option.
Rob, I noticed that you used a default 80%/15%/5% split of stocks, bonds and cash for the illustration. I was not able to get to FICalc directly. Does it make much difference if those ratios are instead 60/40/0?
Great Video!
Would it make sense to simply take out 4 or 5 % each year of your portfolio balance ? That way you are automatically adjusting for positive or negative growth
You would never run out of money but you could see your spending really be impacted, as I am sure that you figured. That probably works better if you have a basket of investments, like real estate or cash that is not being exposed to that potential market volatility. Most will find that they can't adjust their spending to the really bad years and that makes this simple withdraw strategy very difficult to navigate. It is simple, so you have that going for you.
Rob, where's the link to the paper?! You say @ 7:10 link below but I don't see it...
Sequence of return risk... sounds more cool and sophisticated.
2 and 3 bucket allocation approach supposedly helps eleviate the problem. Wait another year. Thats dangerous too, in another way.
Is he saying withdrawals shouldn't exceed gains for 15 years? Wow.
And no consideration for expenses v portfolio size. Let's say a per needs to withdrawal 2 or 3 percent of portfolio to meet expense needs? This formula doesn't make any sense.
Valuable content! Your channel never disappoints.
Now I am going to check out the FI Calc tool. In my situation, we retired to the EU and on top of inflation we have the uncertainty of the strength of the mighty USD.
.....it would be awesome if any of these tools could also take historic forex cycles into account .... somehow. 😮
This is the modern Oregon Trail game.
You died of dysentery!
The formula will make more sense if it was multiples, not a ratio of sums.
What is the ratio of sums from the paper mean? It's difficult to give a clear answer. Only someone dethatched from math can think of strange construct like this.
If after a year, taking account for all activities, your portfolio grew by 10% -> 1.1. If it dropped by 5% -> 0.95
Multiply these numbers together. The result is the overall growth of your portfolio (or decline if less than 1).
You're welcome.
I have a simpler plan. Figure SS + 4% as an oversimplified starting point. Say that's 100k. My plan is to stay as far as possible under that number. In other words, it's a ceiling that I don't want to go near because "sequence of returns" and "Murphy's law" are close cousins.
Looking at current market valuations, I don't see how anyone (in their right mind) is expecting decent returns for the next decade.
In a nutshell, I say plan for the worst.
You should plan for the worst but your very negative outlook is irrational
I have an extremely positive outlook because I have a plan.
@@haldriver1378Not with the stock market.
Good advice Haldriver. Most financial experts don’t get it. For them it’s all about maximized returns. Swing for the fence and rely on the averages. That’s too risky for me. I focus on generating retirement cash flows to augment my retirement fixed income; pensions and SS.
Legitimate question: if someone manage to live off half of the dividend income (buying more shares with the other half), there's no need to worry about the sequency of returns, right? BTW, excelent video. Keep up the good work!
You should take all of your money put it in speculative stocks and take as much risk as possible!!
Then again you can live comfortably off of your dividends.
Assuming you are in relatively safe stocks with good dividend paying track records. However, even those stocks have suffered from deep dividend cuts, such as Walgreens, AT&T, and Kraft, to name a few.
@@sunchips5 Indeed. Absolutely right. But I assume we're somewhat "safer" when diversifying on 'cash flow stocks' through a reliable and time proof ETF. By doing so, we can eliminate the risk of relying on a specific company, since we have lots of them on the basket (and the fund is always changing stocks).
What does ‘skipping inflation adjustment’ mean?
Most retirement plans call for adjusting your withdrawals each year by about 3% or more for inflation. If you are taking out $60,000 the first year you would take out $61,800 the next year.
To over simplify, does the ratio mean if you start the year with 1 million dollars you should end the year with 1 million or more in the first period after withdrawals? I don't think I'm getting it. What is the scenario if the portfolio dips in value below 1 million due to market conditions, pre withdrawals?
Getting rid of RIDS.
Have you seen statistics about what percentage of retirees actually run out of money? Probably hard to measure....
Unless you are totally irresponsible, the only time it will happen is in the event of medical expenses or long-term care expenses.
Interesting. Considering the volatility of the market, when do you take the change measurements?
I am thinking maybe Tuesday afternoon about 2:30 or 3:00 PM.😊
Markets, inflation, recessions, and all sorts of economic conditions happen all the time! Deal with it!
Very wise man but like all other planners and experts they use history and basic math to predict the future but we are facing times that could rival the Great Depression. That’s what the planning and advice should focus on unless someone can explain to me how with the debt the BRICS and possible CBDC doesn’t cold cock everyone. I’m willing to learn. USD ceases to be the reserve currency for oil so how does that impact retirement is one question.
I never sell my stocks, I live off of dividends and capital gain distributions. plus other sources of income. for me, I will not experience any death spiral. Rental Income, Pension, Book royalties, Social Security, Stock dividends, TH-cam channel, all provide passive income that does not run out.
Course if you don't take 5%. Maybe less than 1% things last longer
This is interesting, I don’t have a full grasp on the withdrawal process, but If I withdraw 4% a year, wouldn’t the rest of the nestegg continue to accrue interest? Wouldn’t that be enough to keep it going some more?
…yes. However, in addition to the withdrawal, the portfolio could have market declines.
Does the portfolio return calculation per year consider inflation or is it a simple nominal percentage?
…no inflation; just a simple % change in the portfolio TY vs LY.
Should also point out max out of pocket
What exactly do you mean by taking the inflation adjustment?
I “think” he means don’t adjust your withdrawal for inflation in down market years.
Listened twice not able to follow what does skipping inflation adjustment means ? Can some one explain please. For example - on a given year let’s say I am at 100% ratio and inflation is at 4%, how do I understand skipping of inflation?
The assumption is that expenses will increase by inflation each year in retirement. This approach is saying that, if your percentage is 100% or more, you would skip that increase in spending in those years. Hope that helps.
@@MichaelVasey thanks Mike, helpful.
You can divide by zero but the number becomes infinity
In a high inflation year, you could also take a partial increase. If inflation is 8% and the market is down, maybe you take a 4% increase.
Inflation, recessions, up markets, down markets they all come and go. Please.
I’d like to hear about perpetual withdrawal rates.
There is a thread I just read on the bogleheads website
I'm working on it!
@@rob_berger thank you!
Now we need another formula to calculate how many years we have left 🤔
There are numerous life expectancy projection tools. Some are very detailed
@@YetteEh, I'm not sure I'd want to know. Seems kinda creepy.
Just live a good life until you don't. In the meantime don't spend too much time planning retirement calculations and withdrawals.
@@pensacola321
💯
You never changed the denominator?
…correct, because in his 4-year example, only 1 year saw a gain and gains go in the denominator. The other 3 years were all losses and losses go in the numerator.
How can things in the next 5-10 years be good with a $32T national debt and $1-2Trillion annual deficits which our government will never be able to curb? Sure seems like a time that we have never seen before. We need some AI calculators with this in mind to tell us who are are retiring in the next year where to put our money. Thanks for these reviews Rob. They are very helpful.
You need a crystal ball.
withdraw 4% will last 30 year retirement = rule of thumb.
That’s $3,333 a month, pre-tax, for a $1,000,000 portfolio. Even with SS that’s a thin budget
…assuming no significant market losses. Withdrawals AND losses can kill a retirement plan.
saving for whole life and making a cut in retirement is something not right , this needs to be addressed
Anybody else in their mid-20’s watching these vids? Lol
You are smart to learn about this stuff as you go instead of having to do intensive research crammed into less time later!
Start planning and aggressively saving early! We wish we would have… 😊
Mid 30s but it’s helping me a lot with my parents!
@@silentnot4812 great advice
Mid 30s here 👍
Increasing withdrawal rate , you must consider tax consequences. Profits made annually in your portfolio, place and lock in a money market account, if loses occur, rebalance to your original allocation. Keep it simple.
The more money that I make, the more taxes I pay. I'm fine with that. It means that I am doing very well.
A simpler solution is to annuitize a portion of your portfolio--a simple immediate annuity. Not sure why many folks are afraid to at least consider doing that.
inflation
Annuity Company may go broke
wrong, and if you don't know why please learn before it is too late.
Yes! I’ve done this.
@@heidikamrath1951 Me too.❤ It.
Retirement is one of the dumbest things a person can do. Save for retirement but never retire. Always Be Working.
Stock Market Historian here 😂😂
🤘
Didn't even watch video, but have answer. do what I am doing, work into your late 70s.
Ok😢😂😊
It's very unrealistic to assume that most of your audience has over a million dollars to retire with.
He never stated or implied that his $1,000,000 example represented most of his audience or any portion of his audience, for that matter.
I will never understand why people "plan to fail" in retirement. What is this "running out of money thing" ?
You live on your dividends, fixed income, interest and any entitlements... SS, Pension, rent etc.
Your portfolio can be used to fund long-term care later in life if needed or to leave a legacy.
But having a "withdrawal strategy" and living in constant fear of running out of money sounds nuts to me.
Amen!
Right. I want to draw mine down from age 60-70 on account of IRMAA and RMD's. If 401k lasts 20yrs from age 60-80, thats more than enough. Ss at 70 will cover plenty if they don't make a major cut to it.
Lol. It’s not planning to fail. It’s planning not to fail. You’ve posted so many comments on this video saying the same thing. Take a break. Relax.
For anyone who has followed an actual budget, based on their income at any given time, this is nothing more than an intuitive response. I can't believe it takes a "study", or a 17:00 long video, to explain that you should spend less when you "earn" less. I mean, it's logical and reasonable, but also just plain old common sense to anyone who lives in the real world...isn't it?
Of course. Don't overthink this retirement thing. People have been doing it successfully for years.
Why lawyers charge the way they do.
Skipping your inflation increase in the first year of your retirement is HUGE!, it means your real income has decreased for every year of your retirement.
When he says skipping the inflation adjustment, he’s not referring to income. He’s referring to not increasing your spending during down years; not adjusting your expenses for inflation.