Retirees Gazette

[steelpony10]

     
        Study I ran across researching spend down vs. income investing. Opinions welcome.*


                www.blackrock.com/us/individual/literature/whitepaper/spending-retirement-assets-final-whitepaper.pdf


                 * If you need or choose to spend down you may need to diversify and have allocation limits to control volatility (risk) at the cost of less income in my opinion. Since I income invest I cover volatility (taking on more risk) by creating excess income to needs and depositing it into “safer” less volatile investments monthly which over time has reduced volatility as we age.

[Capital]

steelpony10 , thank you. A good read.

[FD1000]

Good read.  The whole idea for retirees is to feel safe and have enough. If a retiree portfolio performance exceeds the withdrawals + inflation, it means she has it made and why when she is gone there are lots of money left. The article discussed various topic and as expected the finding were logical.  Example: a retiree with pension is more optimistic, Women are more likely to feel financially vulnerable.


My rule of thump is...a retiree should have a portfolio of 20 25 times(healthcare gets expensive) her annual expense, not including SS and assuming she doesn't have any other income such as pension. That was my comfort level. 

We continue to spend as prior to retirement until 2020 because we can't travel.  This year, again, we are going to stay in the US instead of vacationing in Europe. In 2020, we were hiking locally, this year, we are going to drive for at least 2 weeks touring other states as we used to do years ago. 

[steelpony10]

        FD1000 ,

                 We’re set also except for an above average long or drawn out stay for assisted living and LTC. I think I have that contingency covered pretty well also though.

                  I did quite a bit of traveling up to retirement in the states and worldwide. I’d like to revisit some parts with someone that shares the same interests. Looks like that isn’t happening any time soon. 

                   I reached the same conclusion while dealing with 2 sets of parents retirement accounts up to 35 years. As you know we went with CEF’s to try to get way ahead of the game with a part of our portfolio making the rest secondary income. That’s worked great so far.

[FD1000]

I planned for LTC at $500K. My calculation were for 5 years which include both my wife and I at $8K monthly ($500K=5 years * 12 months * 8). That money and all other monies are invested at 99+%, never in cash. Staying at home and/or traveling in the US is a lot cheaper than abroad. Since I started investing, I never had money in cash/CD for more than several weeks, which is part of my system going to cash only in high risk markets.

My wife and I agree most times what and how to spend the money.  We have been vacationing since we got married, almost 40 years ago. The bucket list is getting smaller. BTW, a vacation for use means seeing/doing stuff and be busy all day.

[steelpony10]

Aug 4, 2021 15:52:44 GMT FD1000 said:

I planned for LTC at $500K. My calculation were for 5 years which include both my wife and I at $8K monthly ($500K=5 years * 12 months * 8). That money and all other monies are invested at 99+%, never in cash. Staying at home and/or traveling in the US is a lot cheaper than abroad. Since I started investing, I never had money in cash/CD for more than several weeks, which is part of my system going to cash only in high risk markets.

My wife and I agree most times what and how to spend the money.  We have been vacationing since we got married, almost 40 years ago. The bucket list is getting smaller. BTW, a vacation for use means seeing/doing stuff and be busy all day.

             LTC is about 12k a month by us. 60% of PV could be used for that with 1 on the outside. We had four kids so we were  “deprived” for 25 years or vacations were a fortune. My traveling for work was all reimbursed expenses. So far I got my wife to go to Alaska, whoop de do big adventure. Lol.

[chang]

24h in-home LTC costs $450/day in the greater Boston area, and 150% of that amount on holidays. So figure $13,500/month.

[Chahta]

Please define “spend down” and “income” investors. Looking on the internet spend down is simply withdrawing assets from a portfolio in retirement, nothing in particular. I assume income investing here means using the yield only from a portfolio and spend down means using the TR.

[steelpony10]

        Chahta , 

                 Your definition is close enough. Maybe the 4% “rule” is an example of spend down. I never ran into a true spend down investor though. Who took their regular cut in 2020? Give that person an RG Dun!

                  We do both. Live off regular monthly income and disperse excess income or cap gains from equities into so called “safer” investments which drives portfolio value up over time (gains are higher then our personal inflation rate generally long term) and volatility decreases as these areas of safer investments build value and compound.

[Chahta]

So I am not sure where all this is going. Steelpony advocates setting up a portfolio to generate excess income at the expense of total return? The portfolio can decline and you still take the full yield? In that scenario you are spending down. I know you have growth side too as you just posted. I am referring to your income generating “sleeve”.

[FD1000]

Aug 4, 2021 18:12:41 GMT chang said:

24h in-home LTC costs $450/day in the greater Boston area, and 150% of that amount on holidays. So figure $13,500/month.

The NE and CA are way up there.  I used to understand CA with their great weather, but the NE doesn't have a good weather and both have a huge cost of living. Now CA have fires, drought, tent cities, higher crime.

It's all correlated, higher RE, higher pay, usually higher congestions, higher taxes, more funded public programs, higher pension for Gov/State/School employees = much higher cost of living.

LTC in GA is still about $6-7K monthly.

[steelpony10]

     Chahta ,

              Our income all comes from CEF’s purchased during the bank crisis from all our dividend stocks and cash. They pay on average 8-9%. At this point we take about half of that out and now auto invest all excess monthly income into VTSAX (VTI) no longer PONAX. With no sudden income requirements this set up should be good past age 90 (me). Equities, CEF’s, munis all declined in 2020 and I took the same draw because there’s 100% slop built into our CEF income at this time. 

               You’re correct equities and a muni are secondary options. Also you should know the CEF income we take now as a percentage of our portfolio value is only 2%. If max draw was now it would be 4%. This is because an equal amount of excess income to needs has been auto invested mostly into equities since 2008-2010 growing portfolio value which is dumb luck. 

                I consider this income investing with TR as a secondary source of income. No diversification other then “income” streams, no allocation other then what I thought I needed to invest in CEF’s, no buckets, no international funds etc. There are no high income low risk investments or safe mythical combinations out there. It’s all give and take. You have to accept that as fact along with the unknowns that are out of everyone’s hands.

                 

[Mustang]

Very interesting article. The authors' findings seem to indicate that I'm normal. According to my wife that would be a first.

To me, living off a portfolio's income is living off dividend and capital gain distributions. Spending down is selling shares. Since we are not talking about corporate voting rights I have absolutely no problem selling shares (or units since I invest in mutual funds). I update the number of shares in Quicken but pretty much only look at the dollar amount of my investments. All dividends and capital gains are reinvested. I withdraw dollars and I really don't care where it comes from. I think that puts me in the spend down category.

I have retired twice. First from the military in 1996 and have a military pension, then from industry in 2010 and have a 401K/traditional IRA. I started social security at 62 in 2012. My wife did the same in 2018. Last year was my first year of MRDs. I was surprised to see that reinvested dividends and capital gains exceeded the MRDs. We fall into the category of secure investors, are not big spenders and are moderate risk takers. All MRDs and my wife's social security were re-invested. My wife calls savings/investments our black hole. Stuff goes in but not out. So I have definitely retained an accumulation mindset for now. But there is a good reason why.

We do not have an asset plan. I do not see the sense of it. We do have investment goals. The primary goal is to have a livable, stable income. A secondary goal is to leave something for the kids. If we have the first I don't care how much our assets accumulate. They go to the kids. And with a little luck our withdrawal methods will allow our assets to accumulate. Both MRDs and the 4% Rule tend to leave wealth behind. If they don't the kids are out of luck.

I suppose the biggest reason for no asset goal is life's little uncertainties: How will the markets behave? How long will we live? The one thing we can control is current spending. Just because we have it doesn't mean we should spend it. Why? My wife is the perfect example of why women more risk adverse and have higher levels of financial worry. Because I drug my wife around from military base to military base and because she was the primary care giver she does not have a pension and both her social security and 401K/traditional IRA are much smaller. She was often raising the kids as a single parent while I was on assignment. I even learned that my son was born through a phone call.

Since my pension and social security go away when I die my biggest investment concern is how do we accomplish our primary goal when I am gone. That is why I have a black hole. Along with insurance it will provide replacement income. If things go according to plan (and they won't) all withdrawals from investments will be re-invested until she is living on her own. I hope the worst case is she is able to maintain our standard of living.

I suppose that is why I am normal and why I take conforrt in maintaining assets, believe spending should be realistic, have no specific asset goal but am confident that we can achieve our primary goal of livable, stable income for both of us.

Thanks for the article.  I enjoyed reading it.

[Chahta]

Folks can live off yield and selling shares and have portfolio growth. How does that label them as spend down? I would think that spend down means your WR is high enough to end up with a declining balance each year. If the balance declined the last few years you are in real trouble.

If one’s desire is to live from one’s portfolio then it must be decided how to live just as it is when working. The only real answer to not outlive a portfolio is to plan to have much more than needed or live below your means or keep working to supplement. I’m sorry but it is faulty thinking to worry about heirs beyond your spouse, unless there are special circumstances.

[liftlock]

I see "spending down" as consuming a portion of one's assets to live on over a period of time. A $1.0 million portfolio will last 20 years if it is consumed at a rate of $50,000 per year, assuming the portfolio does not grow. In this example, the initial withdrawal rate would be 5% of the portfolio. The annual withdrawal rates will grow each year, with the last withdrawal rate equaling 100% of what is left.

IRS calculations for RMDs are a form of forced "spend down" calculations from tax deferred accounts. The spend down periods for RMDs are recalculated each year, and are based on an estimate of ones remaining life expectancy which declines with age. Initially, RMDs are quite small: 3.65% of ones portfolio at age 70 per old IRS Uniform Life Tables (see below). They grow to 5.35% at age 80, 6.75% at age 85,and 8.77% at age 90. An investment return rate equal to the RMD rate is required in order to avoid spending down a portfolio. Real rates of return are required to maintain the size of an inflation protected portfolio.  This becomes more difficult to achieve with age because of the growing size of investment return required to stay even. Many retirees will find it more difficult to avoid spending down a portfolio after reaching age 80 / 85.  

www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

RMD calculations provide a conservative way to spend down and consume one's portfolio. The uniform life tables can be extended to ages earlier than are required for RMDs. (Just add one year of life expectancy for each age prior the ages when RMDs start.) This can be useful to someone who wants to start spending down their portfolio before RMDs actually start.

[steelpony10]

Aug 10, 2021 12:04:09 GMT Chahta said:

Folks can live off yield and selling shares and have portfolio growth. How does that label them as spend down? I would think that spend down means your WR is high enough to end up with a declining balance each year. If the balance declined the last few years you are in real trouble.

If one’s desire is to live from one’s portfolio then it must be decided how to live just as it is when working. The only real answer to not outlive a portfolio is to plan to have much more than needed or live below your means or keep working to supplement. I’m sorry but it is faulty thinking to worry about heirs beyond your spouse, unless there are special circumstances.

            I’m thinking the same way. I also think the more scared you are the longer the investment house can make money off of balances etc. so that’s no way to spend your last days. That’s why I identify as an income investor but with a Plan B.

            I told one kid the DOW will be well past 100k probably when he retires if he makes it that long but automobiles will be cost more then 150k and LTC 500k. All part of my one time standard words of wisdom borrowed from my mentors back in the late 60’s.

            The big difference is I didn’t roll my eyes. I got to it right then. Lol. Well I’m guilt free so that’s a load off. I’m a Grand Torino type guy so wait until the will is read if I survive my wife.

[Mustang]

Aug 10, 2021 12:04:09 GMT Chahta said:

Folks can live off yield and selling shares and have portfolio growth. How does that label them as spend down? I would think that spend down means your WR is high enough to end up with a declining balance each year. If the balance declined the last few years you are in real trouble.

If one’s desire is to live from one’s portfolio then it must be decided how to live just as it is when working. The only real answer to not outlive a portfolio is to plan to have much more than needed or live below your means or keep working to supplement. I’m sorry but it is faulty thinking to worry about heirs beyond your spouse, unless there are special circumstances.

Yes.  If share price increases fast enough and the dollar withdrawal is low enough.  But we don't live on withdrawal rates. 

We live on withdrawal dollars and the big question is whether the dollars are enough. To actually withdraw enough some may have to take 8%.  Others only 2%.  Things like return and inflation are unpredictable.  The only real control you have to make your portfolio last 30 years is spending and there are real limits to how much you can cut back.  This is why I do not like dynamic withdrawal methods. 

Take the Guyton-Klinger guardrail method.  An example would be taking an initial withdrawal of 5% from a $1M portfolio.  If the market drops you withdraw less but to try to maintain your standard of living you allow withdrawals to increase to 6% of the previous year's ending balance.  That is the upper guardrail.  A $1M portfolio would allow a $50,000 initial withdrawal.  If the market drops 30% the next year's ending balance is $665,000 (($1M - $50k) x 70%).  That means the second year's withdrawal falls to $39,900 ($665K x 6%).  Can this retiree cut over $10,000 from spending and still get by?  There are a lot of people who can't.

MRDs are a type of dynamic withdrawal method using a variable withdrawal rate.  If the market drops substantially then withdrawals drop substantially.  Even though the IRS divisor get smaller increasing the withdrawal rate each year.  Vanguard tested dynamic withdrawal methods using a fixed withdrawal rate.  It resulted in less than desired income 48% of the time.  Using their floor and ceiling approach (similar to guardrails) resulted in less than desired income 45% of the time.

I have not done comprehensive testing but did test the 4% Rule using Vanguard Wellington, one of my three funds in our simplified portfolio.  The 4% rate is specifically for a 30-year withdrawal period.  Longer and shorter period need a different rate.  According to Bengen and others the historically worst time to retire was 1968 because of the following stagflation years.  I used that as a starting point.  I tested a $1M portfolio and an initial withdrawal of 4% with each subsequent withdrawal adjusted for inflation.  Wellington lasted 25 years before it ran out of money.  Obviously, the share price didn't increase fast enough to provide a stable income for the 30 year expected retirement period.  Using 1971 as a starting point at the end of 30 years Wellington had a balanced greater than $1M (not real dollars).  This time the increase in share price was enough.

I used shares instead of dollars in my definition because of the volatile nature of the market. If you do not take a withdrawal and the market causes your portfolio to drop 30% is that a spend down?  I tried to look up the definition of spend down but only got information for Medicaid.