Unveiling the Retirement Myth

Jon, thanks for doing the article & video. I'm a big fan Jim Otar's: "Zone Strategy".

I'll try to keep the link above up-to-date with any videos and articles for easy access.

Below is Jim Otar's post in the Bogleheads Forum today:

http://www.bogleheads.org/forum/viewtopic.php?t=42110&mrr=1251030588


Wow, I did not think I would get this much response. I am very pleased. Thank you for all your comments.

Yes, the hosting server is congested somewhat due to the overwhelming response. I apologize for that, but there is not much I can do about it. Here are some hints:

-Please download only once and save it on your computer. Then you can read it at anytime at your convenience.

-Please enter your correct name and address and e mail, in case I have to contact you. Once the book is printed, I will purge all this information. I just need it in case of errata.

-For those who are concerned about my business model: I truly appreciate your concern. However, you don't need to worry about me. I am very deep in the green zone, and the existence of these posts indicate that my "business" plan is working well. The only person who gets upset about these free downloads is my wife, but we have been together for 32 years and she is used to me by now (I hope).

- I have gotten an overwhelming download response, so I changed the rules slightly: The green download is free until end of August 31st, or for the first 5,000 (OK maybe a little more than that) successful downloads. After that it will be for a great sum of $3.99.

-It took me on and off 6 years to complete this book, I hope you all enjoy it.

Over and out,
Jim Otar

The ratio is the "asset to withdrawal" ratio. If you have $100,000 and withdrawing $5,000 each year, indexed to CPI, then your asset to withdrawal ration is 20. ($100,000 / $5,000). It is the reciprocal of the initial withdrawal rate, in this case 5%.

In round numbers, for a 65-year old person, if your asset/withdrawal ratio is under 20, then you will likely run out of money -if you were to hold a portfolio- during retirement. The only sure way of having a lifelong income is purchasing a CPI- indexed life annuity.

Again in round numbers, for a 65-year person, if your asset/withdrawal ratio is over 30, then you do not need to buy any annuity, your portfolio is large enough to cover the three financial risks of retirement; longevity, market and inflation risks.

In between 20 and 30, you do need to export the risk - only as much as necessary- but still can hold some investment portfolio.

People have to be aware, and I expect this would be explained in Jim's book, that these quick rules of thumb have to be taken with a grain of salt. The "asset to withdrawal ratio" (the "4% withdrawal rule" by another name) doesn't consider real life situations. If everyone was 65, of normal health, and lived in a vacuum (no expectation of entitlement income, no outstanding loans, no part time retirement income, no desire to pass on an estate, no expectation of a future capital gain such as selling the cottage, no anticipation of a future cash call or special expenditure), then these rules of thumb might have a use.

The fact is, our life is not that simple... our capital is taxed in very different ways, and age is very important. For instance, our "A2W ratio" has to be much lower prior to age 60 and age 65 to accommodate CPP&OAS bridging, and of course, as we approach 85 and beyond, the A2W approaches the number 1 (one) since in our final year we (hopefully) withdraw the last and final dollars from our retirement next egg.

The only number worth knowing is your burger quotient (BQ).... that lifestyle (after tax/after inflation) which if followed, will (just) see you out to a certain age. It requires some computation because it includes the effect of income tax, its effect on the different forms of capital (reg/nonreg/equity/tfsa), other discontinuous financial entities such as loans, future lump sum cash infusions, pensions, entitlements, etc... however, this is a calculation that everyone needs to do.

It is your life and future well-being as well as your heir's... this is more important than applying a simplistic "4% withdrawal" or "asset to withdrawal ratio".

BTW... unless you are way up in the HNW stratosphere, if you expect your investment adviser to volunteer to do this, think again. This is an exercise you should be doing on your own.

A financial plan starts with your Visa bill(groceries/gas/etc) and works back from there. The industry wants you to be afraid of uncertainty... they would prefer that you stick to simplistic adages such "max your RRSP pre-retirement", 4% withdrawal rate post retirement, rather than getting involved with time-consuming analysis such as described above, which earns them no fee.

Cynically,

Steve

Steve, your post sounds like you know what you are talking about...How did THAT come about?

The aim for the retirement planning process is to make so much money... and save so much money prior to retirement that it is impossible to spend it all in the 'golden-years'. There ain't no free-ride in this day and age...and it will get better as we move forward.

Never ever Trust a third party to provide a retirement plan in the best interest of the retiree. Everybody must Look After #1. Retirees are not exempt from the natural forces. How much Money is in the hands of the baby boomers? Is there an Opportunity? Yep, It is ALL about Money.

Some of us are well aware how the Vulture-Systems are designed for the financial guru UCSers peddling their magic formulas, news-letters, books, secrets, oujia boards, recycled secrets, just to list a few...

Deja vue...same ole stuff...some things do not change...

I am preparing for retirement and I have also found Jim's book very useful. If I were to rely solely on my financial advisor, I would never have encountered the princicples Jim is presenting.

I am most interested in SWR since outliving my retirement savings is my worst nightmare. I like the use of "aftcast" as it uses history as a model.

I just read today at the NYT ( http://www.nytimes.com/2009/08/29/your-money/individual-retirement-account-iras/29money.html?_r=1) another approach at arriving at a "safe" withdrawal rate:

"What he concluded was that the overall market’s price-earnings ratio — taking the current price for the Standard & Poor’s 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal — was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 percent stocks and 40 percent bonds meant to last through 30 years of retirement.

If the ratio was above 20, indicating that stocks were overvalued, than a 4.5 percent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 percent rate was safe, tested against every historical period for which data was available. And if it was under 12 — a level it almost got to earlier this year — a rate of 5.5 percent would work.

The most recent figure was 17.67, which suggests a 5 percent withdrawal rate for current retirees. It had been above 20 until October 2008.

Mr. Kitces gets his ratios from a set of data that the Yale professor Robert Shiller creates and stores on Yale’s Web site , at http://bit.ly/3gexz. I’ve provided a link to that data (Mr. Kitces uses column K in the Excel spreadsheet there) and to all of the other research in this column in the online version of this story."

Does anybody have any other alternative approaches/guidelines to arriving at a SWR?