Unveiling the Retirement Myth

I shake my head at so many of the responses that indicate people are looking for a "just give me a number" type of answer. Come on! The future is unknown. There is no SAFE withdrawal rate.

* It's calculation assumes a 'die broke' scenario. But few of us will have family to provide the extra labour of medical support at the end of our life. We will need a reserve of capital. (Oh right, you conveniently assume the other taxpayers will cover that.)

* 'Safe' means 0% probability. See the Table 3. There is no scenario that gives 0% probability of running out in 30 years, much less the 45 years I will need. And look at the average growth in Table 5. Looking for 'safe' mean the average result is an increase in asset value only equal to 2 times, but accepting risk allows the average growth to be 8 times.

* To claim that data from "set of data that the Yale professor Robert Shiller ..." "was predictive enough to produce guidelines" ignores the same error that is implicit in stock-screening - DATA SNOOPING:

The biggest problem with this strategy lies in its basic premise, that back-testing proves something. Academics have given this issue the name 'data-snooping'. Given enough time, enough attempts, and enough imagination, almost any pattern can be teased out of any dataset. And there have been decades and decades of dredging done on the historical stock exchange database. Proponents of the efficient markets hypothesis argue that many of the predictable patterns that have been identified in financial markets may be due to simple chance (Reality Check by Park and Irwin 2009). The relationships simply do not exist outside of the specific data set analysed (e.g. in the future).​

If you want a 'safe' withdrawal buy an annuity. Otherwise be prepared to cut back your expenses in recessions and wait to splurge after good markets, and reinvest the portion of income equal to the degredation of inflation.

Getting back to thread's subject...

"I keep up the pressure now so that I'm better prepared should there be negative impacts in the future." I think that quote from CannonFodder is a pretty good summary of where I believe people's attention should be concentrated.

All the posters above who claimed to find JimOtar's or Steve41's magic number helpful enough to spend $4, and important enough to argue it's finer points, are completely missing the big picture.... most probably because financial advisors and the media have brain washed them into thinking they 'need a plan'.

For Pete's sakes, the future is unknown. The way it will play out is NOT predicted by historical averages, or MonteCarlo simulations, or bootstrapping simulations. You cannot PLAN it.

To assume certain inputs that conveniently support your conclusions is misleading. Eg. JimOtar's assumption that investment returns will be only big enough to cover inflation, or Steve41's assumptions that tax rates upon RRSP withdrawal will be lower than the contribution rate, or nearly everyone's assumption that you should plan to die broke without needing capital at life's end.

Instead you should be doing WHAT YOU CAN every day of your life.
* Don't save 'what your plan says you should save'. Save whatever you can.
* Don't invest in safe (lower return) investments because your plan says you don't need your portfolio to grow. Invest in whatever you think will earn you the highest return (within your volatility tolerance).
* Don't spend $$ in retirement the magic number someone quoted. Spend what your investments earn - after reinvesting inflation and putting $$ aside for year's of poor returns.

What you are referring to is simply the three finance equations that EVERYONE need to learn, but 99% refuse to.

Mortgage/annuity = Present value of an Annuity
Sinking fund = Future value of an Annuity
Future value = Present value = Present value of a Dollar

An example of them is here. If you want to learn how to use them (the calculator version) see these directions.

You may remember the many times I have told people they need to own a financial calculator and know how these functions work. You may also remember that never, ever has any other poster reiterated that advice. In fact almost every time, the response has been, "We don't need to". Obviously you decided you did not have to.

The existence of these financial functions does not prove that financial advisors are useful. Since everyone can buy the calculator there is no necessity to even learn the equations behind the function, much less pay an advisor.

Learning basic math is part of what I call "common sense". You could have learned that common sense from your parents. You just proved they had it to share. When people refuse to learn what common sense dictates they must learn, it reflects badly on them, not on the need to use common sense instead of relying on 'advisors'.

But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds.

E.g Everyday you make trade offs between spending money now (instant gratification) and retiring early (or going back to school, or buying that big boat LATER). The decision is not make according to some 'plan'. It is made according to which you think is more important at that specific time. You ask yourself "will spending this money make my happier?'. Or "will traveling in retirement make me happier?"

In other word you just do your best, knowing only the generality that you will need savings for retirement (etc).

Learning basic math does not constitute a 'plan'. You do not 'run the numbers' through that math everytime you make a purchase (or decide not to). Nor do you do not need to run the numbers every year-end, because you already know that you did your best.

I expanded on the math angle only because you showed you did not know what it was all about.

The belief that "planning is necessary ... to be mortgage/debt free" is wrong. Common sense everyone is born with, and does not require any advisor, tells you to save up FIRST to pay for what you want. Therefore you do not go into debt in the first place.

The offshoot of this error is thinking that you can 'afford' to make certain purchases NOW, because your budget says you will have saved the money by some LATER date. In effect budgets PROMOTE spending before the cash has been saved.

There is no motivation to save 'because of a budget' commitment. There is no emotional gratification from budgeting. You save because you really, really WANT that new car. The more you want it, the more expenses you are willing to cut.
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Regarding whether you are "lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio". There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return.

Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math.

The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.

Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.
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If the OP of this thread really wanted to help people, he would tell them about another time-value-of-money calculation that is NOT on any calculators I know of --- the PRESENT VALUE OF A GROWING ANNUITY. This calculates the nest egg you require to fund an annuity of retirement payments that grow with inflation. Put it into an Excel spreadsheet so that you can solve for any of its variables:

expected after tax investment returns % (less what you reserve for loss years)
the portfolio balance at the start
the inflation rate you expect
the starting value of the draw for living expenses (not including taxes).

The conclusion of my comments that you quoted provide the answer to your objection.

leslie said:

Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math.

The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.

Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.

Click to expand...

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Maybe you remember that there was a big market crash last year. I survived just fine by doing the above - living off what I had put aside for loss years. I cut back all my discretionary expenses - no big deal. My portfolio has now recovered to the Jan08 level, and it is above the inflation adjusted balance I started retirement with.

No need for planning. No need for advisors. Just common sense - doing the best I can each and every year.
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Regarding annuities, you assume my position is 'against them'. Not at all. Once you reach the age where your cohort is dying at a good clip, they start to offer good value because you capitalize on the value left behind by those who die --- and I expect to long longer than the average. I think they are of value to everyone, no matter the size of your portfolio, to cover your necessary costs. The only people I would exempt would be home-owners with a revenue suite. Because RE works much the same way as an annuity.

But there is no value to annuities when you retire early (me). Not enough people are dying for them to give you a better rate than bonds.