"You can’t know for sure how long you’ll live, whether you’ll suffer a costly illness or how markets will perform.... Decumulation isn’t just a tough financial problem. It can be an emotional strain to flip a switch from saving to dissaving.... Do you keep a big nest egg, or do you convert your savings into a stream of monthly checks?
The smart but psychologically difficult choice is to at least partly annuitize — that is, buy a financial product that provides a monthly income. When you buy a life annuity, the seller takes on the risk that you will live to age 110. That’s a big load off your mind. What makes it hard on your psyche is that to get a decent-size annuity, you have to turn over a big chunk of your life savings to the seller, usually an insurance company. For most people, especially younger retirees, some exposure to stocks makes sense. But grasping for high returns to compensate for years of undersaving is unwise. Do you lose sleep when the market plunges — or, worse, sell your shares and lock in big losses? Then you’d be better off in something safer...."
Of course, it's tricky. You're mixing actual finance with the most intensely personal emotions, and the biggest factors are immense and disturbing uncertainties: What will the markets do and when am I going to die?
Anyway... I learned 2 new words: "decumulation" and "dissaving."
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52 comments:
Extremely low interest rates and inflation not discussed. We now effectively have negative interest rates.
I have never heard those words and work in finance- who are these jokers?
Most annuities are crap and usually come with high expenses. The hook used to sell them is security- you won’t have to worry about your leaky bucket going empty.
step 1: collect life savings
step 2: invest in safe risk assets
step 3: profit!
Has there ever been a 10 year period where if you bought and held a major index- S&P or Wilshire or like, you would have lost principal? There aren’t many five year periods either. Look it up…
Ah, the joys of a living language where new words are introduced almost every day. As we decumulate and dissave do we de-evolve?
If you live past 90, you'll Probably be in a nursing home
If you live past 100, you WILL be in a nursing home
real questions, for real people
Do you have heirs?
Do you want to leave them an estate?
These are the REAL questions.
If you're like me, and Have no heirs, WHY would i want to have money to live in a nursing home on?
If you HAVE heirs, and don't want ALL your assets to be consumed by a nursing home...
WHY are you wearing seatbelts?
WHY did you get a vaccine?
Another personal emotion is Democrats raiding your savings because “you are rich” and their new spending bill won’t pay for itself.
Deretired?
My husband has been in finance for must of his career, is respected in his field, has certifications and experience to indicate that he is qualified to handle our retirement funds. But he doesn't, because it is emotional. Big difference when it's your money.
He's great at compartmentalizing in most ways; in particular, his ability to remain friends with people who have cost him in his career always astonishes me. But about our money? That's personal.
Once you turn the corner at age 70, index funds are the way to go IMHO. Playing the market aggressively is for the youngsters...
Has there ever been a 10 year period where if you bought and held a major index- S&P or Wilshire or like, you would have lost principal?
Don't mistake the pre-Biden era with today.
Has there ever been a 10 year period where if you bought and held a major index- S&P or Wilshire or like, you would have lost principal?
Well has there ever been a five-year period where we have experienced such momentous and worrying changes as in the current environment?
Has the country ever lived with levels of government debt that would choke a horse (wartime excluded)? To not expect and plan for major societal disruption, civil war, economic collapse, and extreme hardships would be unwise.
The article is very timely for me as I fully retire this coming month and I have been trying to adjust my mindset from the accumulation of assets to decumulation and adding in current events and the bizarre political and societal environment it doesn't lend itself to many peaceful nights sleep.
Just ordered a book about how to survive this type of collapse written by an Argentinian who lived through their collapse in 2001. I hope it helps as I would wager we have at least a 50/50 chance of something as bad or worse happening here within the next 5-10 years.
There's something that actually works to beat the market when you're saving, called dollar cost averaging. Just invest a regular amount at regular intervals. You'll wind up buying more when it happens to be low and less when it happens to be high, and have a lower average cost than the market offers.
Unfortunately the reverse happens when you're drawing down your savings. You sell more at lower prices and less and higher prices, and get less out than the market offers.
There's no fix for that.
This is why you should try and have at least three children. Walking and talking future eldercare.
Has there ever been a 10 year period where if you bought and held a major index- S&P or Wilshire or like, you would have lost principal? There aren’t many five year periods either. Look it up…
That's true, but doesn't really address the question of how fast you should draw down your assets in retirement--in other words, what standard of living you can afford. The best answer is to have children who care about you (and who make a living), and whom you care about. Then you're not so concerned (financially) about dying too soon and inadvertently leaving a big bequest, or with outliving your assets, because your kids will take care of you.
As an anecdote, my father had a mix of annuity and stock market investments, lived till 99, and was a year or two away from running out of money, as he was outspending his annuity income every year (mainly on full-time caregivers) and drawing down his other assets. Of course his four kids would have supported him had he lived past 101.
Had he left 100% of his money in the stock market he probably would have been in at least as good a position, but we would have still faced the same issue.
I learned 2 new words: "decumulation" and "dissaving."
Here's an older word that will serve you even better: Detachment.
All of us, but especially those who are fairly well to do are way too attached to worldly goods and worldly way of living. We accumulate way too much crap and live too high of a lifestyle. A lifestyle that costs a ton of money to continue.
Detach yourself from that worldly materialism. Learn to live more simply. Downsize the home, downsize the car. Live like a middle-class peasant. Then instead of needing $75,000 a year to live on, you can get by on $25,000 per year. And still have a travel budget.
As the song says, freedom is having nothing left to lose. You can get by -- and be happier -- with less.
Detachment is essential in retirement. Not only for financial prudence, but because this world ain't the be all and end all. There is something beyond. And you can't take all that gold with you.
"To not expect and plan for major societal disruption, civil war, economic collapse, and extreme hardships would be unwise."
And giving your money to a company similar to those that failed in 2008 is a good plan?
1967: I have one word for you: Plastics.
2021: I have one word for you: Cryptocurrencies.
Why does the media so often conflate 'economists' with 'personal finance administrators' - and often add "Nobel Prize winning" to the title as if that made a difference? They are not one in the same any more than a PhD in English studies is (necessarily) an excellent novel writer. So many people do not understand what 'Economics' is as a study.
Reminds me of Russ Robert's - an economics PhD and host of a well-known economics podcast - when he tells the story that he will often be requested by someone in the media to make comments about forecasting the US economy or the stock market - which way will it go next year? When he answers them that he has no idea on those subjects, there's always an incredulous response from the reporter... "but you're an economist! You're supposed to know these things!"
I learned 2 new words: "decumulation" and "dissaving."
Why not just use reduction and spending?
Here is a list of stocks that have a history of paying dividends and increasing them annually, and are currently paying 3.5% or more on their current share price: ABBV, SO, DUK, WPC, VZ, DOW, CMP, SAFT, CVX, K, SRC, FE, GIS, O, LEG. Buy and hold individual shares. Throw in a few closed end funds that are selling at a discount to current net asset value and two master limited partnerships that own pipelines, MMP and EPD. Don’t sell if the market crashes.
Sit back and live off the dividends, which will mostly go up from here. A few cuts will come, but I went through the financial crisis and the pandemic with my retirement income intact.
Morningstar has a dividend investor newsletter.
If you start investing in the stock market in your thirties, you’ll have several experiences of the stock market tanking before you retire, and that won’t be as big a worry for you in retirement. You’re going to take a hit every few years. That’s life.
At least once in your work career, you should switch to a job that pays less but is more fulfilling. That will give you practice in cutting your lifestyle to a lower income to enjoy your retirement.
4% is a good withdrawal rate if you want your principal to keep growing.
6% is also safe but your principal won’t grow much beyond the rate of inflation.
8% will lead to slow exhaustion of your principal, tell your heirs they’re on their own, you don’t owe them anything.
Many people have to keep working into their seventies. If you can afford to retire, consider yourself lucky, but you can keep on working.
We are retired. We have substantial savings, house paid off, cars paid off, multiple defined benefit retirements, Social Security, IRA, and we are not big spenders. WE LIVE BELOW OUR MEANS!!!!
Live BELOW you means folks... and you will save.
When you buy a life annuity, the seller takes on the risk that you will live to age 110. That’s a big load off your mind. What makes it hard on your psyche is that to get a decent-size annuity, you have to turn over a big chunk of your life savings to the seller, usually an insurance company.
In other words, inflation-adjusted government pensions are overly generous?
"Decumulation isn’t just a tough financial problem."
This presupposes cumulation. Which not enough Americans focus on.
Most people live beyond their means, on the assumption that they can always get more of other people's money. Dems are trying to prove that assumption correct.
Bender said....
Downsize the home, downsize the car. Live like a middle-class peasant. Then instead of needing $75,000 a year to live on, you can get by on $25,000 per year. And still have a travel budget.
Y'all would be surprized how comfortably you can live on $25k (IF you're not paying school loans/mortgages/credit cards). I eat at home, and save restaurants for my fishing trips. You can buy NICE steak, for what it would cost to eat at Subway
I think one of the biggest mistakes many people make is failing to properly categorize pension and social security income when making portfolio decisions, but instead stick to a traditional stock-bond split of somewhere between 60 - 40 and 40 - 60 stocks depending on risk tolerance. What I do is take the total annual pretax income from pension and SS streams and divide it by $40K, which is the traditional expected 4% annual draw down on a $1 million balanced IRA. The number thus derived converts the fixed income stream into a annualized number that is easier to integrate into your IRA and after tax stock and bond portfolios. For example suppose you and your spouse have a combined IRA of $1.5 million that is allocated 50% stocks and 50% bonds, i.e., $750K in stocks and $750K in bonds. Also, suppose a combined annual social security income of $60K. That $60K divided by $40K = 1.5 which would be the equivalent sized bond portfolio in millions that would be required to produce $60K income per year at a 4% return. If you add the actual IRA to the IRA equivalent from the fixed income stream, you get $3 million, but that total is no longer distributed 50/50 between stocks and bonds or bond equivalents. The stock portion remains $750K but when divided by the $3 million total is really just 25% of the total portfolio instead of the intended 50%. In this example you would have to allocate 100% of your IRA to stocks to get to 50/50. That may be psychologically difficult for many retirees, but otherwise you're leaving money on the table by under investing in stocks based on your presumed risk tolerance. One way to ease market trepidation is to use the "bucket" system wherein near term spending requirements are held in cash or cash equivalents (I keep 10% of total assets), interim requirements are held in dividend stocks are large cap stocks (say 60%) and the remaining (I target 30%) is in more aggressive growth stocks. As money is spent from the cash bucket it is replenished by dividends from the interim bucket which is, in turn, replenished by profit taking on the growth bucket. The real wild card today is inflation, which can significantly affect any investments that are not at least partially inflation proof. Leveraged real estate is probably the best option for protecting against inflation through rising prices and continually discounted mortgage payments versus constant dollars. My recent moves have been in that direction. Anyway, works for me. Your results may vary.
One additional caution: MMP and EPD should be held outside tax-deferred retirement accounts for a technical tax reason. You can hold DPG, a closed end fund that owns utility and infrastucture investments, inside a tax-deferred retirement account and get the same investment effect without the tax complication.
My wife and I have spent decades in accumulation phase. We have been retired 11 years and barely touched our nest egg. All four kids doing well or are on an upward trajectory.
But I'm more concerned than ever. Not so much for us, but for our children. Inflation. Raids on the accumulated wealth of the "rich", to become the well off to become those with much of anything. Help wanted signs everywhere but people wanting more unemployment insurance and rent forgiveness. Racial animus stirred by the non-racists.
There's a lot more to think about than the old 4 percent rule.
When someone needs to wipe my ass and feed me, it will be time to depart this world. I don't intend to spend money on caregivers, nor will I depend on family members for this either. Living to 100? Don't want that if I spend the last 20 to 25 years of it in a nursing home.
Social security -- a good and necessary institution to be sure -- brought down the extended family as a support system for the elderly, and bankers, brokers, and fund managers are the beneficiaries.
Do your heirs a favor -- decumulate NOW!
I have disposed of the physical estates of three relatives. After the first I learned to start by ordering the largest dumpster that will fit in the driveway. Nobody wants the old piano or the old books or the old creaky furniture or the old sheets or the china or the 15 year old lawn mower (that reportedly still runs but we know better).
If you want to keep the old photographs ... well ... you should have started on those years ago while there was someone still alive to tell you who was in the pictures.
So many variables. Inflation has gone up, but the plus side of the plague is that one spends so much less on eating out or travel.....I bought a few annuities before 2010. The interest rates were comparatively high then and, until just recently, inflation was nil, so I guess annuities turned out to be a wise investment. I think back then an investment in GE under Jack Welch would have been considered the wiser move by market savants. If I could offer one piece of advice to my fellow senior citizens, I would advise you all to put some money into annuities, but do it before 2010......I don't think the Biden Presidency will turn out to be a success for the economy, but that's not what the market is predicting. The stock averages keep going up, and I have gotten richer since he became President. It sucks to be an Afghan, but I'm all right, Jack.....My childhood poverty was a matter of luck. Ditto my modestly affluent senior years. There's no divinity that shapes our financial ends. It's a tale told by an idiot and it signifies nothing. If you don't believe me, read Paul Krugman. It's definitely a tale told by an idiot.
Every situation is different. Two important factors are the size of your pension (hopefully adjusted for inflation) and whether you have long term care insurance. Most people in their 80's and 90's will spend less money (house paid for, no expensive vacations or cars and they are usually done with accumulating stuff) on everything except health care. A good long term health care policy will eliminated the biggest worry - having to pay for needed care givers or burdening your family financial with that.
Annuities can make sense if you don't want to pass on your assets to someone else after you die and if you don't have a good pension. Yes, the insurance company is taking a hefty fee for this, but you are able spend your assets fully without having to have a safety buffer for a longer than expected life.
The French have an interesting system with the viager occupé, whereby you sell your house for about 30% of market value and in return have the right to live there the rest of your life and get a monthly sum from the buyer.
Many people have to keep working into their seventies. If you can afford to retire, consider yourself lucky, but you can keep on working.
Retiring early for many is not an option. Then again, more people likely CANNOT work into their seventies or even deep into sixties. Not because they do not want to but because job security is not what it was. Lots of people involuntarily "retired" at an early age. Forced out by age discrimination, laid off by downsizing or restructuring, etc., and harder to find a quality job at that age. Sure, you can be a Walmart greeter . . . but no thanks.
"The smart but psychologically difficult choice is to at least partly annuitize — that is, buy a financial product that provides a monthly income. When you buy a life annuity, the seller takes on the risk that you will live to age 110."
You take on the risk that the company stays solvent and honors their commitment. No thanks.
We saved our asses off and lived well below our means. Now retired and the only real risk to us is the government taking what we've saved. I consider that a significant risk.
I''ve always called it the accumulation phase and the distribution phase. It has been hard to switch over to spending money instead of saving it. It's taken awhile, but I'm getting better at it!
"Unfortunately the reverse happens when you're drawing down your savings. You sell more at lower prices and less and higher prices, and get less out than the market offers.
There's no fix for that."
Not true. Have a sizable cash reserve built up when the market is high so you don't have to pull out market funds when it's low.
I blame the idiots the media keeps trotting out as pop personal finance experts for spending the last 25 years shitting all over annuities.
* Max out your 401Ks as early as you can
* Follow Dave Ramsey's baby steps regarding debt
* Put the maximum amount possible into your Roth IRA
If you do ONLY THESE THREE THINGS, then when you retire at 60, your IRAs and 401Ks will be huge and you will have no debt except for your house. At that point, the "4% Rule" will work for you until you can start collecting SSA at age 62.
This isn't rocket surgery.
"Do your heirs a favor -- decumulate NOW!
I have disposed of the physical estates of three relatives. After the first I learned to start by ordering the largest dumpster that will fit in the driveway. Nobody wants the old piano or the old books or the old creaky furniture or the old sheets or the china or the 15 year old lawn mower (that reportedly still runs but we know better)."
Amen!!!!!
Pianoman nails it at 1:22 PM. I did that all except for maxing out the Roth- I missed the benefit in doing that to the full extent, and missed doing it the right way, too- learn from Peter Thiel how a Roth should be used.
typingtalker said...
Do your heirs a favor -- decumulate NOW!
Nobody wants the old piano or the old books
If you want to keep the old photographs ... well ... you should have started on those years ago while there was someone still alive to tell you who was in the pictures.
My mom was Convinced, that her 40 year old Betty Crocker cookbooks would be worth BIG MONEY!
unfortunately, no one was interested in dirty old torn up books with pages (and PAGES!) missing
She Also wanted to keep 20 (or so) portrait sized photos (from ~1900), that were "relatives"
She didn't know which ones were which; but they were HERS! and HAD TO stay
Actually,
she had (some) cool stuff, and hired a paid estate seller person, to run an estate sale...
She ended up making More than enough to pay for the estate seller person.. Netted maybe $1k
Didn't sell the dirty cookbooks (or photos) though
'...I learned 2 new words: "decumulation" and "dissaving."'
I was curious enough about "decumulation" that I tried to find its origin. Without making this my life's work, I could not find a "first usage" of the word.
However, it's been around for awhile. Searching Google Books, the oldest example I found was in the 1915 Official Gazette of the United States Patent Office.
https://www.google.com/books/edition/Official_Gazette_of_the_United_States_Pa/4NJNAQAAMAAJ?hl=en&gbpv=1&dq=decumulation&pg=PA130&printsec=frontcover
Here are a few other examples from the 20th century, mostly in reference to economics.
1954
https://www.google.com/books/edition/Journal_of_the_University_of_Bombay/olZwAAAAIAAJ?hl=en&gbpv=1&bsq=decumulation&dq=decumulation&printsec=frontcover
1920
https://www.google.com/books/edition/Some_Aspects_of_the_Inequality_of_Income/rj0uAAAAYAAJ?hl=en&gbpv=1&dq=decumulation&pg=PA337&printsec=frontcover
1930
https://www.google.com/books/edition/The_Economic_journal/3DhEAAAAIAAJ?hl=en&gbpv=1&bsq=decumulation&dq=decumulation&printsec=frontcover
Like Althouse, I'd never seen it used until now.
rehajim said, "Has there ever been a 10 year period where if you bought and held a major index- S&P or Wilshire or like, you would have lost principal? There aren’t many five year periods either. Look it up…"
I'm not sure you could have bought a "major index" in 1965, but the DJIA never cracked 1000 for the next 18 years. It was an up-and-down market, with 1000 roughly the ceiling, for that length of time. Had you been 50 in 1965, you would have passed retirement age before this high-inflation-low-growth era ended. Chances are you would have bailed at some point (probably at one of the lows) and sunk (what was left of) your savings into CDs, which were paying handsomely in the late '70's and early '80's.
Since then it's been a pretty benign market. Yes, there have been significant tumbles, but we've become conditioned to believe they don't last. Nothing says that droll 18-year Sargasso Sea of disappointment could not swamp us again.
I blame the idiots the media keeps trotting out as pop personal finance experts for spending the last 25 years shitting all over annuities.
Annuities have their place in an investment portfolio, just as equities, bonds, gold, etc. It is all about minimizing the risk of losing your savings.
Unfortunately, with inflation my one annuity (currently drawing on it) is not going to be as helpful as I thought over the next few years.
Buy equities when it makes you want to puke to buy them. Look at the lows in recent crashes and weep at lost opportunities. The next time, and there will be a next time, buy.
Not been that hard for me and my wife. We waited until we would be able to maintain our desired standing of living from income derived from our investments without depleting those investments. We have our money across a variety of investments, including enough in low earning but guaranteed no loss to withdraw solely from those for 10 years, in case we need to wait out a market downturn. Now that retirement is upon us, we are feeling very financially secure, and will be able to do the things we want in retirement. I just wish that the Covid panic would subside and let things get back to normal.
As said by others: max out every year your Roth IRA and when you are young in aggressive growth stocks. max out your 401K again aggressively when you are young. Have a reasonable amount of cash in savings, at least six months of normal spending if you can and to the extent you can have as much as you can comfortably set aside into other more conventional stock funds. Paying of your mortgage early is nice but if it's a fixed low interest mortgage your probably better of saving more than use those funds to pay down the mortgage and definitely get long term care coverage starting when you are young and get life insurance that builds up in value so when get old you can borrow against it. Be realistic about your health and your prospects of living into your nineties. If you aren't going to get there start spending more when you finally retire and can still enjoy ten years or so before you start "de-energizing".
Regarding the 4% depletion, I plan to spend heavy on travel in the early years of retirement, so I will deplete a bit earlier and cut back when I am 72 and not able to travel. I maxed my 401K all my life so I don't really think I can spend it all.
I can enjoy the South Pacific and the Pyramids etc while I am able. I have lived well below my means except for my habit of accumulating part time graduate degrees.
Two things have been killing retirees lately. Low, near-zero interest rates, and recently, inflation.
Old folks save their entire lives thinking they can make 4 or 5 percent on a minimum risk investment so they don't have to dip into their principal. Not these days.
And inflation is a silent tax that hurts everyone, but especially those on a fixed income or the lower earners.
Workers (it won't always be Covid rules) have to go to work. They have to put gas in the car.
I am lucky...I hate paying $5/gallon, but it won't kill me. Not so benign if you're making $20/hour.
'Live BELOW you means folks... and you will save.'
This is great advice. I could drive almost any car, but our two cars together were less than $65k when new, and we will drive them until they disintegrate.
No fancy jewelry or watches, no country club, no second house in Tahoe.
We could do all of those things but choose not to. The payoff is being free to travel wherever we want, live in a nice house in a nice neighborhood, drink great wine and eat at great restaurants, and play some of the best golf courses in the world when my wife retires in a few years.
To be honest, we do all of that now, but it's because we moderated when younger and saved...
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This here is why people in the media are ruining it for the people listening to them.
Unless you have reason to believe you have a shortened lifespan, or you just absolutely need the money to live on (because you took Ramsey's advice but there happened to be a big bear market just as you were retiring), taking SS at age 62 is almost always a very, very bad idea.
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