4 ms·

If your net worth starts decreasing when you retire you retired a decade too early. I know "I want to spend just enough in retirement that my last check bounces

by pc86 3y ago

If your net worth starts decreasing when you retire you retired a decade too early. I know "I want to spend just enough in retirement that my last check bounces" is a funny joke and all but you have no idea how long you'll live, and no financial advisor worth the paper their business card is printed on would suggest you spend more than your investments earn in retirement.

PopAlongKid 3y ago
>no financial advisor worth the paper their business card is printed on would suggest you spend more than your investments earn in retirement. Sounds like you have never heard of the 4% rule[0]. Further, there are reasons to withdraw funds above ordinary living expenses, such as for gifts and donations. >you have no idea how long you'll live, Of course you do, within a range of probability. And there is insurance available to minimize the risk of uncertainty. [0]https://www.fool.com/retirement/strategies/withdrawal/4-percent-rule/ https://www.fool.com/retirement/strategies/withdrawal/4-perc...
- MuffinFlavored 3y ago
  How does the 4% rule work if you are invested in index funds that yield a dividend? Let's say you have a 2% dividend. Do you let the dividend reinvest and then trigger a sale for 1% of your portfolio quarterly (4 quarters * 1 % = 4% a year) or do you make the dividends not reinvest, they pay you 0.5% a quarter, you need to pull the other 0.5% a quarter by selling off? Does it really matter from a tax perspective?
  - PopAlongKid 3y ago
    >Does it really matter from a tax perspective? Most likely, no. If you are in a tax-deferred account (IRA/401k) then all the money distributed is going to be taxed at ordinary income tax rates. If you are in a regular brokerage investment account, then both your long term capital gains and qualified dividends are taxed at the same favorable rate. I don't see the point in re-investing dividends if you are going to take out cash in the same amount within less than a year.
  - ghaff 3y ago
    If dividends are earned, they'll be recorded on your 1099. From a tax perspective, it shouldn't matter if you use use them to automatically buy more shares in the same index fund, have them flow to a money market account at the broker, or transfer the amount to your checking account. The difference is cash flow. Obviously if your only income source is dividends, at some point you'll have to sell some of the underlying asset for the cash. 4% is just a rule of thumb to give you an idea of what your savings should be relative to annual spending.
  - throw0101b 3y ago
    > How does the 4% rule work if you are invested in index funds that yield a dividend? The simplest method: look at your portfolio's worth on January 1, and take out the appropriate amount. Let the remainder ride. So roughly: * Year 1: take out 4% * Year 2: Year 1 amount + inflation from Year 1 * Year 3: Year 2 amount + inflation from Year 2 * […] * Year N: Year (N-1) amount + inflation from Year (N-1)
- jjav 3y ago
  > And there is insurance available to minimize the risk of uncertainty. Is there? I haven't heard of this but admittedly had not thought of researching into it. It would be a game changer to be able to buy an insurance policy that guarantees a monthly payment indexed to inflation starting at age, say, 85 until death.
  - pulvinar 3y ago
    That's an IPA (inflation-protected annuity), which are or can be a life annuity, paying until death. But I wouldn't say they're always the best choice.
MuffinFlavored 3y ago
> If your net worth starts decreasing when you retire you retired a decade too early. Every quarter you drawdown your networth decreases to cover your expenses. Then you hope it maintains/stays the same by the stock market predictably reliably recovering from your 1%/quarter (4% drawdown/year) sale/gets offset by dividends, etc. To me it seems it might be noise but there is for sure a period where your net worth decreases as you spend your "nest egg". Especially more so if the market doesn't just go straight up over time on average.
throw0101b 3y ago
> If your net worth starts decreasing when you retire you retired a decade too early. […] and no financial advisor worth the paper their business card is printed on would suggest you spend more than your investments earn in retirement. Completely wrong: * https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study * https://en.wikipedia.org/wiki/William_Bengen https://en.wikipedia.org/wiki/William_Bengen Principal liquidation is just fine and has lots of theoretical/historical analysis to support it, with (tens of) millions of people doing it as we speak.
notacoward 3y ago
There are at least two scenarios where that's definitely not true. (1) Planned, time-limited expenses that decrease net worth. For example, a child's college education. If you've budgeted for it, this is fine. (2) General market wobbles. My net worth increases or decreases by tens of thousands in a day, just because of what the market did. (No, I don't have all of my assets in the market, but enough.) If the long term trend is downward and/or not keeping up with inflation, that would be a worry, but a dip here and there is also fine. Is net-worth decrease a problem outside of these scenarios? Even that depends. It's probably still "no" if there are more income sources (e.g. social security, inheritance from parents) that haven't kicked in yet and will make Number Go Up again when they do. Less obviously, if you're going to run out of money at 150, that's not likely to be a problem. If it's at 75, that very likely is a problem. It really is possible to save too much, though few do. Telling people to plan for an infinite retirement, which is basically what you're doing, is also bad advice. There's no virtue in scrimping and saving more than you really need to.

by pc86 3y ago

PopAlongKid 3y ago

>no financial advisor worth the paper their business card is printed on would suggest you spend more than your investments earn in retirement. Sounds like you have never heard of the 4% rule[0]. Further, there are reasons to withdraw funds above ordinary living expenses, such as for gifts and donations. >you have no idea how long you'll live, Of course you do, within a range of probability. And there is insurance available to minimize the risk of uncertainty. [0]https://www.fool.com/retirement/strategies/withdrawal/4-percent-rule/ https://www.fool.com/retirement/strategies/withdrawal/4-perc...

MuffinFlavored 3y ago
How does the 4% rule work if you are invested in index funds that yield a dividend? Let's say you have a 2% dividend. Do you let the dividend reinvest and then trigger a sale for 1% of your portfolio quarterly (4 quarters * 1 % = 4% a year) or do you make the dividends not reinvest, they pay you 0.5% a quarter, you need to pull the other 0.5% a quarter by selling off? Does it really matter from a tax perspective?
- PopAlongKid 3y ago
  >Does it really matter from a tax perspective? Most likely, no. If you are in a tax-deferred account (IRA/401k) then all the money distributed is going to be taxed at ordinary income tax rates. If you are in a regular brokerage investment account, then both your long term capital gains and qualified dividends are taxed at the same favorable rate. I don't see the point in re-investing dividends if you are going to take out cash in the same amount within less than a year.
- ghaff 3y ago
  If dividends are earned, they'll be recorded on your 1099. From a tax perspective, it shouldn't matter if you use use them to automatically buy more shares in the same index fund, have them flow to a money market account at the broker, or transfer the amount to your checking account. The difference is cash flow. Obviously if your only income source is dividends, at some point you'll have to sell some of the underlying asset for the cash. 4% is just a rule of thumb to give you an idea of what your savings should be relative to annual spending.
- throw0101b 3y ago
  > How does the 4% rule work if you are invested in index funds that yield a dividend? The simplest method: look at your portfolio's worth on January 1, and take out the appropriate amount. Let the remainder ride. So roughly: * Year 1: take out 4% * Year 2: Year 1 amount + inflation from Year 1 * Year 3: Year 2 amount + inflation from Year 2 * […] * Year N: Year (N-1) amount + inflation from Year (N-1)
jjav 3y ago
> And there is insurance available to minimize the risk of uncertainty. Is there? I haven't heard of this but admittedly had not thought of researching into it. It would be a game changer to be able to buy an insurance policy that guarantees a monthly payment indexed to inflation starting at age, say, 85 until death.
- pulvinar 3y ago
  That's an IPA (inflation-protected annuity), which are or can be a life annuity, paying until death. But I wouldn't say they're always the best choice.

MuffinFlavored 3y ago

> If your net worth starts decreasing when you retire you retired a decade too early. Every quarter you drawdown your networth decreases to cover your expenses. Then you hope it maintains/stays the same by the stock market predictably reliably recovering from your 1%/quarter (4% drawdown/year) sale/gets offset by dividends, etc. To me it seems it might be noise but there is for sure a period where your net worth decreases as you spend your "nest egg". Especially more so if the market doesn't just go straight up over time on average.

throw0101b 3y ago

> If your net worth starts decreasing when you retire you retired a decade too early. […] and no financial advisor worth the paper their business card is printed on would suggest you spend more than your investments earn in retirement. Completely wrong: * https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study * https://en.wikipedia.org/wiki/William_Bengen https://en.wikipedia.org/wiki/William_Bengen Principal liquidation is just fine and has lots of theoretical/historical analysis to support it, with (tens of) millions of people doing it as we speak.

notacoward 3y ago

There are at least two scenarios where that's definitely not true. (1) Planned, time-limited expenses that decrease net worth. For example, a child's college education. If you've budgeted for it, this is fine. (2) General market wobbles. My net worth increases or decreases by tens of thousands in a day, just because of what the market did. (No, I don't have all of my assets in the market, but enough.) If the long term trend is downward and/or not keeping up with inflation, that would be a worry, but a dip here and there is also fine. Is net-worth decrease a problem outside of these scenarios? Even that depends. It's probably still "no" if there are more income sources (e.g. social security, inheritance from parents) that haven't kicked in yet and will make Number Go Up again when they do. Less obviously, if you're going to run out of money at 150, that's not likely to be a problem. If it's at 75, that very likely is a problem. It really is possible to save too much, though few do. Telling people to plan for an infinite retirement, which is basically what you're doing, is also bad advice. There's no virtue in scrimping and saving more than you really need to.