The Tax Foundation
|One of my (many) pet peeves is…|
SAFE WITHDRAWAL RATES!!! Oh my how this drives me up the wall.
Working with a nice lady today and she is very, very hesitant to quit her COJ (Crappy Old Job for newbies). After seeing her with minimal debt, with well over 7 figures in assets and not huge spending, I asked why the hesitation?
To which she answered “Everyone talks about the 4% rule for a Safe Withdrawal Rate.”
AHHHH… So, let’s explain, again, what a SAFE WITHDRAWAL RATE (SWR) actually means?
It’s the maximum you could have taken from your portfolio and had money left when you died. That’s it.
You had a dollar left to your name on the date of death you were “successful” in retirement because you never ran out of money. Wow…. Count me impressed, especially because you were eating Ramen noodles under candlelight the whole time and never did anything enjoyable.
On the other hand, if you died with millions you were also “successful”. Who cares that you also ate Ramen noodles because you were worried running out of money. You were “successful”, no?
Does that make any sense?
The SWR means nothing more than using the past to come up with a percentage of your portfolio to withdraw each year so you never ran out of money. That’s ALL THIS SAYS! It says NOTHING about lifestyle. It says NOTHING about a change in your consumption patterns, i.e., some year you may want to go to India and other years you’ll just chill at home.
But even worse, it says literally NOTHING about future rates of return… it solely focuses on the past. And pardon my French, but that’s flippin’ STUPID. Why? Because the model that everyone and their mom uses for SWR is the 4% rule.
The 4% rule was based during time periods when intermediate government bonds were yielding approximately 600% more than now! Some years they may have yielded only 400% more than now, some years 20 times more. Either way, intermediate bonds ALWAYS have yielded way, way more than anything we’re seeing today.
Thus, the 4% rule that many people use today is obsolete and should not be used, especially if the issue is we’re trying to establish a SWR. These two things are mutually exclusive. The 4% rule as modeled in the past is NOT acceptable as a current SWR.
However, why even bother with an SWR anyway? Why limit yourself in that regard? Makes no sense to me. Why not just use some good ole-fashioned common sense? Markets go down, spend less. Crazy, eh? Want to take that trip to India but the last year was a bit rocky in the markets? Postpone it until better days come.
Or why not just take it but recognize you may have to tighten your belt at some time in the future?
Or why not consider establishing a reverse mortgage line of credit too as a source of tax-free income? (I hear the naysayers “reverse mortgages are scams…evil…will make you homeless…etc.” For those who think that way, don’t take one then. Problem solved.)
Anyway, going back to the sweet lady I am working with, according to my models, and I use VERY conservative models by the way, not only does she and her hubby have a 95% probability of not running out of money but the median liquid asset base she’ll leave to her kiddo’s is almost $5 million and that’s in TODAY’s dollars!
This means that 5% of the time if she never tightens her belt and has consistent bad luck she runs out of money. Yet 50% of the time, the median, she leaves MORE than $4.8 million to the kids and that does not include her house which is soon to be paid for in a very expensive part of the country.
Not too shabby eh? Do you think she can retire? Of course!!! But the financial planning industry has done a great job at convincing her it’s TOO RISKY!!!
No. It’s too risky to stay working in some COJ putting weight on, adding to your stress, not enjoying your time to do what YOU want to do. You don’t know if tomorrow is going to come. So ENJOY, ENJOY, ENJOY your time while you can!
Obviously, don’t just tell your boss to kiss off today. Crunch the numbers first. But once you do, if the numbers show promise, drop to your knees and seek guidance and make your decision accordingly.
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