|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Thus, the 4% rule that many people use today is obsolete and should not be used, especially if the issue is we’re trying to establish a SWR.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.
Should Lanny & Maggie Pay $233,000 For Investment Advice?
Look at this image:
What jumps out at you there?
Hopefully, you can see the two numbers in the blue box. The one on the left is $1,070,000. The one on the right is $837,000.
In running a financial plan for a couple, Lanny and Maggie, I am showing them the TRUE cost of paying a 1% per year investment management fee on their $487,000 portfolio. NOTHING else in the plan changed, mind you. I simply clicked on 1 button and added a 1% management fee.
And, as you can see, the cost is $233,000. This is $233,000 they will NOT have in which to leave to their heirs, their church, or even better yet, to enjoy in their retirement together.
Ultimately, this is what the REAL cost of paying someone to manage your money comes to; YOU have less.
Now, some will argue you are actually receiving MORE of a benefit from the professional advice than the cost you’re paying. They’ll try to quantify this with such studies as from Vanguard, “Advisor’s Alpha.”
According to Vanguard, paying that 1% fee may be worth it if an advisor can help you by “focusing on behavioral coaching”. i.e., keeping your emotions in check during bear markets.
I ALWAYS chuckle at this idea that the average investor is ready to throw in the towel at the first evidence of a bear market. I’m sure some are. But in my experience it’s the PROS, not the clients themselves, who are nervous Nellies. See my video here on a recent example of this exact thing.
Now, to Vanguard’s credit, they don’t make an argument that superior investment selection is something advisors can do in order to earn their 1% fee. The days of that even being debated are LONG gone thanks to folks like the founder of Vanguard himself, John Bogle, and others such as Burton Malkiel.
“A Random Walk Down Wall Street” by Malkiel remains a classic to this day.
Of course, I’d be remiss not to mention my all time classic favorite investment book from John Bogle, “Common Sense on Mutual Funds.”
So, if superior investment performance is not to be obtained by hiring a professional and you aren’t jumping off a bridge when the Dow drops 100 points, tell me again the reason for paying someone an annual investment management fee?
Oh, right, tax, estate planning, diversification and asset LOCATION. Those are ALSO benefits a professional advisor brings to the table for which he/she needs to be compensated for. Indeed, indeed.
Then why don’t they simply charge for those services as opposed to the 1% management fee which costs $233.000 in total? Seems a steep price to pay, no?
Of course it is! And EVERYONE knows this.
In fact, in late March a VERY prominent guy in my business posted on LinkedIN that he’d never seen as many advisors reach out to him to discuss pay-for-service fees instead of the typical 1%.
The 35% drop in assets were killing the advisors income stream! The advisors wanted to find a better way to bill clients to avoid such a dramatic hit.
Notice though, these purported “fiduciaries” weren’t reaching out to this guy when the money was flowing in. And they certainly weren’t asking how they could reduce the expense to their CLIENTS during these trying times….
NO! They were reaching out to inquire how they could bill a higher fee! (Side note: That’s why I could care less about a “fiduciary” standard. It’s a meaningless sales pitch.)
Ultimately, advisor’s compensation should be disclosed similar to when you go close on a home for a mortgage. You see very clearly your amortization schedule and thus the amount of interest you’ll pay over the course of that loan. YIKES!!!
I guarantee you, if advisors and had to say to the Lanny’s and Maggie’s of the world, “my services are going to cost you $233,000 over the course of our relationship”, there’d be a heck of a lot less fees paid out to advisors. And THAT, my friend, IS a fiduciary standard I could live with.
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