The Retirement Gamble

[Ad Orientem]

http://tinyurl.com/cd83duw

Promo for a Frontline episode airing tonight on PBS. The takeaway... index and keep fees and expenses low.

[Ad Orientem]

PS here's the link to the PBS promo. This sounds like must see TV.
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

[Ad Orientem]

For anyone who missed it tonight on PBS the program in its entirety can be watched here...
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

It was one of the most depressing and infuriating programs I have seen in years. But it was also one of the best and I'm sending the link to all my friends and relatives. I am so glad I discovered the Permanent Portfolio. Thank you Harry Browne and while we are at it Jack Bogle.

[Reub]

Thank you, Ad. I plan on watching it later today.

[Pointedstick]

A sobering piece. What hit me most is how many people talked to just want a set-it-and-forget it retirement "system." They're confused and frightened. It's all too easy for me to forget that most people aren't finance buffs, and this video was a real wake-up call. There's no real education on finance in schools, and a lot of parents aren't able to teach their kids this stuff because they don't know it themselves.

The narrator grated on me a bit. He didn't seem all that knowledgeable himself and took a lot of what people said at face value without really digging in. He seemed mystified by compound interest and shocked, shocked to find that actively-managed mutual fund managers (gasp) recommend actively-managed mutual funds. I mean, does anybody expect that this would be otherwise? Of course a salesperson is going to push their own product.

I would have liked some discussion of ERISA. There was a lot of corporation and Wall Street bashing without any explanation of congress's role in shaping (causing?) the transition from defined benefit plans to defined contribution plans. Seemed like a major piece of the puzzle was left out.

I also wanted a really simple explanation how much you actually need to retire safely, because nobody actually seemed to understand this. I mean, something like "25x to 33x your annual expenses." Boom, done. Everyone who brought up "having enough" was still talking about savings as a ratio of income, not expenses. That went unchallenged throughout the entire video. So frustrating.

The older guy with 500k wasn't sure he had enough, despite the fact that that sum of money could easily support a 20k annual expense level without drawing down the principal! And that's not even counting the Social Security payments he's getting. Unless he's invested in really awful garbage, he'll probably be fine as long as he doesn't spend more than about 3.5k/mo.

[Libertarian666]

The older guy with 500k wasn't sure he had enough, despite the fact that that sum of money could easily support a 20k annual expense level without drawing down the principal! And that's not even counting the Social Security payments he's getting. Unless he's invested in really awful garbage, he'll probably be fine as long as he doesn't spend more than about 3.5k/mo.

Exactly where would one get this "easy" 4% real return after taxes, which is what you would need to avoid drawing down purchasing power of your principal? Inquiring minds want to know!

[Pointedstick]

The older guy with 500k wasn't sure he had enough, despite the fact that that sum of money could easily support a 20k annual expense level without drawing down the principal! And that's not even counting the Social Security payments he's getting. Unless he's invested in really awful garbage, he'll probably be fine as long as he doesn't spend more than about 3.5k/mo.

Exactly where would one get this "easy" 4% real return after taxes, which is what you would need to avoid drawing down purchasing power of your principal? Inquiring minds want to know!

The HBPP, of course! 

Heck, even a Boglehead stock/bond split would probably do fine compared to what most of the poor folks on that show had.

[Libertarian666]

The older guy with 500k wasn't sure he had enough, despite the fact that that sum of money could easily support a 20k annual expense level without drawing down the principal! And that's not even counting the Social Security payments he's getting. Unless he's invested in really awful garbage, he'll probably be fine as long as he doesn't spend more than about 3.5k/mo.

Exactly where would one get this "easy" 4% real return after taxes, which is what you would need to avoid drawing down purchasing power of your principal? Inquiring minds want to know!

The HBPP, of course! 

Heck, even a Boglehead stock/bond split would probably do fine compared to what most of the poor folks on that show had.

4% real return after taxes is pretty optimistic; I wouldn't want to count on that continuing for several decades after retirement.

I'm planning on 0% real return after taxes, drawing down my assets at a rate of 3% a year, which will last me until age 97 or so. I guess I'll need to get a job then. 

[Pointedstick]

4% real return after taxes is pretty optimistic; I wouldn't want to count on that continuing for several decades after retirement.

I'm planning on 0% real return after taxes, drawing down my assets at a rate of 3% a year, which will last me until age 97 or so. I guess I'll need to get a job then. 

You might want to look into the HBPP. It's done much better than that for the last 40 years.

[Libertarian666]

4% real return after taxes is pretty optimistic; I wouldn't want to count on that continuing for several decades after retirement.

I'm planning on 0% real return after taxes, drawing down my assets at a rate of 3% a year, which will last me until age 97 or so. I guess I'll need to get a job then. 

You might want to look into the HBPP. It's done much better than that for the last 40 years.

I'm very well acquainted with that portfolio. In fact, I wrote a program to track it many years ago (before the availability of general-purpose spreadsheet programs) which, IIRC Harry mentioned in his newsletter.

However, has it actually done much better than 4% real return after taxes? That's much higher than anything I've seen.

[rocketdog]

A sobering piece. What hit me most is how many people talked to just want a set-it-and-forget it retirement "system." They're confused and frightened. It's all too easy for me to forget that most people aren't finance buffs, and this video was a real wake-up call. There's no real education on finance in schools, and a lot of parents aren't able to teach their kids thus stuff because they don't know themselves.

I haven't watched the show yet, but your comment reminded me of when our company added an annuity option to our 401K Plan.  This was shortly after the recession hit and a lot of employees had suffered a substantial loss of their retirement savings (my own boss told me she had enough savings to retire before the recession wiped out a big chunk of it).  Our company brought in someone from Fidelity to give a seminar about how the new annuity worked. 

I attended it to hear what he had to say, and all I remember is how he kept saying the catch phrase "That's the guarantee".  He was referring to the minimum amount the annuity would pay you no matter what the market was doing.  He must have said "That's the guarantee" at least a dozen times during the 1-hour seminar. 

I could only assume that phrase was intended to comfort and reassure employees that they could get a guaranteed payment during retirement, even though the return was pretty crappy.  He wanted to appeal to their sense of fear and uncertainty. 

Our company has since discontinued that annuity option, but they never told us why.

[Ad Orientem]

4% real return after taxes is pretty optimistic; I wouldn't want to count on that continuing for several decades after retirement.

I'm planning on 0% real return after taxes, drawing down my assets at a rate of 3% a year, which will last me until age 97 or so. I guess I'll need to get a job then. 

You might want to look into the HBPP. It's done much better than that for the last 40 years.

I'm very well acquainted with that portfolio. In fact, I wrote a program to track it many years ago (before the availability of general-purpose spreadsheet programs) which, IIRC Harry mentioned in his newsletter.

However, has it actually done much better than 4% real return after taxes? That's much higher than anything I've seen.

Actually the HBPP is extremely tax efficient. Unless you are wealthy with most of your assets in fully taxable accounts you can probably figure your tax obligations will be in the neighborhood of 1% of your portfolio. Add to that maybe .25% (high end) in fees and expenses. With the average real (post inflation) return on the PP somewhere between 3-6% in most years you should definitely be making money after inflation, taxes and portfolio ER. Counting on a 4% return might be a tad optimistic. But I definitely think 3% is a safe number. And I am being conservative in my estimations.

[Reub]

I just watched the show and although it might be illucidating for financial neophytes, there was not much there that would surprise PPites.

[Ad Orientem]

I just watched the show and although it might be illucidating for financial neophytes, there was not much there that would surprise PPites.

That's very true. Its value lies in the stark manner they present the case. And in that respect I think it is a great tool for cluing in the financially ill-informed.

[notsheigetz]

That's very true. Its value lies in the stark manner they present the case. And in that respect I think it is a great tool for cluing in the financially ill-informed.

Total bullshit. If you are < 40 years old give some reasonable thought to retirement in the back of your mind. Start doing the math more seriously when you turn 40 but don't stress out over it. Just come up with a reasonable plan.

Pay no attention to that scary music in the background. It has ulterior motives. It always does.

[Tyler]

Actually the HBPP is extremely tax efficient. Unless you are wealthy with most of your assets in fully taxable accounts you can probably figure your tax obligations will be in the neighborhood of 1% of your portfolio. Add to that maybe .25% (high end) in fees and expenses. With the average real (post inflation) return on the PP somewhere between 3-6% in most years you should definitely be making money after inflation, taxes and portfolio ER. Counting on a 4% return might be a tad optimistic. But I definitely think 3% is a safe number. And I am being conservative in my estimations.

+1

With the 15% tax bracket currently at $70k for married-filing-jointly, a couple with some good tax advice for managing capital gains during a rebalance can live quite well in retirement and pay 0% dividend and CG tax on their PP even if it's 100% in a taxable account, reducing taxes substantially.  Throw in some tax-deferred savings and they have even more room to maneuver.

FWIW, Craig & MTex showed in the book that the PP averaged a 3-6% real return over every rolling 10-year period of the last 40.  There are no guarantees in investing, but that's a pretty solid track record.

(Edited for clarification & brevity)

[MachineGhost]

Actually the HBPP is extremely tax efficient. Unless you are wealthy with most of your assets in fully taxable accounts you can probably figure your tax obligations will be in the neighborhood of 1% of your portfolio. Add to that maybe .25% (high end) in fees and expenses. With the average real (post inflation) return on the PP somewhere between 3-6% in most years you should definitely be making money after inflation, taxes and portfolio ER. Counting on a 4% return might be a tad optimistic. But I definitely think 3% is a safe number. And I am being conservative in my estimations.

As mentioned elsewhere, the tax expense ratio I use is .51%.  Commission shouldn't be significant these days, no more than .5% max.  And market impact is probably not worth worrying about if you don't have several million in assets or rebalance only once a year or when hitting bands.

[rocketdog]

FWIW, Craig & MTex showed in the book that the PP averaged a 3-6% real return over every rolling 10-year period of the last 40.  There are no guarantees in investing, but that's a pretty solid track record.

FWIW, here are the unadjusted rolling 10-year returns of the PP (notice any pattern?):
1972 - 1981 13.2%
1973 - 1982 13.7%
1974 - 1983 12.7%
1975 - 1984 11.5%
1976 - 1985 12.9%
1977 - 1986 13.5%
1978 - 1987 13.6%
1979 - 1988 12.9%
1980 - 1989 10.2%
1981 - 1990 9.0%
1982 - 1991 10.7%
1983 - 1992 8.7%
1984 - 1993 9.7%
1985 - 1994 9.1%
1986 - 1995 9.0%
1987 - 1996 7.7%
1988 - 1997 7.8%
1989 - 1998 8.4%
1990 - 1999 7.6%
1991 - 2000 7.7%
1992 - 2001 6.5%
1993 - 2002 6.8%
1994 - 2003 6.9%
1995 - 2004 7.8%
1996 - 2005 6.6%
1997 - 2006 7.2%
1998 - 2007 7.8%
1999 - 2008 6.7%
2000 - 2009 7.3%
2001 - 2010 8.4%
2002 - 2011 9.4%

[Libertarian666]

You might want to look into the HBPP. It's done much better than that for the last 40 years.

I'm very well acquainted with that portfolio. In fact, I wrote a program to track it many years ago (before the availability of general-purpose spreadsheet programs) which, IIRC Harry mentioned in his newsletter.

However, has it actually done much better than 4% real return after taxes? That's much higher than anything I've seen.

Actually the HBPP is extremely tax efficient. Unless you are wealthy with most of your assets in fully taxable accounts you can probably figure your tax obligations will be in the neighborhood of 1% of your portfolio. Add to that maybe .25% (high end) in fees and expenses. With the average real (post inflation) return on the PP somewhere between 3-6% in most years you should definitely be making money after inflation, taxes and portfolio ER. Counting on a 4% return might be a tad optimistic. But I definitely think 3% is a safe number. And I am being conservative in my estimations.

Yes, the HBPP is extremely tax efficient during the accumulation phase. Unfortunately, when you take money out of a pre-tax retirement account, that is all counted as ordinary income. This will reduce your after-tax cash flow by a minimum of 15% at current tax rates and likely considerably more than that when you take into account the effect of "other" income on Social Security taxability, and the likelihood of future tax increases.

So being able to count on being able to access proceeds of 4% of your portfolio after taxes every year, in real terms, is way too optimistic for me.

[rocketdog]

Unfortunately, when you take money out of a pre-tax retirement account, that is all counted as ordinary income. This will reduce your after-tax cash flow by a minimum of 15% at current tax rates and likely considerably more than that when you take into account the effect of "other" income on Social Security taxability, and the likelihood of future tax increases.

True, but don't discount the fact that you also put that money into the account tax-free.  Not only would you have likely paid a higher tax rate on the money had you not contributed it in the first place (depending on your tax bracket), but now the money that otherwise would have gone to pay the taxes is compounding for you year after year until you withdraw it. 

[Tyler]

The alternative is to keep your money in a taxable account, live off the cash component, and spread out large capital gains from eventual rebalancing over more than one year. Running a few quick calculations in Turbotax, an early retiree (married filing jointly) with a million-dollar permanent portfolio and capital gains of less than $75k or so in any one year would pay no federal taxes at today's low interest rates. (Edit: you'd need good tax planning when selling gold since that's taxed differently, but that seems pretty manageable). Hmm... Not a bad plan.

And like Rocketdog says, most people would take the tradeoff of tax deferred savings during their earning years. That adds up.

[Libertarian666]

The alternative is to keep your money in a taxable account, live off the cash component, and spread out large capital gains from eventual rebalancing over more than one year. Running a few quick calculations in Turbotax, an early retiree (married filing jointly) with a million-dollar permanent portfolio and capital gains of less than $75k or so in any one year would pay no federal taxes at today's low interest rates. (Edit: you'd need good tax planning when selling gold since that's taxed differently, but that seems pretty manageable). Hmm... Not a bad plan.

And like Rocketdog says, most people would take the tradeoff of tax deferred savings during their earning years. That adds up.

Oh, I'm not saying tax deferral isn't valuable. I'm just pointing out that one can get overly confident if one has a million dollars in assets that largely haven't been taxed yet, without considering the tax effects of taking the money out.

And that's assuming that the current tax rates stay in effect and that nothing is done to skim money out of retirement accounts on the pretext of providing "safe government investments". I think those are dangerous assumptions.

[MachineGhost]

The alternative is to keep your money in a taxable account, live off the cash component, and spread out large capital gains from eventual rebalancing over more than one year. Running a few quick calculations in Turbotax, an early retiree (married filing jointly) with a million-dollar permanent portfolio and capital gains of less than $75k or so in any one year would pay no federal taxes at today's low interest rates. (Edit: you'd need good tax planning when selling gold since that's taxed differently, but that seems pretty manageable). Hmm... Not a bad plan.

How do you figure there would be no taxes due on $75K of income as a retiree?

[Pointedstick]

How do you figure there would be no taxes due on $75K of income as a retiree?

Because all that income is not wages but capital gains taxed at 0% if you're under the 25% bracket, which for a married couple is about 75k. It's actually even better than that, since their standard deduction adds another 11k of tax-free capital gains income.

Of course, your state can tax this capital gains income however they want.

[rocketdog]

How do you figure there would be no taxes due on $75K of income as a retiree?

Because all that income is not wages but capital gains taxed at 0% if you're under the 25% bracket, which for a married couple is about 75k. It's actually even better than that, since their standard deduction adds another 11k of tax-free capital gains income.

Of course, your state can tax this capital gains income however they want.

I thought capital gains were taxed at 0% if you were under the 15% bracket?  Or did I read that wrong somewhere else?