Today's New York Times as an article entitled
How to Avoid Cracking the Retirement Nest Egg at
http://www.nytimes.com/2003/08/17/busin ... 7RETI.html To tell people with $1 million portfolios that they can spend less than $4,000 a month is "absurd," said Dr. Philip Cooley, the Prassel Professor of Business at Trinity University in San Antonio, who has published several papers on sustainable withdrawal rates in the last five years.
"When you recommend such low rates, you cause the retiree to forgo a joyous life in early retirement," he said, "and they end up with a lot of money later on, when they can't take advantage of it."
He said his research indicated that over 30 years, a withdrawal rate of 7 percent of the initial portfolio value, without adjustments for inflation, is sustainable 86 percent of the time for a stock-dominated portfolio.
I would clarify that statement this way: "To tell people with $1 million portfolios that they cannot spend more than $4,000 a month is absurd" said Dr. Cooley. (That, I suppose is the intent of the quotation, but not what it says literally.) This, of course, is a 4.8% withdrawal rate and Cooley says it is absurdly low.
Planning to live on withdrawals that are fixed in nominal terms, with no adjustment for inflation, is too risky for me. I have clear memories of what inflation did to retired people in the 1970's. My own work suggests that, with a logarithmic utility function for money and using standard mortality tables, optimal policy is to adjust the withdrawals annually for a little less than the inflation rate. I'm not willing to make that my plan -- partial adjustment for inflation -- but Cooley makes a point that supports my point: The earlier years of retirement are the ones you are most likely to live through.
I don't mind the idea of having a lot of money "later on (that I) can't take advantage of." That's the price of a policy that takes only a small risk of going broke while still breathing. Further, since I inherited a part of my capital stash, leaving something to heirs seems only fair. I do not follow the "Die Broke" idea. As I have posted, my present plan is to hold my withdrawals under 2% a year for the next thirty-odd years. Like
ataloss, I'm contemplating taking only the dividends and selling nothing.
(Footnote on the logarithmic utility function for money: this recognizes that people place a value on additional money according to what they already have, rather than on the absolute amount of the addition. So, an additional $10,000 means more to the man with a $50,000 stash than to the man with a $5,000,000 stash. So far as I know, all SWR studies ignore the idea of a proper utility function for money. The omission doesn't seem to trouble anyone but me. I'm waiting to pounce on somebody-or-other, to say that his SWR work is invalidated by this relevant but excluded consideration.
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He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]
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