INFLATION AND ROI PERCENTAGES

[dancinmama]

If you were a year away from retirement and using a retirement calculator, what percentage would you use for inflation going forward? Also, we are playing with different investment scenarios in retirement. Out of curiosity, DH asked me to calculate how long our savings would last in a money market type of account. What percentage would you use for something like that going forward - erring on the conservative side.

DH plans to retire in 2012 and we have been having fun with the MSN Money retirement calculator. Any better suggestions for an on-line retirement calculator?

[Deleted]

We just went through this exercise and used 3% inflation. Of course that's also the rate of return we used for all of our investments ;D.

Here's a fun calculator to use:

www.firecalc.com

[Gardening Grandma]

If you were a year away from retirement and using a retirement calculator, what percentage would you use for inflation going forward? Also, we are playing with different investment scenarios in retirement. Out of curiosity, DH asked me to calculate how long our savings would last in a money market type of account. What percentage would you use for something like that going forward - erring on the conservative side.

When we were in the preparation stage, we ran the numbers using 3%, 3.5% and 4% for inflation.... Of course I'm old enough to remember the double digit inflation during the 80's, so that was also in the back of my mind.

Morningstardotcom has some really good information, articles, and forums on retirement planning and investing during retirement.

Honestly, if you retired with ALL of your assets in a money market account, I seriously doubt that it would last your lifetime. If you are looking at 20-30 years in retirement, you need more growth than the fraction of a percent that money market accounts give.. I have a chart that shows the odds of running out of money depending on the time frame and the asset allocation. A person planning to withdraw 4%/yr and who is 100% invested in bonds (which pay more than MM) has a 63% chance of running out of money.

[Baby Fawkes]

Apr 22, 2011 10:05:02 GMT -5 Gardening Grandma said:

I have a chart that shows the odds of running out of money depending on the time frame and the asset allocation. A person planning to withdraw 4%/yr and who is 100% invested in bonds (which pay more than MM) has a 63% chance of running out of money.

Maybe I'm missing something here, but surely that chart isn't very useful without the context of the initial size of the accounts. I take it that chart is specific for you then, right?

[Gardening Grandma]

Since the withdrawal rate is a percentage, the actual size of the account is irrelevant.
And, no, the chart was not for us specifically. Our FA gave it to us - the source was from an article. It listed various scenarios for a 20 yr retirement, a 25 yr retirement and a 30 yr retirement and gave the odds (of money lasting) based on a combination of the withdrawal rate (4% to 7 %) and the stock/bond mix...

Another example:
For a 20 yr retirement and a withdrawal rate of 4% and a stock/bond mix of 100/0, the odds of running out of money was only 3%. Same mix, but at a withdrawal rate of 5%, the odds of running out of money rose to 9%. Same mix, but withdrawing at 7%, odds of running out of money rose to 44%.

Another example (this is the one closest to our situation)
30 yr retirement: 4% withdrawal rate and a stock/bond mix of 60/40, odds of running out of money was14%. Same withdrawal rate and stock/bond mix of 40/60, the odds were 15%. (Our mix is about 52/35/13 (the last is liquid) and we are staying just under 4%)

[dancinmama]

Apr 22, 2011 10:05:02 GMT -5 Gardening Grandma said:

If you were a year away from retirement and using a retirement calculator, what percentage would you use for inflation going forward? Also, we are playing with different investment scenarios in retirement. Out of curiosity, DH asked me to calculate how long our savings would last in a money market type of account. What percentage would you use for something like that going forward - erring on the conservative side.

When we were in the preparation stage, we ran the numbers using 3%, 3.5% and 4% for inflation.... Of course I'm old enough to remember the double digit inflation during the 80's, so that was also in the back of my mind.

Morningstardotcom has some really good information, articles, and forums on retirement planning and investing during retirement.

Honestly, if you retired with ALL of your assets in a money market account, I seriously doubt that it would last your lifetime. If you are looking at 20-30 years in retirement, you need more growth than the fraction of a percent that money market accounts give.. I have a chart that shows the odds of running out of money depending on the time frame and the asset allocation. A person planning to withdraw 4%/yr and who is 100% invested in bonds (which pay more than MM) has a 63% chance of running out of money.

We've been running the numbers, but right now we're looking at a 2.5% annual withdrawal rate.

[Gardening Grandma]

dancinmama,
If you are planning a 2.5 rate, do you plan to increase it with inflation? Or keep it constant?
Also, do you intend to spend down the principal? Or hope to leave some for an inheritance?

The reason I ask is that if you don't plan to spend down the principal, then your funds need to grow at least 2.5% if there is 0 inflation. A MM won't give you 2.5 - at least not right now....

The chart doesn't show the results for a 2.5 withdrawal rate, but it IS pretty conservative. bonapp's calculator will though (nice calculator btw!)

[dancinmama]

Apr 22, 2011 10:28:55 GMT -5 Gardening Grandma said:

dancinmama,
If you are planning a 2.5 rate, do you plan to increase it with inflation? Or keep it constant?
Also, do you intend to spend down the principal? Or hope to leave some for an inheritance?

The reason I ask is that if you don't plan to spend down the principal, then your funds need to grow at least 2.5% if there is 0 inflation. A MM won't give you 2.5 - at least not right now....

The chart doesn't show the results for a 2.5 withdrawal rate, but it IS pretty conservative. bonapp's calculator will though (nice calculator btw!)

We do plan to spend down the principal, leaving only the home as an inheritance.

The MSN Money retirement calculator accounts for inflation. You give them an inflation percentage to plug in and based on that, the calculator adjusts the dollar amount so that more is withdrawn from the retirement account every year to account for inflation.

[dancinmama]

Apr 22, 2011 9:56:48 GMT -5 @bonnap said:

We just went through this exercise and used 3% inflation. Of course that's also the rate of return we used for all of our investments ;D.

Here's a fun calculator to use:

www.firecalc.com

bonnap: Thanks for the calculator. I will be playing with it today. I need to READ more on how the calculator works, but so far it says that for any historic 30 yr. period, we would not have run out of money.

Depending on how I tweak the numbers on the MSN Money calculator it says that we could be a little short for a 30 year retirement if I go strictly money market like DH wanted me to. That's why I asked here what percentage people would use for that. I used 1%. If I use 1.5% we'd be okay, but it would be dumb to just arbitrarily say, "Okay then, I'll use 1.5%." I doubt that we would ACTUALLY go total fixed income, but DH wanted me to see if we could and have the money last 30 years.

There are SOOOO many variables which is what is making this so difficult - like we might not live to be 85 or one or both of us could live longer, but we figured that 30 years was pretty safe.

[Gardening Grandma]

Apr 22, 2011 10:43:09 GMT -5 dancinmama said:

Apr 22, 2011 10:28:55 GMT -5 Gardening Grandma said:

dancinmama,
If you are planning a 2.5 rate, do you plan to increase it with inflation? Or keep it constant?
Also, do you intend to spend down the principal? Or hope to leave some for an inheritance?

The reason I ask is that if you don't plan to spend down the principal, then your funds need to grow at least 2.5% if there is 0 inflation. A MM won't give you 2.5 - at least not right now....

The chart doesn't show the results for a 2.5 withdrawal rate, but it IS pretty conservative. bonapp's calculator will though (nice calculator btw!)

We do plan to spend down the principal, leaving only the home as an inheritance.

The MSN Money retirement calculator accounts for inflation. You give them an inflation percentage to plug in and based on that, the calculator adjusts the dollar amount so that more is withdrawn from the retirement account every year to account for inflation.

Have you considered Treasuries/ TIPS?

[Gardening Grandma]

Apr 22, 2011 10:53:33 GMT -5 dancinmama said:

Apr 22, 2011 9:56:48 GMT -5 @bonnap said:

We just went through this exercise and used 3% inflation. Of course that's also the rate of return we used for all of our investments ;D.

Here's a fun calculator to use:

www.firecalc.com

bonnap: Thanks for the calculator. I will be playing with it today. I need to READ more on how the calculator works, but so far it says that for any historic 30 yr. period, we would not have run out of money.

Depending on how I tweak the numbers on the MSN Money calculator it says that we could be a little short for a 30 year retirement if I go strictly money market like DH wanted me to. That's why I asked here what percentage people would use for that. I used 1%. If I use 1.5% we'd be okay, but it would be dumb to just arbitrarily say, "Okay then, I'll use 1.5%." I doubt that we would ACTUALLY go total fixed income, but DH wanted me to see if we could and have the money last 30 years.

There are SOOOO many variables which is what is making this so difficult - like we might not live to be 85 or one or both of us could live longer, but we figured that 30 years was pretty safe.

You're right. It IS very complicated. And the consequences for mistakes can be pretty bad. We went to see a FA who was a big help during the process. Although I feel he gave us good advice, in retrospect, I'd have gone to a fee only FA instead of a fee based one. We're now doing it on our own, but I felt that he gave us a good start....

[runewell]

Apr 22, 2011 10:05:02 GMT -5 Gardening Grandma said:

I have a chart that shows the odds of running out of money depending on the time frame and the asset allocation. A person planning to withdraw 4%/yr and who is 100% invested in bonds (which pay more than MM) has a 63% chance of running out of money.

Well if I retire with $100, I'm going to run out of money no matter how I invest it. Although i suppose if I can live on a withdrawal rate of $4/yr I might be OK.

[dancinmama]

Apr 22, 2011 10:54:23 GMT -5 Gardening Grandma said:

Apr 22, 2011 10:43:09 GMT -5 dancinmama said:

We do plan to spend down the principal, leaving only the home as an inheritance.

The MSN Money retirement calculator accounts for inflation. You give them an inflation percentage to plug in and based on that, the calculator adjusts the dollar amount so that more is withdrawn from the retirement account every year to account for inflation.

Have you considered Treasuries/ TIPS?

We are looking at everything right now. Ultimately we may settle on investing some in stocks (probably a S&P indexed fund), some in a bond fund, and some in some kind of fixed income instrument(s); but right now we are really trying to see how far our retirement funds will go with the lowest ROI to determine how much risk we really need to take.

[Gardening Grandma]

If you retire with 100 and withdraw a fixed 4% every year and earn 5%, then you would not run out of money. In fact, you'd have more, not less after a few years (assuming 0 inflation). If you withdraw a fixed 2.5% and inflation stayed at 1% you would not run out of money unless it earned 0% (like under the mattress). But you can get about 3% pretty safely with Treasuries....

It really DOES depend on your asset allocation and withdrawal rate and inflation. That's why it's more complicated than folks realize until they actually start contemplating the reality.

[Gardening Grandma]

Dancinmama
I'd look at balanced funds. We have about 20% of our portfolio in VWINX (Vanguard). It's about 37% stocks and 57% bonds, and weathered the bear market pretty well. Gives a nice dividend too.....

[dancinmama]

Apr 22, 2011 10:57:54 GMT -5 Gardening Grandma said:

Apr 22, 2011 10:53:33 GMT -5 dancinmama said:

bonnap: Thanks for the calculator. I will be playing with it today. I need to READ more on how the calculator works, but so far it says that for any historic 30 yr. period, we would not have run out of money.

Depending on how I tweak the numbers on the MSN Money calculator it says that we could be a little short for a 30 year retirement if I go strictly money market like DH wanted me to. That's why I asked here what percentage people would use for that. I used 1%. If I use 1.5% we'd be okay, but it would be dumb to just arbitrarily say, "Okay then, I'll use 1.5%." I doubt that we would ACTUALLY go total fixed income, but DH wanted me to see if we could and have the money last 30 years.

There are SOOOO many variables which is what is making this so difficult - like we might not live to be 85 or one or both of us could live longer, but we figured that 30 years was pretty safe.

You're right. It IS very complicated. And the consequences for mistakes can be pretty bad. We went to see a FA who was a big help during the process. Although I feel he gave us good advice, in retrospect, I'd have gone to a fee only FA instead of a fee based one. We're now doing it on our own, but I felt that he gave us a good start....

We met with a couple of FAs years ago (in our mid to late thirties) and at that time they told us that we were way ahead of the game and to keep doing what we were doing - so that's what we did. Maybe it's time to revisit an FA for reassurance, if for nothing else.

[dancinmama]

The only reason we can even contemplate early retirement for DH is that he started max contributions to his 401k at age 24. Once we adjusted to the initial drop in take home pay, contributions were just on automatic pilot.

In addition, there were several years that I was able to day-trade DH's company stock within his 401k and I did pretty well. That hasn't been allowed for years though.

In addition, he has been with the same company for almost 31 years and will receive a pension, although quite a reduced annual amount for retiring at 55 vs staying until age 60.

He has a very stressful job and was diagnosed with Crone's two years ago. He has been asymptomatic for the most part, but it has been a huge reason for his decision to take early retirement.

[Baby Fawkes]

gardeninggradma,

I see where I was misunderstanding. You are assuming that regardless of asset base everyone is going to withdraw the same percentage. The chart makes sense based on that assumption. I was thinking of it based on a required $ amount withdrawn, which can be a vastly different withdrawal percentage amount depending on your needs/wants and inital asset base size.

[Gardening Grandma]

Baby bean,
Exactly. Now, it turns out that there are a number of different withdrawal possibilities. One interesting one I've read about is withdrawing an average of a percentage over 3-5 years. So one year, one might withdraw only 2%. The next year only 3%. then the next year take a trip ( buy a car, have a big medical bill) and withdraw 6%. The average over the three years is still under 4%.

Personally, for now, our plan is to withdraw a fixed amount that is under 4% of the balance on Dec 31. that's in good years. In bad years we can reduce it to 2% or 1% or nothing at all. I have a "bare bones" budget that is based only on our pension, SS and rental income. If we had to, we could live on that. The'd be no extras and it would be tight, but doable.....

dancinmama,
Seeing a FA before your DH retires probably would be a smart move. It sounds like you've been making smart decisions all along....

[dancinmama]

Apr 22, 2011 11:54:07 GMT -5 Gardening Grandma said:

Baby bean,
Exactly. Now, it turns out that there are a number of different withdrawal possibilities. One interesting one I've read about is withdrawing an average of a percentage over 3-5 years. So one year, one might withdraw only 2%. The next year only 3%. then the next year take a trip ( buy a car, have a big medical bill) and withdraw 6%. The average over the three years is still under 4%.

Personally, for now, our plan is to withdraw a fixed amount that is under 4% of the balance on Dec 31. that's in good years. In bad years we can reduce it to 2% or 1% or nothing at all. I have a "bare bones" budget that is based only on our pension, SS and rental income. If we had to, we could live on that. The'd be no extras and it would be tight, but doable.....

dancinmama,
Seeing a FA before your DH retires probably would be a smart move. It sounds like you've been making smart decisions all along....

gardeninggrandma: I've been playing with our budget too - bare bones versions vs. more free-spending versions. The budget that I chose to use when playing with the retirement calculators allows for pretty liberal spending on a monthly basis, but does not allow for expensive travel or the purchase of a car. We could probably save (from the budget) for the expensive travel, but when the day comes when we need to buy a car, we'll just have to take it out of savings or do a 0% interest for X number of years if they are offering those at the time.

I tried to be liberal with the spending estimates and conservative with the investment income estimates to provide an overall conservative estimate of how long we could live on what we have.

[Gardening Grandma]

How old is your DH? Are you looking at (hopefully) more than 30 years' retirement?

[dancinmama]

Apr 22, 2011 12:20:31 GMT -5 Gardening Grandma said:

How old is your DH? Are you looking at (hopefully) more than 30 years' retirement?

gardeninggrandma: He will be 55 when he retires. We are calculating 30 years for retirement. We have not included SS into our retirement planning on the income side - it will probably be there, but we just have never counted on it. If need be, later on down the line we could downsize and sell our home. We are located in a VERY HCOL area so it is worth quite a bit of money in spite of the depressed housing market.

Regardless, we definitely WILL be making more than 1% ROI and one percentage point more, or even a half a percent for that matter, makes a huge difference on how long our retirement nest egg will last.

[Deleted]

85 may be on the young side unless your DH already has health issues or his family is short-lived. What is the age difference between you and DH?

I'm using age 100 for our numbers. DH's maternal grandfather did live to 102 so there is the possibility of longivity. But both DH's parents have had kidney cancer (very rare and really odd that they have both had it). His father died at age 70. His mother is 76 but has had 5 serious boughts of cancer so we don't know that she'll make it another 10 years. But she's still a smoker (FIL was too) and fortunately DH is not. Besides the math is so much easier if one uses 100 ;D

I would include SS in your calculations. Don't use it in your spending model though. It can help you if inflation comes roaring back or you can bank the money for those bigger purchases like replacement cars.