A big question when it pertains to retirement is whether or not you” ll have the resources you require to pay for every little thing, so you need to have some realistic assumptions of what your cost will appear like, what will you spend on food as well as fun, traveling and also healthcare, taxes on withdrawals as well as every little thing else that might turn up, and after that you consider inflation, and afterwards you can take an appearance at, Do you have the properties as well as the income to sustain that kind of spending? For right currently, we” ll emphasis on the price side of things, as well as we” re going to touch on the greatest costs categories, we” ll likewise look at some devices you can use to obtain some sensible expectations, those will certainly be connected to in the description listed below, but with those tools, you can figure out approximately exactly how much other individuals spend or what you could expect to invest, and naturally, this all depends on your health and wellness as well as your area and also your way of life, but you can start with some excellent notified assumptions and also after that fine-tune that as things go on.So these are the most popular investing categories that a lot of things fall into, and we” ll begin with your general budget plan, so in many cases, your retired life investing might be similar to your existing investing level, at least that might be an objective, or … We put on” t want you to have to make sacrifices to reduce your criterion of living in retired life, so there are a couple of means to look at this one is called a replacement proportion, it” s not exactly my favorite, but it” s worth looking at … This is where you claim, I desire to change a portion of my earnings, usually some percent, like 80% or 90%, for instance, of my present revenue, and you claim, Well, I” m not going to spend as much on commuting to work, for example, I won” t pay payroll taxes ‘maybe I don ‘ t demand 100% of my current gross revenue, yet I can take some portion of that, as well as purpose for that as my costs degree in retirement, you can also look at your existing investing degrees in a couple of various means, and I” ve got various other video clips on this, by the method, they obtain into it in more detail, but one way to go is to look at a bottom up view of your costs, and that” s where you generally look at your spending plan and also see where cash goes every month and also presume that you ‘ ll have many of those exact same costs, of course, there will certainly be some modifications, however presume that you” re going to invest on the very same things after you retire that you invest money on today, alternatively, you might go with a top down view as well as that” s where you ‘ re going to take your total income, so you might begin with your pay stubs from your W 2 or your tax obligation return, then we deduct out any cost savings that you do, so if you put money into retirement accounts or cost savings accounts, we would minimize those quantities out and the remainder is all of your spending and also tax obligations, so some of those tax obligations are going to go away, so your pay-roll taxes, for instance, are not something you would certainly proceed to pay after you stop working, however the point being, we take your total income minus your savings, that amounts to complete outflows.It goes somewhere
, we put on ‘ t recognize precisely where it goes, but it is going somewhere, as well as if you want to keep the exact same requirement of living, we desire to be able to fund roughly that exact same outflow, possibly minus pay-roll tax obligations or any other modifications that are going to come up in retired life, so what are some of those prospective adjustments … Well, one might be, for instance, your home mortgage, if you pay that off at some point, you would no longer have the principal and rate of interest part of the repayment, although the taxes and insurance policy or maybe HOA fees would certainly proceed to be costs that you face in retirement or you could travel more, you might say, once I quit working, I” m going to spend extra on traveling than I’have previously because I ‘ ll have more time, you may go out to eat extra, you could just alter a number of various points, so you desire to build those into your assumptions, as you look at expenses in retired life, one more resource of details that might be useful is to utilize studies, so this can be especially helpful if you ‘ re reasoning of moving or if you just desire to contrast exactly how your expenditures could look to various other people as well as just get a wild guess on what expenditures might look like, you can state, Look, we” ve got 2 grownups right here, no youngsters in the home, when you” re retiring.That ‘
s typically the instance, what do individuals generally invest on these various categories, as well as that can offer you a ballpark hunch and also you can look at different areas if you” re taking into consideration moving, then it” s also vital to look at inflation and regular retiree habits as you develop out your presumptions so inflation is of program, the phenomenon of rates climbing over time, for instance, we have some difficult hitting economic information below, an extra pound of chocolate chip cookies in 1980 was about a buck 50, as well as that has gradually climbed especially recently, and also it” s now 4.60 or so for that exact same pound of chocolate chip cookies, if you think back to various other points like what you could have paid for housing in the past and also several decades ago, it may seem laughably low, so rising cost of living is absolutely something to take seriously that said, retired people put on” t necessarily spend at a rate that just marches up thoughtlessly with rising cost of living, as well as that” s based on a number of different concepts as well as some research study, so you, for instance, have real estate costs and also that” s part of the rising cost of living calculation, so you might have fixed price home loan, yet your mortgage payment isn” t always going up and also you ‘ re not paying’rental fee or you ‘ re not dealing with a landlord who” s going to enhance your real estate expenses at the following revival, your real estate cost is typically fixed, at the very least for currently, so another method of looking at it is what” s called the retired life costs smile, that” s based on study from David Blanchette.And if I might summarize it, I ‘ ll essentially state that he found that senior citizens spend at a price of roughly rising cost of living minus 1%, so as you do your retired life estimates, you” re going to assume that rising cost of living happens at a certain rate, and your spending at the very least in some classifications, might happen at a somewhat slower rate, that” s what I do with customers, when I” m doing retirement estimates, I usually look at it a number of various ways, one is with that blind inflation modification, it simply maintains on going up and also we” re not looking at anything else, yet we additionally look at the retirement spending smile, although in that instance, I do such as to have healthcare expenses inflate at a faster rate since that simply appears to be a problem for senior citizens. Another concept is the go go, the slow go and also the no go, which is where you state, right after you retire, you” re into your Go Go Years, you have quit functioning, you have this complimentary time, you have energy as well as the need to do a great deal of the points that you” ve been waiting to do, so you spend cash on those points at a fairly higher rate.But when we obtain
into the slow go years, you ‘ ve completed a lot more, you ‘ re much less curious about eight hr flights or whatever, and you might spend a little much less … Ultimately we get involved in the no go years where actually you” re not investing a whole lot on traveling as well as amusement, yet those healthcare costs are tending to ramp up for you sometimes, all of that to claim that you desire to think concerning exactly how your future might unfold. There is inflation to compete with, and at the exact same time, we often see the senior citizens put on” t always match rising cost of living flawlessly, a pair of different patterns can potentially come into play. We even see this in government information, so the Bureau of Labor Stats considers exactly how much individuals are spending typical house expenses age 55 to 64, that claimed, approximately this level, allow” s state 65 to 74.
There” s a little a reduction as well as at 75 and over, it ‘ s much more of’a decline since ‘ s no assurance that that ‘ s what points will look like for you. As well as once more, we need to bear in mind those health care expenses, although Medicare can cover surprisingly a whole lot, but once more, you simply wish to think about various ways things could unravel, by the means I” m Justin Pritchard and I help people intend for retired life and invest for the future, and in the description below, you” re mosting likely to discover a great deal of sources, a number of web links to the things that we” ve looked at below, as well as some larger photo retired life preparation resources, so I assume you will certainly discover those very valuable, make certain to inspect all of that out, this is likewise a time for a quick pleasant suggestion that it” s simply a brief video, it can ‘ t possibly cover whatever, and also it ‘ s not personalized guidance, please please read this very meticulously and talk to some professionals before you make any type of big decisions.Now onto medical care
costs, let ‘ s consider the landscape as well as some particular tools and also surveys you can use to obtain some numbers that you might wish to place into your own computations, so health care happens in a pair of different ways, however before age 65, if you retire previously, that age … A couple of points might occur. Number one, you might advance with retired person medical care from your company, you might make use of COBRA or your state” s extension program to proceed with the protection you formerly had for approximately 18 months for the most part, that can obtain fairly costly, but worth looking at.You may additionally buy your own protection, perhaps via an insurer or through an industry or exchange, as well as when you do that, you may be able to possibly get some extremely reduced cost if you have a relatively reduced income, that” s of you get your plan with the exchange or industry and you get approved for some aids, and also finally, if you have a spouse and also that person occurs to be covered and also you can jump on their coverage, it” s typically a certifying event when you leave your work and lose your coverage that might make sense to proceed with their plan, so let” s have a look at some of those prospective savings if you use an industry plan, this is a device from the Kaiser Family members Foundation that can assist you approximate some expenses and also you can have fun with this …
I” ll put a web link in the description, put in your location, yet if you” re making use of an industry plan, you can pick different levels of earnings, allow” s just say it ‘ s someone age 61 just for laughs. And so they might be able to save regarding 750 bucks a month at that level of earnings from a superior tax obligation credit score, and obviously, you” d wish to discover precisely how those work, yet if the income was greater, perhaps they are doing some part-time job or some Roth conversions or something like that. That might drop down to regarding 254 dollars per month in terms of the superior tax credit that they” re getting, so as you approximate your medical care expenses in retirement, component of it is going to be the costs you pay, as well as right here we are before age 65, and those premiums or the effective premium is going to depend on your income level, in some instances, Integrity also has a pretty great tool, and also this is going to aid us transition to …
Once we get into Medicare age, but we” ll begin before Medicare, and also we” re going to have a solitary female age ’62, ‘ cause that ‘ s where I landed, as well as she ‘ s going to retire today, live till 93, so her medical care price is going to be a respectable amount for this year, so for her initial year of retirement, she” s paying roughly 12000 bucks, however if she” s going to make it till, allow” s say age 65 or so, you see how that goes down off quite a little bit due to the fact that …
And they have a warning sign that stands out up below, yet as soon as you are eligible for Medicare, then your expenses usually drop quite a bit, so allow” s talk concerning Medicare now, as well as by the method, that ‘ s presuming she didn ‘ t qualify for any type of tax aids, when you reach age 65, that” s usually when you ‘ re eligible for Medicare, it can take place at various ages in various scenarios, yet that” s actually the ballpark age, so you do desire to sign up numerous months or at least get the round rolling a number of months ahead of time to stay clear of any kind of charges, those can be lifetime charges that include price to your coverage, so you put on” t want that, you also want to be conscious of your revenue starting at around age 63, and also that” s since your Medicare premiums look back a pair of years, they look back two years prior to what your revenue was, and if you had fairly a high earnings, then that can lead to higher premiums, however in general, as soon as you” re on Medicare, health and wellness insurance coverage can be rather budget friendly unless you have some really major health and wellness issues, also after that, you may be able to place a cap on your overall out of pocket costs by making use of additional kind plan, so you have a pair of different options available, you really want to chat with an insurance coverage broker that specializes in Medicare as well as can assist you figure out offered your circumstance, what may make the many feeling for you to get a ballpark estimate of what those expenses might look like and also the ranges as well as the components that could go into it, we” ve got the Lead Mercer Health care study, the most recent out right now is the 2020, we” ve obtained a 65 year old lady here simply on uh initial Medicare, if she has …
Allow” s say greater danger, I think this is about 2 problems, so a pair of conditions that she” s obtained to deal with, you might even be much healthier, however a high threat person, allow” s claim may be paying 5700 out of pocket total, so that” s made up of some premiums as well as your out of pocket price, so bear in mind that Medicare does not cover everything, so you” ve obtained to pay for an oral vision in certain, and some various other, a number of various other points. Your total amount out of pocket prices are going to depend on your problems, if you don” t have any type of type of means to cap your prices, they can get rather high, so if you are in the worst uh 95th percentile, that” s what this specific study located, this is no warranty of what you might experience or anything like that, however just some ball park numbers here from that study, or if you happen to use some kind of extra strategy, you would end up paying higher costs, yet you could anticipate to be able to decrease your danger of out of pocket prices, so that” s going to be something you desire to review with a wellness insurance policy agent who, once again, specializes in Medicare, next we come to long term treatment costs, as well as this is one of the most tough components when it comes to retirement planning.We don ‘ t
recognize if you” re going to require treatment or how lengthy it would last, or precisely what kind of treatment you ‘ ll requirement, are you going to have somebody come in a pair of times a week to tidy points up and also prepare some meals, or are you” re going to be living in memory treatment with 24 hour guidance, as you can picture, the rates on those very significantly, so you can get some rough quotes through this GE expense of care survey, and also you can choose your area if you desire … Let” s say you ‘ re in the Denver metro location, and they could claim that the monthly median cost there … So homeowner services, 67 68 thousand bucks a month. If you are in an exclusive area, for instance, it can promptly go up from there, so obtain an idea of what things may look like in your location, as well as you can make some estimates of what type of care you might need.Obviously, there ‘ s no means to forecast that, yet this is something you may desire to develop into your strategy as well as from there, you can begin assuming about just how you could desire to fund to that, or if you even want to assume about attempting to money to that. There are a number of different choices you can consider allocating assets that you currently have conserved up or that you ‘ re conserving up, you’can allocate those for prospective long-term care prices, there are insurance coverage that can be found in a number of various flavors that could possibly aid with that, you can assume of your house equity perhaps as a means to fund some long term care costs, there are a variety of various things to think of. Next off, we have taxes, as well as those can be a prospective price in retired life that come as a surprise, you may assume that once you quit functioning, you” re no longer paying taxes, that is in fact not the situation, so you are frequently going to pay taxes on pensions that you receive, a portion of your Social Safety and security could be taxable, although if you” re a glass half full kind of person, at least 15% would be tax cost-free, it kind of just depends on your revenue level, so these are points that you desire to look into.Your distributions from pre tax retired life accounts are normally taxed, or at the very least they get included as potentially taxed income, so that ‘ s going to be your insurance deductible Individual retirement accounts, any pre tax obligation 401k, 403b balances that you have actually saved up, those kinds of points might trigger you to pay tax obligations and they might affect various other components of your tax obligation return and also your finances, those Roth accounts can potentially produce tax obligation totally free income, as well as so that method if you satisfy all of the Internal revenue service requirements, you would certainly not pay earnings tax obligation on distributions you take and those put on” t interfere with various other points on your tax return or your funds. That can be actually valuable. And there are some approaches you can use to manage when and exactly how much you pay in tax obligations, so sometimes individuals think of Roth conversions. And also there are pros and also disadvantages of that, of training course. Incidentally, I” ve obtained an additional video clip on this, it speaks about just this taxation and retired life topic on its own, so I” ll try to bear in mind to make that appear up above here.When we get
to your taxed accounts, those commonly can create some tax responsibility for you, which could be biggest when you offer something that has acquired a great deal of worth, ideally you have some of that in your profile, things that you got long back, and it obtained value, that you might have a funding gain on, so you want to be assuming regarding what is the tax obligation impact of that type of deal, there are a number of ways to manage the tax obligations that you pay in retirement, in particular, it might make good sense to pay some taxes even before you are required to.I meant those Roth conversions, which would certainly be when you take money from pre tax obligation pension and pay tax obligations intentionally to obtain it right into a Roth, and the outcome of that, if you meet all the needs, is future tax obligation totally free earnings, or if you in fact need the cash for spending, you can simply withdraw and fill up the tax braces that might make good sense if you” re in a reasonably reduced tax bracket today, so chat with a certified public accountant or with a monetary organizer as well as see if those kinds of methods makes feeling, before you make any choices, you can also reduce your tax costs in retirement with basic tax obligation efficient investing strategies, so that” s avoiding a lot of short-term resources gains might be preventing high turn over. Possibly you wish to do that. Maybe you don” t, that ‘ s up to you as’an investor, but it ‘ s usually mosting likely to be tax reliable to make use of much more easy type tools as you spend your cash, you can additionally look in the direction of things like perhaps postponing Social Security, which provides you time to fill those tax obligation brackets, take circulations or do Roth conversions, you could intend to believe concerning if you provide to charity, does it make good sense to do so in certain tax obligation friendly means, maybe you” re offering extremely valued protections that have actually gained a whole lot of worth, providing those to charity, possibly you” re offering money straight out of your individual retirement account to a qualifying charity, once more, that” s assuming that you fulfill the needs to do so, that” s a certified philanthropic distribution or a QCD, but all that stated, there are means to handle several of these expenses to make sure that you wind up with more after tax obligation cash or more money that mosts likely to the causes that you value.So I wish you discovered that useful. If you did, please leave a quick thumbs up, thank you, and take treatment.
There” s a little bit of a decline and at 75 as well as over, it ‘ s also more of’a decline currently that ‘ s no warranty that that ‘ s what points will certainly look like for you. Number one, you may proceed on with retired person healthcare from your company, you may use COBRA or your state” s continuation program to proceed with the coverage you formerly had for up to 18 months in a lot of cases, that can get fairly expensive, however worth looking at.You might also get your own coverage, maybe through an insurance provider or with a marketplace or exchange, and when you do that, you may be able to potentially get some extremely reduced price if you have a relatively low revenue, that” s of you get your plan with the exchange or market and also you certify for some aids, and lastly, if you have a spouse and that individual happens to be covered and also you can get on their insurance coverage, it” s generally a qualifying event when you leave your work and also lose your insurance coverage that might make feeling to continue with their plan, so let” s take an appearance at some of those potential savings if you make use of an industry plan, this is a tool from the Kaiser Family Structure that can assist you estimate some expenses and also you can play with this …
I” ll put a link in the description, placed in your place, yet if you” re utilizing an industry plan, you can pick different degrees of income, let” s just claim it ‘ s one person age 61 simply for laughs. That could drop down to about 254 bucks per month in terms of the exceptional tax credit rating that they” re obtaining, so as you estimate your healthcare expenses in retirement, part of it is going to be the costs you pay, and below we are before age 65, and those costs or the effective premium is going to depend on your income level, in some instances, Fidelity likewise has a quite amazing device, and also this is going to assist us shift to …
Once we obtain right into Medicare age, yet we” ll start prior to Medicare, and we” re going to have a solitary lady age ’62, ‘ reason that ‘ s where I landed, as well as she ‘ s going to retire today, live till 93, so her medical care expense is going to be a suitable amount for this year, so for her very first year of retirement, she” s paying approximately 12000 dollars, however if she” s going to make it until, let” s say age 65 or so, you see how that drops off fairly a bit due to the fact that …
As well as they have an advising indication that stands out up here, however when you are eligible for Medicare, after that your prices usually drop quite a little bit, so let” s chat about Medicare now, and by the method, that ‘ s thinking she didn ‘ t qualify for any kind of tax aids, once you get to age 65, that” s generally when you ‘ re eligible for Medicare, it can happen at various ages in different circumstances, however that” s really the ballpark age, so you do desire to enlist several months or at the very least get the sphere rolling several months in advance of time to stay clear of any kind of penalties, those can be lifetime penalties that include cost to your coverage, so you don” t want that, you also desire to be conscious of your income beginning at around age 63, and also that” s because your Medicare premiums look back a couple of years, they look back two years prior to what your earnings was, as well as if you had fairly a high earnings, then that can lead to greater premiums, however in basic, as soon as you” re on Medicare, wellness insurance coverage can be fairly inexpensive unless you have some actually significant wellness issues, even then, you may be able to put a cap on your total amount out of pocket spending by using supplemental kind strategy, so you have a couple of various alternatives offered, you actually want to chat with an insurance coverage broker that specializes in Medicare and can assist you figure out provided your scenario, what could make the most feeling for you to obtain a ballpark estimate of what those costs may look like and also the ranges and the elements that could go right into it, we” ve obtained the Lead Mercer Medical care research, the latest out right now is the 2020, we” ve got a 65 year old female below just on uh original Medicare, if she has …
Allow” s state higher danger, I believe this is concerning two problems, so a pair of conditions that she” s got to deal with, you could even be healthier, however a high threat person, let” s state may be paying 5700 out of pocket total amount, so that” s made up of some premiums as well as your out of pocket cost, so bear in mind that Medicare does not cover whatever, so you” ve got to pay for an oral vision in particular, and some various other, a number of other things. Your total amount out of pocket costs are going to depend on your conditions, if you wear” t have any type of type of way to cover your expenses, they could get rather high, so if you are in the worst uh 95th percentile, that” s what this particular research study discovered, this is no assurance of what you could experience or anything like that, however just some ballpark numbers below from that research study, or if you take place to utilize some kind of extra plan, you would certainly finish up paying higher costs, however you might expect to be able to lower your danger of out of pocket costs, so that” s going to be something you desire to review with a health and wellness insurance representative that, once again, specializes in Medicare, next we come to lengthy term treatment costs, and this is one of the most challenging components when it comes to retired life planning.We put on ‘ t
recognize if you” re going to require care or just how lengthy it would certainly last, or specifically what type of treatment you ‘ ll demand, are you going to have somebody come in a pair of times a week to clean points up and cook some meals, or are you” re going to be living in memory care with 24 hour supervision, as you can visualize, the rates on those really dramatically, so you can get some rough price quotes through this GE expense of care study, and also you can pick your location if you want … Allow” s state you ‘ re in the Denver metro location, as well as they could say that the regular monthly typical cost there … So homeowner services, 67 68 thousand bucks a month.
If you have spent any time researching retirement planning online, you have heard of the 4% rule. If you haven’t heard of it, the 4% rule suggests that if you spend 4% of your assets in your initial year of retirement, and then adjust for inflation each year going forward, you will be unlikely to run out of money. To put some numbers to it, if you wanted to retire and spend $40,000 per year, adjusted for inflation, from your portfolio, you would need to retire with one million dollars to adhere to the four percent rule. This rule is alternatively described as the requirement to have 25 years worth of spending in your portfolio to afford retirement. 1/25 equals 4% – it’s the same rule. While it is simple and elegant, the 4% rule is probably not the best way to plan for retirement, especially if you plan on retiring early. I’m Ben Felix, Associate Portfolio Manager at PWL Capital. In this episode of Common Sense Investing, I’m going to tell you why the 4% rule is not a rule to live by.
The 4% rule originated in William Bengen’s October 1994 study, published in the Journal of Financial Planning. Bengen was a financial planner. He wanted to find a realistic safe withdrawal rate to recommend to his retired clients. Bengan’s breakthrough in determining a safe withdrawal rate came from modelling spending over 30-year periods in US market history rather than the common practice of simply using average historical returns. Using data for a hypothetical portfolio consisting of 50% S&P 500 index and 50% intermediate-term US government bonds he looked at rolling 30-year periods starting in 1926, ending with 1992. So, 1926 – 1955, followed by 1927 – 1956 etc., ending with 1963 – 1992. The maximum safe withdrawal rate in the worst 30-year period ended up being just over 4%. From this simple but innovative analysis, the 4% rule was born. More recently Bengen has adjusted his spending rule to 4.5% based on the inclusion of small cap stocks in the hypothetical historical portfolio.
While the 4% (and the 4.5% rule) may have basis in historical US data, there are substantial problems with these rules in general, and specifically in the case of a retirement period longer than 30 years. In his 2017 book How Much Can I Spend in Retirement, Wade Pfau, Ph.D, CFA, looked at 30-year safe withdrawal rates in both US and non-US markets using the Dimson-Marsh-Staunton Global Returns Dataset, and assuming a portfolio of 50% stocks and 50% bills. He found that the US at 3.9%, Canada at 4.0%, New Zealand at 3.8%, and Denmark at 3.7% were the only countries in the dataset that would have historically supported something close to the 4% rule. The aggregate global portfolio of stocks and bills had a much lower 30-year safe withdrawal rate of 3.5%. Considering returns other that US historical returns is important, but, in my opinion, one of the most important assumptions to be aware of in the 4% rule is the 30-year retirement period used by Bengen. People are living longer, and many of the bloggers citing the 4% rule are focused on FIRE, financial independence retire early.
In Bengen’s study the 4% rule with a 50% stock 50% bond portfolio was shown to have a 0% chance of failure over 30-year historical periods in the US. That chance of failure increases to around 15% over 40-year periods, and closer to 30% over 50-year periods. FIRE likely means a retirement period longer than 30 years. Modelling longer time periods using historical sampling becomes problematic because we have data for a limited number of historical 50-year periods.
One way to address this issue is with Monte Carlo simulation. Monte Carlo is a technique where an unlimited number of sample data sets can be simulated to model uncertainty without relying on historical periods. Even with Monte Carlo simulation, there is an obvious risk to using historical data to build expectations about the future. The world today is different than it was in the past. Interest rates are low, and stock prices are high. While it may be reasonable to expect relative outcomes to persist, such as stocks outperforming bonds, small stocks outperforming large stocks, and value stocks outperforming growth stocks, the magnitude of future returns are unknown and unknowable. To address this for financial planning, PWL Capital uses a combination of equilibrium cost of capital and current market conditions to build an estimate for expected future returns for use in financial planning. This process is outlined in the 2016 paper Great Expectations.
Using the December 2017 PWL Capital expected returns for a 50% stock 50% bond portfolio we are able to model the safe withdrawal rate for varying durations of retirement using Monte Carlo simulation. We will assume that a 95% success rate over 1,000 trials is sufficient to be called a safe withdrawal rate. For a 30-year retirement period, our Monte Carlo simulation gives us a 3.5% safe withdrawal rate. Pretty close to the original 4% rule, and spot on with Wade Pfau’s global revision of Bengen’s analysis. Now let’s say a 40-year old wants to retire today and assume life until age 95. That’s a 55-year retirement period. The safe withdrawal rate? 2.2%. I think that this is such an important message. The 4% rule falls apart over longer retirement periods. So far we have talked about spending a consistent inflation adjusted amount each year in retirement. One way to increase the amount that you can spend overall is allowing for variable spending. In general this means spending more when markets are good, and spending less when markets are bad. The result is more spending overall with a lower probability of running out of money. The catch is that you have to live with a variable income or have the ability to generate additional income from, say, working, to fill in the gaps when markets are not doing well.
We also need to talk about fees. Fees reduce returns. Fees may be negligible if you are using low-cost ETFs, but they become extremely important if you are using high-fee mutual funds, or if you are paying for financial advice. The safe withdrawal rate in the worst 30-year period in the US drops to 3.56% with a 1% fee, making the 4% rule the more like the 3.5% rule after a 1% fee.
Adding a 1% fee to the Monte Carlo simulation reduces the safe withdrawal rates by around 0.50% on average. In both cases this is a meaningful reduction in spending. Of course, fees need to be considered alongside the value being received in exchange for the fee. This value should be heavily tied to behavioural coaching and financial decision making. There have been two well-known attempts to quantify the value of financial advice, one by Vanguard and one by Morningstar. Vanguard estimated that between building a customized investment plan, minimizing risks and tax impacts, and behavioural coaching, good financial advice can add an average of 3% per year to returns. Morningstar looked at withdrawal strategies, asset allocation, tax efficiency, liability relative optimization, annuity allocation, and timing of social security (CPP in Canada), to arrive at a value-add of 2.34% per year.
PWL Capital’s Raymond Kerzerho has also written on this topic, finding an estimated value-add of just over 3% per year. Based on these analyses, one could argue that paying 1% for good financial advice could even increase your safe withdrawal rate. I would not go that far, but the point is that while fees are a consideration, they may be worthwhile in exchange for good advice.