Investing or Savings at Retirement

I'm no money expert, but I would leave it invested and pull off whatever amount I need to live each year. You should be able to pull 7% ($140,000) per year and never touch the $2M if you're in the right investments.

Assuming your house is paid for, I'm guessing you can live pretty comfortably on $140K plus social security and what not.

I would recommend reading up a good bit around asset allocation and SWR (safe withdrawal rates). There have been extensive studies back testing to find a SWR and I think the big one that has spawned off many recent studies is the Trinity study. You can find graphs and charts showing showing withdrawal rate versus asset allocation and the probability of success given historical performance for a given "retirement duration" (e.g. how long you need the money to last). It is important to understand this considers almost all retirement dates meaning not just cherry picking good or bad times to retire but instead runs simulations considering almost all historical possibilities. Using one of these safe withdrawal rates, is guarding against some of the worst outcomes therefore if we have just average returns then your balance will actually grow rapidly. The study I think found that the median balance after 30 years would be 2.8x the starting balance based on the rules of thumb.

You can review these and see the results but typically the higher the stocks the higher the probability of success at any given withdrawal rate. You need to consider the psychological factor as well due to the added volatility and most people don't want to sell stocks after they have dropped.

Below is a link from quick google that shows what I am talking about. I am not saying this is the best resource but this is an example to give you an idea of the information available.

Updated Trinity Study

There have also been studies that show the probability of the stock market being negative over certain time periods. For instance any day has like a 47% chance of being negative. Any month has like a 37% chance of being negative. A 5 year rolling period has 12.5% chance of being negative. If you want to play the straight numbers with no psychology then you leave it all in stocks. If you want to use the historical time period performance than I would recommend setting your asset allocation based on your comfort factor. For instance you may consider keeping 5 years worth of expenses outside of stocks and that ensures you have an 88% probability of not having to sell a stock at a loss. When you go to pull a withdrawal at whatever frequency (quarterly, monthly, yearly), if the market is up then pull from the market and if it is down then pull from your stable fund. I personally would definitely not pull it all out of the market and the data supports that decision. If you want to take it all out of the market then how much you can withdraw safely drops dramatically.


Frequency of Positive Returns based on Time

I recommend doing some reading on this to get comfortable with it or else meet with a professional. One thing to consider is you could be more aggressive if your withdrawals are flexible (e.g. you plan to pull 4% but if the market took a downturn you could still live comfortable on 3.5%). I would say shoot for a lower SWF for bare necessities but obviously give yourself the freedom to spend up to the SWR you are comfortable with when the market is good. Another thing to consider is that you will likely get SS at some point which will lower how much you have to pull from investments.

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Once you retire (assuming you had $2m or so), would you continue to leave in investments, knowing it could make or lose money, or would you want all funds in a standard savings account (which would be less risk but much much lower returns)?

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Depends on risk tolerance. What % of retirement income would derive from other sources... pension, SS, etc.?

If the latter is high enough to allow the retiree to ride through market downturns without panicked selling, "remaining invested" is the answer.

I am not an annuity person at all. The fees are ridiculous. Still, if the choice is annuity vs a savings account, annuity would probably provide better return.

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gpburdell

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If not 7, what is a good percentage to safely take out annually at retirement?

What’s the average growth of an S&P 500 index fund over the last 40 years or so?

Read the article that bod312 linked above about the Trinity study. For a 30 year retirement, 4% is considered the maximum safe withdrawal rate if you want a very high probability of not running out of money. If you are planning for an even longer retirement, then the SWR is even less. Of course how your portfolio actually performs over that time matters.



At a 7% withdrawal, even with 100% stocks you only have a 53% probability of not running out of money which is a coin flip. I'm not going to depend on luck for my retirement.

Also you have to worry about sequence of returns risk which can drastically affect things. The few years before AND after you retire are critical and can easily derail your retirement or put you into OT status.

So I just ran a monte carlo simulation on portfolio visualizer using the historical returns of the Total US Stock market (100% allocation), but with a GARCH model (which is more conservative) with both a 7% and 4% annual withdrawal rate for 30 years.

All 5000 simulations survived at that withdrawal rate under both conditions, and even at the 25th percentile at 7%, it ends with more left in the account than started ($123,143). And at 4% withdrawal rate, the 10th percentile ends with $178,328 left in the account.

I also ran simulations with a risk sequence test with the 10 worst years consecutively, and the results were similar.

Granted, I would not withdraw at 7%, but your chart is not consistent with historical returns or even close. Granted the historical data are for the last 50 years, whereas your data are for the last 150 years, but I don't think data from the 1800s, which was pretty terrible for stocks, provide much insight into today's conditions with global markets and much more access to those markets.

I also see from your link that they did monthly withdrawals (these are annual), so I re-ran the analyses using monthly withdrawals instead (e.g., 4% = 0.333333% monthly), and the results were similar, and actually a little bit better than annual withdrawals.

Anyways, in the picture below, the top table is at 7% and the bottom table is at 4%.

7% withdrawal simulation results:

4% withdrawal simulation results:

Can you run a scenario on a total market fund with a 7% withdrawal rate retiring in October 2007 at the peak?

Also try one starting at the 2000 peak.

I’m just curious.

Eta- Starting in March 2000, I tried $100k in VTSMX with a 7% monthly withdrawal ($583 fixed), indexed for inflation, and I ran out of money in 2011.

If I don’t increase withdrawals for inflation (impractical IMO), I’d run out in 2014.

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I feel like this makes things quite difficult to determine when accounting for inflation.

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Food, utilities, gas, car purchase, entertainment, etc.?

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Food, utilities, gas, car purchase, entertainment, etc.?

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Sure but shelter costs account for about a 1/3 of the CPI basket. And a majority of those costs, and their impact of inflation, are either fixed (fixed rate mortgage), will decrease (refinance, downsize, etc.), will not be present altogether (paid off before going into retirement), OR will go away (paid off during retirement).

It’s even tricky for those, like myself, who have a fixed-mortgage, refinanced with a lower payment, and/or get rid of things like PMI. But this is especially true for those at retirement age.

Add childcare and education costs that are unlikely, and all of a sudden upwards of 40% of the costs that make up the CPI, which are some of the costs that have had the largest increase over the last couple of decades, are either not present, fixed, or decreasing.

In other words, inflation will be fundamentally different for many in retirement than the overall population.

What about inflation in health care and not just inflation but the amount you spend in health care as you age?

In general they talk about the retirement smile. The smile represents your spending in retirement. Early on your spending is high and potentially higher than pre retirement because you are traveling, buying your toys and doing all those things you put off until you had more time. Then you generally get over the spending spree on toys and traveling becomes harder as you age and your spending drops off big time. Then as your body starts to breakdown in old age, your spending on health care and support.

The big question is how conservative do you want to be and what are your goals. All I know is I am not so much concerned with leaving a large nest egg to my heirs or charities but I likely will because I absolutely do not want to run out of money ever. At least the benefit is that due to the sequence of returns risk you should have a good idea pretty early in retirement whether realistically you should be worried.