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JAFO31 writes,

<<<<<MikeMatheson: "Tough one, especially in light of the fact that there is no such word as "irregardless." Bring Harry up to speed on that.

Anyway, my sarcasm and pedanticism aside, the same can be said of any investment, can't it? When someone is attempting to estimate how much money they'll have in retirement, it is impossible to know year by year rates of return. However, by using a relatively conservative constant rate, it is possible to at least make a rough guess. Actually, there ain't much choice for us folk without crystal balls.">>>>>>>

There is a large difference in using constant average growth when someone is in the accumulation stage (saving/investing) compared to when they ar making withdrawals. This issue has been discussed thoroughly on the Retire Early board (in Speakers' Corner), generally much earlier in that board's existence and on the related The Retire Early Homepage (URL linked at that board) AND, IN FACT, is a substantial reason for the genesis of the "safe" withdrawal rate as defined on those boards. Y'all might want to read some of 'intercst's' writing on this matter, especially on The Retire Early Homepage. This isue is also why some of the financial advisor sites ar constructing Monte Carlo simulations to determine withdrawal rates.

<<<<<<<"So the illustration is guaranteed NOT to be the reality. If we are within reason, however, it is still possible to give someone an effective tool for generating addtional tax-deferred income at retirement. I'm aware that our estimations will not be totally accurate, so this is my formula:

(1) Take the 20 year average of the investment being reflected within the VUL (say 16% in the S&P 500)
(2) Cut that in half (now we're at 8%)
(3) Subtract the management fee (I round off to 3%)
(4) Run your illustration (mine would be done, therefore, at 5%)

I will be wrong, of course, about the available income in 20 years. But I will most likely err on the side of caution. If I under-promise and over-deliver, I can live with myself. If it does not do as well as I had illustrated, I will be surprised. However, the client will have understood right from the beginning that there is no guarantee. Obviously, the prospect would not buy if my estimations looked impossibly optimistic.">>>>>>

Mike, I do like the balance of your concept. One related question, where do you factor in inflation?


Thanks for the plug.

The Retire Early Study on Safe Withdrawal Rates is available at the following link:

It's based on 130 years of stock market, interest rate, and inflation data compiled by Yale University Economics Professor Robert J. Shiller. It covers the years 1871-2000.

I've actually used this tool to show a few of my friends the futility of high commission financial products such as whole life. For example, let's look at the maximum "100% safe" inflation-adjusted withdrawal rate for a 20-Year pay out period for the Vanguard S&P500 index fund with an expense ratio of 0.18%. A withdrawal rate of 4.56% of the initial balance ($45,600 from a $1 million portfolio) adjusted annually for inflation would have survived every 20-year pay out period from 1871-2000.

Purchasing a product that has a similar equity investment, but a 3% annual expense ratio, would drop the 100% safe withdrawal rate to 3.47% of the initial portfolio balance. (i.e. $34,700 from a $1 million portfolio.

Limiting what you lose to fees and commissions has a big effect on a retiree's income.

I won't even get into the question of terminal value of the portfolio (they're huge) for folks that are in a position to limit their retirement withdrawals to the "100% safe" rate.

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