Addressing Common Retirement Misconceptions

Yahoo Finance had kind of a long read recapping an update from Morningstar about safe retirement withdrawal rates. I read the original Morningstar write up and it wasn't terribly insightful. What I took from it was that the safe withdrawal rate in 2021 was 3.3%, last year it was 3.8% and now it is back to 4%. It's hard to articulate why, but that just doesn't seem like a logical outcome for a generic version of "safe" to change that much year to year. That feels like overcomplicating things or maybe it's a solution in search of a problem.

My take has always been to take no more 1% per quarter of whatever your balance is with the understanding that you will need to pay for something expensive every so often that will require taking more than 4% in some years. I used the example of a tree falling onto one client's house earlier this year. 

There are some interesting comments on the article though as is often the case. What makes them interesting is what I believe are misconceptions so I thought it would be fun to paste some of those questions here and address them in case any of these misconceptions are common misconceptions.

As a retiree, one thing that I fear the most is the inflation. The safe withdrawal rate of 4% is not so safe when inflation is high. I was little concern during 2022 with high inflation with the market downturn. 

If you're sticking to 4% then the risks are more related to poor market returns, terrible market returns more likely, behavioral mistakes and not being able to stick with a 4% withdrawal rate. 

Maybe I am misunderstanding but if treasuries are paying 4% plus, can't you draw 4% without even touching the principal? 

He is misunderstanding. Putting it all into treasuries provides no opportunity for growth. If inflation averages 3% per year for the next 15 years then in 2038 our expenses will be 50% higher. Putting it all in treasuries provides no shot of keeping up with that. If the 4% treasury portfolio pays out $50,000 today, it will pay the same $50,000 in 2038 with no growth in account value. 

I would much rather withdraw 10% or more per year from my retirement accounts and do it without taking any principal. How? I invest in buy-write ETFs that pay 11% or more per year in dividends, which pay monthly (so about 1% per month). 

Covered call funds have many favorable attributes. Keeping up with the broad stock market is not one of them. Assuming an 11% payout in perpetuity is a very bad idea. Part of the math that determines options premiums is the risk free rate of return from T-bills. T-bills now yield 5% after years of not having any yield. Building a plan based on assuming an 11% payout forever is really going to hurt this guy if that is what he is saying. Allocating a little to one of these, sure but going whole hog into anything is very risky and I don't think he has any clue of the risk he is framing out for himself. 

It's also bad advice because it does not consider how much savings you have anyway. If 4% means going hungry then whats the point.

The point is sustainability of the nest egg. If you need $5000/mo from your nest egg but only have $400,000 accumulated, that $5000 is unsustainable. Maybe the answer would be to let it deplete and then figure something out later (that sounds nerve wracking but either way) but before doing that, it is important to properly understand what the 4% rule is about, it's about sustainability. 

I will only spend my dividends… my pirates bounty of stocks and cash stay in the accounts earning $$.

Great if that works out, what's your backup if it doesn't?  

When I retired in 2010, I had about $360K in a deferred IRA and $60K in a Roth IRA. I have taken RMD's since 2010 when I turned 70 and now I have over $550K in my deferred IRA and about $450K in my Roth without investing a dime. 

So there's a typo in the starting value of his Roth, it did not go up 7.5x but the bigger lesson is to not confuse a roaring bull market for you're being a genius. Market participants had a very lucky decade. 

And what about RMDs? At 80, the multiplier is 20.2 which is just under 5%.

RMD means you have to take it out of your IRA, you are not required to spend it. There were multiple comments along these lines so I think this one really is a common misconception.

my tsp return rate for the last few years has averaged 20%.

No it hasn't. He's including contributions into his mental accounting. 

I have zero intention of living to 90. 15 years going broke in a facility is not living.

 

This is not purely financial, yes going broke in a facility for 15 years is a bad outcome. People frequently assume frailty and assisted living as inevitabilities and they are not. Lift weight and cut carbs. When you see 90 year olds deadlifting 300 pounds or doing gymnastics in the park, why can't that be you? Being 90, healthy, able to do whatever you want sounds pretty good and so you might as well have a little in the bank when you get to that point.

 

well.... the Treasury Bonds are paying 5.5% so you can withdraw 5% each year and your principle will keep growing... and you can do that until you die... the 4% rule is not a good deal... 

 

Let us know how far $40,000 in interest goes in 2043. Put differently, this sort of idea is relying solely on inflation protection from the Social Security COLA.

 

Retire, move to Spain, enjoy food and excellent healthcare. Don't worry about money, you'll be fine with average SS check. 

 

For some people, this will be the answer but start researching this now.  

 

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