Nevin's Data "Points"

Over the years, so-called personal finance experts have provided valuable information—but also a smattering of misinformation—but I can think of none quite as egregious as some remarks recently made by Dave Ramsey. By now I’m sure you’ve heard—or heard about—his “counsel” with regard to acceptable retirement withdrawal rates—and his disparagement of the “supernerds” who would dare to disagree with him. As for that counsel, at a high level, Ramsey maintains that an 8% withdrawal rate is not only doable, but sustainable. All you have to do is be invested 100% in equities—oh, and assume a 12% return. [i] Of course, such machinations have always been predicated on assumptions—about inflation, about market returns and, most notably, about the length of life itself. That said, this didn’t become a specific focus—a so-called “rule of thumb”—until 1994, whe...

 A recent white paper has garnered a lot of discussion by casting “shade” on a traditional premise about retirement plan withdrawals. The premise—a so-called “rule of thumb [i] ”—isn’t all that old, actually; it dates back only to 1994, when financial planner William Bengen [ii]  claimed that over every rolling 30-year time horizon since 1926, retirees holding a portfolio that consisted 50% of stocks and 50% of fixed-income securities could have safely withdrawn an annual amount equal to 4% of their original assets, adjusted for inflation without… running out of money.  That said, even though it was predicated on a number of assumptions that might not be true in the real world—a 30-year withdrawal period, a 50/50 portfolio mix of stocks and bonds, assumptions about inflation—oh, and a schedule of withdrawals unaltered by life’s changing circumstances (not to mention a 90% probability of success)—a recent Morningstar  paper  challenged its conclusio...

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but the data suggests that most retirees aren’t exactly burning through their retirement savings. I remember my one and only conversation with my father about retirement income. He had already decided to quit working, and had gathered his assorted papers regarding his savings, insurance, etc. for me to review. Determined to “dazzle” Dad with my years of accumulated financial acumen, I proceeded to outline an impressive array of options that offered different degrees of security and opportunities for growth, the pros and cons of annuities, and how best to integrate it all with his Social Security. And when I was all done, he looked over all the materials I had spread out before him, then turned to me and said – “so how much will I have to live on each month?” See, my dad, like many in his generation, were accustomed to living within their means. And, according to new ...

One of my more frustrating memories of parenthood was trying to help my kids with their homework. Not because I hadn’t covered the territory once upon a time myself, or because I couldn’t manage to refresh my recollection(s) of the subject. It wasn’t enough to teach my kids a method sufficient to arrive at the correct answer, and to help them understand how we got there. No, it didn’t “count” unless I could arrive at the answer by adhering to what struck me as a weirdly inefficient and complicated regimen upon which their teachers insisted. If this was the “new math,” I remember thinking at the time, I fear for the sanity of the next generation. This past weekend The New York Times ran an article aptly, if somewhat awkwardly, titled, “ New Math for Retirees and the 4% Withdrawal Rule .” The focus of the article, like the 4% rule itself, was how to pace withdrawals in retirement so that you don’t run out of money before you run out of retirement. However, like so many other things...

While drawing boards have been used by engineers and architects for more than two centuries, the phrase “back to the drawing board” is of much more recent origin, coined by the Peter Arno in a cartoon first published in the March 1, 1941 issue of New Yorker magazine.(1) The cartoon features a crashed plane in the background, a parachute in the distance, several military officials and rescue workers rushing to help/investigate—and one remarkably nonchalant individual, walking in the opposite direction with a rolled up document tucked under his arm as he comments, “Well, back to the old drawing board.” For all the much-deserved focus on retirement savings accumulations, a growing amount of attention is now directed to how those already in (and fast-approaching) retirement are actually investing and drawing down those savings. A recent EBRI analysis(2) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) took a withdrawal from that account...

Recently the Center for Retirement Research at Boston College released a paper titled “Can Retirees Base Wealth Withdrawals On the IRS’ Required Minimum Distributions?”¹ The answer to that question, according to CRR, is “yes.” A more complete response might be, “yes, or any number of other random withdrawal methodologies.” There are some advantages to a drawdown strategy based on the schedule provided by the Internal Revenue Service (IRS) for required minimum distributions, or RMDs.² First off, and as the CRR paper notes, it’s relatively straightforward. Secondly, it effectively defers initiating withdrawals until age 70-½, which also provides some additional accumulation opportunity. Perhaps most importantly, it helps avoid the stiff penalties the IRS imposes on those who don’t withdraw funds from these accounts at least as rapidly as the RMD schedule provides. The CRR paper cites as an advantage the reality that those drawdowns are based on the portfolio’s current market value, th...

I was recently asked about the so-called 4 percent “rule.” That’s the rule of thumb(1) that many financial consultants rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. Of course, like so many of the “assumptions” about retirement, certainly in the aftermath of the 2008 financial crisis, that withdrawal rule of thumb has drawn additional scrutiny.(2) At the time, my comment was that the 4 percent guideline is just that—a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on. How much are people actually withdrawing from their retirement accounts? At a recent EBRI policy forum,(3) Craig Copeland, senior research associate at the Employee Benefit Research Institute, explained that the median IRA individual withdrawal rates amounted to 5.5 percent of the account balance in 2010, thoug...