Case 2: Mark

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Background

I was listening to the Dave Ramsey Podcast yesterday, and Mark (Age 56) from San Antonio called in.  You can hear the exchange using the above link and starting at 38:06.  Mark asks about how much money he can safely take from his nest egg in retirement, citing advice he’s received from 4% withdrawal rates down to 1.5% per year.  Dave’s answer to Mark’s question was absurd and dangerous, so I’d like to answer it myself with the limited information we have.  Let’s make a plan for Mark’s money.

Goal

Mark wants to retire in January 2022 and not run out of money.

Balance Sheet

We’re limited to what we hear in the call.  It sounds like Mark only has to worry about himself and has $3 million set aside for retirement, mostly invested in mutual funds.

I’m going to assume he has some other liabilities, but maybe also some other assets to offset these.  He plans on working four more years, so to be safe, let’s just assume the next four years doesn’t change his picture much and he’s entering retirement at Age 60 with $3 million in net assets.

Special Considerations

The Social Security actuarial tables give a 56 year old male like Mark a 50% chance to reach 80 years of age and about a 20% chance to reach age 90.  Let’s plan for Age 90.

Make A Plan

Since we don’t have details about Mark’s plans in retirement, let’s allow him a 4% withdrawal rate or $100,000 per year, whichever is more.

Lastly, we’ll give Mark a 50/50 stock/bond allocation and withdraw from his accounts to keep the target allocation in balance.  For example, if his stock balance is greater than his bond balance, he’ll withdraw from his stock portfolio.

Results

If Mark uses the above plan, he can expect to reach age 90 with money still in the bank 97.8% of the time:

Mark at 4%
Figure 2.1:  Assuming an average stock return of 6% and a bond return of 3%, Mark’s outlook in retirement is very positive.

The above assumes real stock return is 6% on average, and real bond return is 3% on average — both a bit worse than the historical returns used in generating the model.

Let’s get more pessimistic and assume real stock returns going forward are 4% on average, and bonds provide a 2% rate of real return:

Mark at 4% Pessimistic
Figure 2.2: With a stock return of 4% and a bond return of 2%, Mark’s faces a much higher risk of running out of funds in his long retirement.

Even in a dimmer future, Mark’s retirement looks pretty secure and his nest egg can be expected to outlive him.

Contingency Plans

One problem Mark faces is that if the market return is poor after he retires, he can’t be sure if it’s just a temporary blip or a more negative long term outlook in reality.  Fortunately, he has a few contingency options.  He could decide to withdraw 3.5% to be safe, or if he notices the coffers declining he might find some part time work he enjoys that will supplement his lifestyle.  In reality, I don’t expect Mark to follow the 10% Worst Case (red path) into oblivion — he’ll make adjustments as he goes.

Afterword

I think that Dave Ramsey gets 95% of it right and he’s helped a zillion more people than I have, but he is dead wrong about his advice to Mark.  To summarize: He asks Mark to estimate his returns over the last few decades.  They agree those returns were around 12%.  Dave tells him to pretend it makes 11% per year and suggests he just pull out 11% a year forever.  Nevermind that Mr. Ramsey confounds nominal and real values as it suits him, let’s look at Mark’s plan with an 11% withdrawal rate and the same conditions used in Figure 2.1:

Mark at 11%
Figure 2.3: Mark’s expected future following Dave Ramsey’s advice on his withdrawal rates.

Conclusion

The downside of setting your withdrawal rate too low is that you’ll die with money still in the bank.  The downside of setting your withdrawal rate too high is that you’ll be an octogenarian eating cat food.  I’ll leave it to you decide from which of these you should protect yourself.

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