# Calculated Risk

Richard Quinn

SOMEONE POSTED THIS comment on a Facebook retirement-planning group that I follow: “My plan is based on my spouse and I living to 95 and 94 respectively. Our paid house is now worth about 900K. I am comfortable it will appreciate at 5% per year. The plan shows a 75% chance of success. If we sell the house at 85-84 and rent at a retirement community the success goes to 99%. We could cut back on expenses and that 75% chance would improve but why do that if I don’t need to?”

I suppose that, if the commenter changed his longevity assumption to age 80, his success probability would increase as well—but I wouldn’t advise it.

This person is using retirement-planning software that requires numerous assumptions, such as his estimate that his house will appreciate 5% a year. Given that, even with that assumption, his plan has a 75% chance of success—meaning there’s a 25% chance that he and his wife will run out of money—it seems there may not be sufficient investments to meet their needs.

Then there’s the old “cut back on spending” strategy. Who would retire with a 75% chance of success—based on all the variables and assumptions in the software—and then have spending less as the backup strategy? And yet several people commenting on the post said they’d be fine with a 75% chance of not running out of money. Talk about sleepless nights.

We don’t know how old this couple is, but selling a house around age 85 is a big gamble, as is the assumption that they can simply rent in a retirement community at that point. Selling and moving is a big hassle—not something I’d recommend at that age. I sold and moved home at age 75, and I don’t recommend that, either.

Moving to a retirement community may take time. Places might have waiting lists and, depending on the type of facility, may require relocating a considerable distance. On top of that, the cost could be more than maintaining a house.

Suddenly, the Facebook discussion took a strange turn. Someone asked: What withdrawal percentage are you using in the planning tool? The answers from various commenters ranged from 0% to 5%. The person claiming 0% said he’d just take money as needed. I wonder how the planning tool incorporated that strategy.

Another contributor said he and his wife will be retiring early, and plan on withdrawing between 5% and 8% from savings in the years before collecting Social Security at age 70. I wonder how many years, with withdrawals at 5% and above, we’re talking about.

Most of the people in the discussion weren’t yet retired, but they had great plans, great assumptions and apparently great confidence. They relied on planning software to tell them if they’d be successful or not.

In my opinion, it’s impossible to plan every year of retirement. Instead, I think the surer strategy is to start retirement with an adequate income stream, whether from Social Security, investments, income annuities or a pension, that’ll allow you to maintain your pre-retirement standard of living. If that income stream is adequate, chances are you won’t run out of money.

If, after you retire, you fancy a luxury cruise, you save for it or take the money from a designated travel fund, just as you should have done before retirement. You also ought to maintain an emergency fund, again just as you (hopefully) did while working.

Retirement-planning software is helpful, but it’s no replacement for common sense. Tweaking your software inputs may make your plan “work,” but it may also give a false sense of security. Somewhere outside those software programs there’s a potential whammy. My advice: Don’t press your luck.

A rough calculation tells me that, in my 13 years of retirement, at least \$100,000 of unanticipated expenses have cropped up, including tree and oil tank removal, HVAC units replaced, dental work and more. I could add an additional \$200,000 in unplanned discretionary spending that was a necessity or deemed to be: new kitchen, two new bathrooms, a new deck, a new car. I wonder if the planning software has a place to enter “spouse would like” under future spending?

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8 months ago

I planned our retirement for years for the worst scenario. I read that all you need is 10-15 times your annual expenses. My numbers show that 20 times is a lot better (LTC + inexpected other expenses). I retired with 25+, not including SS. I’ve been in retirement since 2018 and the portfolio has grown a lot more. We never got profit sharing or stocks, just a couple of thousand bonuses a couple of times during work. It was all based on monthly 401K for years and then very good risk control.
We need about 2-2.5% annually from the portfolio. When my wife starts taking her SS, we are going to need max 1.5% for ongoing expenses.
The idea was to retire safely one time. We both did it younger than age 62.

BTW, during the time we worked, we hardly worked overtime, because a balance of work and home is important for mental health and raising kids. We also did a lot of traveling around the world from an early age. Again, that was possible by living below our needs and being frugal. Our coworkers purchased expensive vehicles, while we bought Honda and Toyota. Our first house cost only \$112K and was 20 years old, while anybody we knew spent \$300K on newer and more beautiful ones. The real estate agent was a little angry that we were approved for up to \$350K house and only wanted to spend a lot less. 10 years later we upgraded to a much better and bigger house for only 15% more but still much cheaper. We still live in that house after 24 years.

Last edited 8 months ago by Fund Daddy
8 months ago

Spouse would like…

Program: There’s no way your income will ever cover that.

8 months ago

I wonder if the 5% the person assumed that his home would appreciate is before or after inflation. I doubt that he considered the upkeep, taxes, insurance, etc. over that period. To extrapolate recent housing price increases over a long period is foolish. Ultimately, home prices can’t go up faster than the amount that buyers can afford.

I just assume that my investments will increase at the rate of inflation, at that rate I should be fine unless I spend an unlikely long period in a nursing home. A less conservative, but reasonable, assumption would be a return of inflation plus 2%. I’m 74 and single, I plan to stay in my current home until I can no longer safely drive and then go to an appropriate senior living facility of some sort.

8 months ago

8 months ago

That’s no fun. Reading the discussions is a great way to learn about people and their ideas, and to learn overall.

8 months ago

Here is an example from a person whose planning may be questionable. .

========

“Questions. I want to track my actual portfolio performance since that will be key in my expense management throughout the length of my plan. This isn’t something that XXX does today and Empower, Fidelity, eMoney, etc. do a less than adequate job:

1. How are you tracking portfolio performance?

2. Is anyone using the Time-Weighted Rate of Return method?

3. What tools or software do you use?”

=========

Is tracking past performance the way to set future expenses? Does that mean the driver of spending, hence lifestyle is fully dependent on portfolio performance? Shouldn’t the goal be to cover primary living expenses from income not totally dependent on portfolio performance?

I don’t have the answers, but it all seems rather stressful.

8 months ago

Our last move was when I was 60 and it was tough. The amount of stuff we had was daunting and we ended up not bringing about half of it into our house! If we moved again, it would mean hiring movers as our friends can no longer carry the load of helping. It was easier at some level to pass on items that we were no longer going to use. More recently, we changed the purpose of some rooms and cleared them to regroup. Financially, we are doing ok, but if assisted living/nursing comes, we do not have enough money to fund it and to leave the remaining spouse in good financial health. We had planned to age in home, but now realize that caregiving may be beyond us. We have an appointment with a financial planner to discuss Medicaid, whether a reverse would make sense (or even be enough). My point is that planning is great, but every few years you need to revisit your spending and your plans to manage transitions. (husband is 76 and I am younger)

8 months ago

One point I’d like to make is that if you run out of money at age 95 the nursing home can’t kick you out on the street. You’ll be under Medicaid and continue to get the same care and service as all the other residents. The really critical thing you need in a nursing home is younger relatives who are business capable and have your best interests at heart, and who will come to visit you on a weekly basis to monitor your care. The good news for me is that if I live to 95 I’ll probably have finished losing all my marbles and won’t care anyway.

8 months ago

I read this morning on a local news feed an article about a local nursing home –

The new owners have abruptly announced they do not see the business as viable and will be closing the nursing home effective in January 2024. All residents must secure alternate housing and will be discharged from nursing home by this date

I worry those who depend on a law to guarantee their care will find if the facility falls on hard times the nursing home may simply cease to exist.

Last edited 8 months ago by William Perry
8 months ago

That happened to my parent’s assisted living facility, but luckily after my parents were gone. Doubt the residents had their entry fees returned.

8 months ago

My guess is that paid entry fees would have a prior claim before any other creditors or equity owners of the nursing home when it is sold or liquidated.

8 months ago

Doesn’t that require that you are in a nursing home that accepts Medicaid?

8 months ago

I think that depends on the state.

8 months ago

Article on the subject here. Key quote: “Note that as long as a resident has a pending application for Medicaid, they cannot be forced to leave. An exception exists if the nursing home residence does not accept Medicaid as payment.”

I think assisted living regulations are different to nursing homes regs. and may be state based. People considering a CCRC should check that it accepts both Medicare and Medicaid.

8 months ago

That Medicaid article you posted is excellent. I believe that Richard Quinn’s comment about Medicaid rules depending on the state is correct.

8 months ago

Gee thats a pleasant thought. When a home is not getting paid I’m thinking same care and service needs to be monitored

8 months ago

Richard,

I think I might have mentioned before on
HD that we bought a Condo and then sold our house at age 68.

I don’t recommend THAT either.

It is much more stressful that someone can possibly imagine.

And I always note a piece of wisdom we were too stupid to follow …

START GETTING RID OF YOUR STUFF NOW!!!!

Don’t wait until you are in the middle move to start purging.

8 months ago

Yes–please purge! I see so many houses where we live (in a retirement community) that have garages filled from floor to ceiling with ‘stuff’. I’m sure most of that stuff came with them ten–or twenty–years ago when they moved in.

When I worked at a college, one of my jobs was to clean out the laboratories of retired faculty members. Most of their labs hadn’t been cleaned out in 30+ years. I delighted in chucking 90% of the items into a dumpster.

I become more of a minimalist the older I get. I have four boxes of ‘stuff’ sitting next to me right now that’s about to go to the local Goodwill store. Having lived in a 700 square foot apartment for several years (following my divorce), I discovered there is very little stuff I actually need.

8 months ago

The key consideration is that l believe most Americans have no concept of the difference between needs and wants, thus they have two “car” garages that have no room to fit in a car in because the owners “need” all that stuff.

8 months ago

One way to move without going nuts: https://humbledollar.com/2023/07/my-magic-wand/

You still need to be willing to let “stuff” go. Of course, it’s easier if you don’t have a whole lot of stuff to start with. Watching other people move into my CCRC I have realized that, aside from books, I really don’t have that much in comparison. Another advantage of frugality.

8 months ago

Amen to that. We are still trying to go through stuff five years later. Just can’t seem to let go.

8 months ago

Let go of things on a functional level–what do you still use? Memorabilia: how many more times are you going to look at it? I’ve sold some items that our kids do not want, just to be sure it goes to someone who values it. Old electronics, work clothes, jackets/coats, old kitchen ware are good targets for a first pass.

8 months ago

The fact that your poster child is likely in for a rude awakening doesn’t mean that planning is a bad idea, just that he’s a bad planner. Every few years I have a fee-for-service advisor run the numbers for me, but I have always planned out to 100, even though I rather hope to check out five or ten years earlier, and I have always looked for success rates in the high 90s, at varying inflation rates.

I also have an insurance policy: the CCRC I’m living in promises not to throw me out if I run out of money, and backs it with a benevolent fund (I just wrote a check to the Annual Appeal for the fund, and it will go on my QCD list next year). I would still have access to all the facilities.

You are right that moving to a retirement community needs planning, at least in my area, but that doesn’t mean that you shouldn’t do the planning. Better to sign up in your mid-60s and move (as I just did) in your mid-70s, than find yourself a surviving spouse in your mid-80s with an albatross of a house and nowhere to go.

Your high discretionary spending was entirely optional, and could still be included in a plan. My last plan included travel expenses that were based on my previous spending, and a new car. Living in a CCRC means I don’t have to worry about the roof, the HVAC or the foundations, never mind new bathrooms.

8 months ago

You mention your plan to gift to the benevolent fund next year via a QCD. As we are in the crunch time of the tax year when many QCDs are made there are many requirements that may act as tax traps which could disqualify a gift as being eligible for exclusion from income as a QCD.

Two common problems I saw in the past –

IRS Pub 526 describes the contemporaneous written acknowledgment (CWA) requirements which require that –
You must get the acknowledgement on or before the earlier of:
a. The date you file your return for the
year you make the contribution; or
b. The due date, including extensions,
for filing the return

The acknowledgement does not specifically state that you did not receive (or expect to receive a benefit) from the contribution. This problem seems to be more common with smaller charities and church contributions.

These problems with a QCD acknowledgement may appear later after your return is filed and when the CWA provisions make it to late to fix.

In tax planning and compliance the hoop jumping to achieve your goal is critical to bullet proof your actions. I recommend reviewing the IRS QCD requirements annually if you are making a QCD contribution as the rules may and do change.

See https://www.irs.gov/pub/irs-pdf/p526.pdf for the 2022 rules. I expect the 2023 version will be issued in February 2024.

Best, Bill

Last edited 8 months ago by William Perry
8 months ago

Gee, never thought planning was a bad idea. I’m just for realistic, perhaps conservative planning and removing as many variables as possible.

Yes, our spending was discretionary, but that the point. Plan for all types of spending.

Last edited 8 months ago by R Quinn
8 months ago

I have to admit this makes me nervous. The older you get, the more helpless you are. You can’t go back to work when you’re over 85, and you’re too old to rough it. I would rather have plenty of money, and increase my net worth in my retirement.

8 months ago

Hi Richard, I love your articles. Keep up the great work.

Regarding this specific article, I’d suggest to you that a 75% chance of success may be just fine. To me, that means that there’s a 75% chance that I won’t need to make adjustments to my retirement spending plan and a 25% chance that I will.

If monitored regularly, small spending tweaks early in retirement have can have a hugely beneficial impact.

Thinking of these percentage in terms of “pass/fail” isn’t helpful. It would be more helpful to think of them in terms of whether I may need to tweak my future spending. If done soon enough, those tweaks needn’t be painful.

8 months ago

Bob,

I wanted to say something similar to your reply but you said it better than I could by far.

Do you write anywhere? Seriously!!!

Pass Fail is a horrible way to think about this and running out of money especially if you delay social till 70 and social covers the majority of your needs.

8 months ago

I hope you are more successful at the last sentence than the Feds have been at instituting the same plan for Social Security

8 months ago

Thanks,

It appears many people agree with you, but for someone not a risk taker and trying to cover all bases, 75% success probability is scary stuff. That probability is based on the projected spending and inflation. Do people project future spending at levels that allow for cuts not affecting life style? Seems unlikely, but I don’t know.

I’m trying to think what I might tweak in spending. The answer is plenty, but nothing I really want to.

Living on a pension I guess I’m obsessed with retirement income streams where the probably of success is near 100% Creating such a stream may be a challenge, but it can be done using various sources and seems better than trying to deal with withdrawal percentages based variable account balances.

8 months ago

I think the final paragraph of your comment is especially astute. We talk about withdrawal strategies as though they’re set in stone and never subsequently revisited, but the reality is quite different. As you suggest, making tweaks can put us back on track, especially early in retirement when small, beneficial changes have a chance to compound over the rest of our retirement.

8 months ago

No doubt true, but do you think the most typical retiree has the ability to assess and make those adjustments? If they do, it still requires ongoing monitoring and calculation. The other thing is if we believe in the go-go years retirees often want to spend more in the early years of retirement.

8 months ago

Does the typical HD reader have the ability to assess and make adjustments? Absolutely. What about the typical retiree? It’s hard to know what we should consider “typical.” But I imagine most retirees use Social Security and any pension income to cover their fixed costs, and then they cover extras out of whatever savings they have, which are probably modest. Do they have to replace the roof this year? Suddenly, their savings look a whole lot smaller, so next year they’ll avoid splurging. I suspect that’s the reality for most retired households.

8 months ago

Richard and Jonathan, thank you for your comments/replies to my original comment. I’m a big fan of each of your work.

The question of whether the typical retiree has the discipline and knowledge to effectively make in-flight retirement spending adjustments is the issue. I’d like to think that retirees who are using the output of a Monte Carlo simulation could do so. That’s why I think it’s important to stop using the pass/fail (or red light/green light) vernacular and would love to see advisors and online tools describe it differently.

The language we use matters, and in this space we have room for improvement.

8 months ago

I suspect you are right, but sooner or later the ability to avoid splurging and carry on will be stretched for many. Given the median household income age 65 and above is about \$60,000+- and net worth for age 65 a little over \$400,000 and declining thereafter, not much splurging room to begin with.

Be interesting to know how HD readers compare.