Most of us are familiar with the sitcom Seinfeld, “A show about nothing.” In a famous episode one of the lead characters insults the owner of a deli serving soup and he shouts out “No soup for you!” and the character has to walk away without any soup. In return, they nickname the deli owner “The Soup Nazi”. As a result the [blank] Nazi has become synonymous in popular American culture with someone who denies us a basic good, service or right. What most don’t realize is that their supposedly trusted financial advisors have become modern day “Retirement Nazis”.
If you think I’m kidding, take a look at this interview with Wade Pfau, one of the leading researchers on retirement withdrawal strategies: http://retirementresearcher.com/retirement-rules-rethinking-a-4-withdrawal-rate/ . Mr. Pfau points out that based on research done about 20 years ago by financial advisor Bill Bengen, a retiree could expect to be able to withdraw 4% of his/her assets starting in year one of retirement, increase those withdrawals by the cost of living each year and expect those assets to last throughout at least a 30 year retirement. This concept has become known as ‘The 4% rule.’
In the interview, Mr. Pfau introduces us to the fact that we may be entering a new period where the 3% rule is a better estimate for inflation adjusted spending. He also implies that this does not cover the potential for hundreds of thousands of dollars in health care and long term care spending. He outlines newer flexible strategies that may allow you to increase your spending to 4.8% or even 6%, depending on your asset mix, but these strategies can become extremely complicated.
For example, someone with $1 million retires at age 66. In addition to social security and their pension, they determine that they will need to withdraw $48,000 in year one for their retirement. If the markets perform as assumed, their money should last a lifetime with annual raises for inflation. If the market has a particularly good year they can take out up to 10% more the following year. If the markets perform poorly, they have to be flexible enough to cut their expenses by 10%.
Here’s the rub. It’s easy to be flexible when asked to spend more than our budgets. But it’s not always easy to be so flexible when we are asked to spend less. One of the first things you learn as an advisor is that life happens. And here’s a bigger rub. Payments to your advisors and fund managers count as withdrawals. If you are paying your advisor the typical 1% of assets per year, you can’t take out $48,000 for yourself. First you have to deduct an amount for those health and long term care benefits we discussed above, most likely through insurance policies that will cost the typical couple several thousand dollars. Then you have to take out your payment to your financial advisor. Using the national average of 1%, that’s another $10,000. Then you have to take out your payments to your various asset managers. If you are frugally using index funds, this could be as low as about $2500 on a $1 million portfolio. If you are using actively managed funds, that can easily be another $10,000.
At the end of the day, that $48,000 is quickly reduced to roughly $30,000 by the Retirement Nazis and potentially as low as about $25,000. But that assumes you have flexibility, and based on Mr. Pfau’s strategy, the stomach to actually increase your stock allocations throughout retirement rather than the more typical strategy of reducing the percentage of stocks in your portfolio in favor of bonds and cash. If you don’t have that flexibility and strong stomach, you have to go with the 3% rule. But then, again, you have to deduct fees and some other retirement costs which can easily knock your safe withdrawal amount down to just a few thousand dollars a year. In other words, the Retirement Nazis are funding their own retirements – not yours, which is why you see so many articles telling you to just work longer to make the numbers work. You can have your soup, but no retirement for you!