tag:blogger.com,1999:blog-5621914599310831423.post212264899822576875..comments2024-03-01T03:44:39.796-08:00Comments on The Retirement Café: Expense Risk in RetirementDirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-5621914599310831423.post-81478322494543477522016-02-08T09:51:11.411-08:002016-02-08T09:51:11.411-08:00Roughly.
Assuming you plan spending so that you ...Roughly. <br /><br />Assuming you plan spending so that you have a 5% probability of portfolio ruin, there would be roughly a 5% probability of losing a lot of the investment portfolio from which you are spending. Whether that is a "large chunk of money" depends on how much you have saved. (For the majority of households in the U.S., that is not a large chunk of money.)<br /><br />There is about a 0.5% (0.43%, actually) lifetime probability that you would file bankruptcy. In that case, you would lose everything <i>that is not protected from creditors</i>, but that wouldn't literally be "everything." Bankruptcy laws ensure that you don't lose "absolutely everything."<br /><br />So, while I think your last statement accurately captures the spirit of the issue, a better statement would be "a 5% probability that I lose a large chunk of my <i>retirement savings</i>, versus a 0.5% probability that I lose everything not protected for creditors."Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-88898952332829366642016-02-08T09:32:28.538-08:002016-02-08T09:32:28.538-08:00So, a 5% probability that I lose a large chunk of ...So, a 5% probability that I lose a large chunk of my money, versus a 0.5% probability that I lose absolutely everything?Emily in NChttps://www.blogger.com/profile/11795576956095621632noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-47132161735120946772016-02-02T10:45:29.933-08:002016-02-02T10:45:29.933-08:00Thanks for the reference Dirk. I read all your bl...Thanks for the reference Dirk. I read all your blogs, but it sure helps to refresh. I appreciate the fact that you are a thought leader - looking beyond just typical market volatility for possibilities of ruin in retirement. I wish more planners did this. Really looking forward to your next blog with a listing of ways to mitigate spending/expense crisis in retirement. Thanks, Brad.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-34266445098322211522016-02-02T09:25:43.674-08:002016-02-02T09:25:43.674-08:00Brad, most of the major risks were identified in T...Brad, most of the major risks were identified in Throne's paper and listed in <a href="http://feedproxy.google.com/~r/TheRetirementCafe/~3/mfGRMfPwAX8/why-retirees-go-broke_8.html" rel="nofollow">Why Retirees Go Broke</a>. My next post will suggest what you can do to mitigate them.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-56291551687557891932016-02-02T09:23:09.343-08:002016-02-02T09:23:09.343-08:00That isn't what it means, Emily. You're eq...That isn't what it means, Emily. You're equating the risk of outliving your portfolio (5%) with bankruptcy risk (0.5%), which is my main point – they aren't the same thing. Here’s an example.<br /><br />Let’s say we listed your retirement assets and they included:<br /><br />• $250,000 in equities<br />• $100,000 in TIPS bonds<br />• Home equity $200,000<br />• Social Security benefits paying $30,000 annually<br />• A fixed annuity paying $10,000 annually<br />• An emergency fund of $40,000 cash<br /><br />Now, assume that your planner advised you to spend 3% of your stock and bond portfolio so you would have a <b>5% probability</b> of outliving the savings in that portfolio. Then assume that you were unlucky enough to fall into the 5% and your savings portfolio is now depleted. You still have home equity, Social Security benefits, an annuity, and your emergency fund of cash, so you aren’t broke.<br /><br />Alternatively, assume that your investments were fine but you were hit with a million dollar debt from out-of-pocket medical costs or a liability claim. You would spend your savings portfolio, your emergency cash and your home equity and possibly your annuity. You would still have Social Security benefits, so you still wouldn’t be broke. In fact, with a little planning you could save some of your assets by declaring bankruptcy. But, you would be worse off than had you only lost your savings. <br /><br />The probability of needing to file bankruptcy is <b>less than 0.5%</b>, but the outcome is much worse than losing only your savings to market volatility.<br /><br />The 5% is the probability of losing your savings portfolio as a result of market risk. The 0.5% is the probability of needing to file bankruptcy due to a spending crisis. They’re two different problems. <br /><br />It’s a little like saying that if you’re in an automobile accident there is a 5% probability that you will be seriously injured and a 0.5% probability that you won’t survive. In the retirement example, however, it’s a 5% probability that you will lose only your savings due to market risk compared to a 0.5% chance that you will lose those savings <i>and</i> nearly everything else due to a spending crisis.<br /><br />Does that help?<br /><br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-37894667756768726742016-02-02T08:11:17.710-08:002016-02-02T08:11:17.710-08:00Dirk, can't wait till the next post. I want t...Dirk, can't wait till the next post. I want to see what you identify as the major expense risks. I have tried to work on the long term care expense risk, and I assume medical is one. Fraud might be another. Can't wait to see the items you list and ways to mitigate them. BradAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-21104018891165343312016-02-02T07:25:09.563-08:002016-02-02T07:25:09.563-08:00The tone of this post is dire, but I'm not sur...The tone of this post is dire, but I'm not sure. Doesn't this statement<br /><br />> Retirees typically plan for a 5% to 10% probability of<br />> outliving their retirement savings, but about a half-<br />> percent of Americans 65 and older file for bankruptcy,<br />> and that number appears to be growing.<br /><br />mean that we're planning for more than 10 times the rate of retirement bankruptcies than we're actually seeing in the general population (5% as opposed to 0.5%)?Emily in NChttps://www.blogger.com/profile/11795576956095621632noreply@blogger.com