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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5069  
Subject: 8 years till ER Date: 10/11/2004 12:06 PM
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Hi all,

I just found this board yesterday and am glad to see there are others as obsessive about ER as I am. My partner and I are 47 years old and are planning to retire at age 56.

I have made every mistake possible when it comes to retirement planning, but it looks like things will work out in spite of my errors. I didn't start saving until we were 37 years old - that's way late. I also work in the tech industry and turned out to be a real investment whiz ... until the crash where I lost a butt load of money.

However, my partner and I LBOM, we only took out a $87k 15 year mortgage (4 years to go), we have high earnings, no debt outside the mortgage, we will both have gov't pensions (reduced for ER though), and medical benefits in retirement.

So, we are maxing out our 401k/403b, Roths and stashing the rest away in Vanguard's Total Market Index fund.

My really rough figures are that we will have $800k - 1 million in the combined accounts, a combined pension in the low twenties and probably something from SS at 62. I also have a very small pension as a former Digital Equipment employee, but HP will have to stay a float to see that.

At the point that we retire, I would like to have 5 years of living expenses in laddered CDs. I guess when I get within 5 years of retiring (age 51) I will reduce the amount I put in the 401k/403b and in the after tax (Total Market Index) accounts and start buying CDs. I will also use the former mortgage money (12k per year) to buy the CDs.

Writing this is making me realize that I won't be able to take advantage of the after age 50 catch up for contributions to 401k/403b's and Roth's. I guess I would have a couple of options here:

1. Cut way back on spending at age 51 - this is probable plus we will receive raises between now and then.

2. Sell some of the existing money in the Vanguard Total Market Index fund to buy CDs.

3. Use a combination of 1 & 2.

Any other ideas ?

-helen

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Author: familyceo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2653 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 12:47 PM
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I like the idea of laddering the CDs once you're 51 and 5 yrs from retirement. DH and I have done something similar.

I do have a question though?? What monthly payments will you have at the that time? Mortgage, auto, home equity loan, credit card??

I retired at 39 (10 yrs ago) and DH is retiring next yr at 53 1/2. We will have a mortgage payment (4.75%) and a small home equity loan. Everything else has been/will be paid off. I find that it is quite easy to set up a budget when you have so few payments each month.

In reference to your "cut back on spending at age 51...I think it's a great idea to "spend" (and save) like you would be doing at 56. We did that in order to see just where we will be upon retirement. We have found that our costs will be 66% of our pensions. (that is after taxes) We will not have to dip into our 457s, Iras, or savings for awhile.

Hope this helps.
Good luck!

ceo

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2654 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 2:10 PM
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Hi Familyceo,

Thank you for the quick reply. Good for you for being able to retire so young and contgrats to your husband for joining you next year !!!

To address your point, our only debt is the mortgage and that will be paid off in 4 years when we are 51. So, if I subtract the mortgage out of what we are spending now, we are living on approximately $50k per year.

I'd actually like to be living on about $70k per year for the first five years of retirement so that we have plenty of money to travel. I do think we will get something from SS and we will begin that at age 62. Then there will probably be an inheritance at some point down the road.

So where we are right now is that we are saving about 37% of our gross for retirement, not counting the matching of my 401k. I'm sure we could save more, but some things are not worth cutting back on. My partner's parents are getting up there in age and have very few years left where they can travel. I want her to take the nice vacations with them while they are able to go. We also have three dogs (two of which are Great Danes) which are expensive to care for (vet bill this morning was $100).

Once again, my biggest problem is finding the balance in life. I tend to get so obsessive about things and retirement savings is just perfect for that. Just when I think I have it all figured out I find a new way to look at something. And, God forbid I would miss out on a deal - like taking advantage of the 401k & Roth catch up contributions after age 50 .... Aggghhhh !

I guess I'll toss this around some more in my head. If anyone else has ideas for juggling the 5 years of laddered CD money vs. the after 50 catch up contributions I'd appreciate it.

-helen


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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2655 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 2:48 PM
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My really rough figures are that we will have $800k - 1 million in the combined accounts, a combined pension in the low twenties and probably something from SS at 62. I also have a very small pension as a former Digital Equipment employee, but HP will have to stay afloat to see that.

A nest egg of $800,000 to $1,000,000 is a substantial nest egg. Investors can safely withdraw a maximum of 4% annually from a well-performing, well-balanced portfolio without cannibalizing their principal. Withdrawing less is better, and withdrawing much less is much better. Investors can withdraw more than 4% annually from their portfolios, but they will raise their vulnerability to outliving their money -- or they will find that the only way they can maintain their standard of living is to die early.

Well-performing portfolios have low costs. Low costs are more important than asset allocation, and they are much more important than individual securities selection.

Well-balanced portfolios follow some sort of reasonable asset allocation strategy. One of the odd things about investing in the real world is that the specific asset allocation strategy isn't important. What is important is that investors choose a REASONABLE asset allocation strategy and rebalance their portfolios to match their strategy annually. I rebalance my portfolio when I add new money, and then I take care of any problems that threw my portfolio seriously out of whack at the end of the year.

If you subscribe to TMF's Rule Your Retirement, then I highly recommend the TMF article "The Fool's Rules for Asset Allocation":
http://www.fool.com/newsletters/13/allocation/index.htm

If not, then I highly recommend Bill Schultheis and his book, The Coffeehouse Investor, which you can find in your local library or on Amazon.com, and Schultheis' website:
http://www.coffeehouseinvestor.com/

From the information you provided in your post, you can plan to have an annual income of something like $32,000 from your portfolio, something like $20,000 from your pension, and I'll guess something like $15,000 from your Social Security retirement benefits. Your gross annual income will be in the neighborhood of $67,000. This money is mostly taxable, so you should plan to have a net annual income in the neighborhood of $36,000.

Your retirement expenses will be nothing like your working expenses. On the one hand you're not saving for retirement anymore, you're not paying Social Security or Medicare taxes, your children probaby are on their own, your requirements for a business wardrobe are substantially reduced, and you probably can get by with one car, rather than a motor pool. On the other hand, your medical expenses almost certainly will be higher, you'll probably want to spoil your children or grandchildren, you'll probably want to enjoy some of the things you denied yourself while you were working (e.g., frequent meals at restaurants and exotic vacations), you may want to hire someone to clean and maintain your home, you may even take up one of those hobbies notorious for consuming money (e.g., chasing a small, white ball across the countryside or trying to outwit an eight pound, 12-inch fish). Consequently you should forecast your expenses in retirement now so you can make any needed adjustments to your investment plan or retirement plan leisurely, rather than in a panic.

You can get a better estimate of your Social Security retirement benefits. About three months before your birth month, the Social Security Administration will mail you a copy of your Social Security Statement. The Statement will have an estimate of your benefits. If you can't find your most recent Statement, then you can request an out-of-cycle Statement from this website:
https://s044a90.ssa.gov/apps6/isss/bp-7004home.jsp

When I guesstimated your net income, I assumed a high income tax rate. You can get a better guesstimate of your net income by using last year's forms and instructions to calculate your federal and state income taxes using your forecast income. The tax rules, forms, and instructions will change between last year and the time you retire, but this technique is the most reliable method I know to guess at net income for some future year.

So, we are maxing out our 401k/403b, Roths and stashing the rest away in Vanguard's Total Market Index fund.

I assume when you wrote "Vanguard's Total Market Index fund," you meant Vanguard's Total STOCK Market Index Fund (ticker symbol VTSMX). I think VTSMX is a great fund. I have shares of it in my portfolio, and I recommend it to family members, friends, and business associates.

However depending on your investments in your 401(k)/403(b) and IRAs, you may have a problem with asset allocation. Portfolios of stocks perform better than portfolios of every other asset class over long periods of time. The threshold for a "long period of time" is five to seven years. Consequently while you're in the accumulation phase of your investment life, a 100% allocation to stocks is reasonable.

However portfolios of stocks have greater short-term volatility than most other asset classes. When you're in retirement, that volatility can be worrisome. Many investors choose to mitigate that worry by trading some long-term performance for short-term stability by adding bonds to their portfolios.

I would suggest that as you approach five to seven years from retirement, you SLOWLY adjust your portfolio allocation so that at retirement you have a 50/50 mix of stocks and bonds. Since you chose to invest with mutual funds, I would suggest that you could implement this asset allocation strategy by adding a bond index mutual fund that tracks the Lehman Brothers Composite Bond Index. Since you chose to invest with Vanguard, I would suggest you should chose Vanguard's Total Bond Index Fund (ticker symbol VBMFX).

For other TMF members who may be reading this reply, I would not dump a lot of new money into bonds now. Normally market timing is a horrible idea. However interest rates are creeping upwards after hitting 40-year lows, and there is an inverse relationship between interest rates and bond values. The short version of the story is when interest rates rise, investors pay less for bonds to keep their total returns about the same -- historically about the prime interest rate plus two or three percent. Whether rates regress to their norms next week, next month, or over the next several years, they will regress, and when they do bond values will fall. I would not react to this extraordinary economic environment by yanking money out of bonds, but I would suggest dollar cost averaging new money into bonds over the next couple of years.

As you read about asset allocation strategies, you might conclude that you want to invest in many sectors, including large stocks, small stocks, international stocks, bonds, and real estate. Since we're talking about Vanguard, you could implement a sophisticated asset allocation strategy using Vanguard's index mutual funds:
- large stocks - 500 Index Fund (VFINX)
- small stocks - Small-Cap Index Fund (NAESX)
- international stocks - Total International Stock Index Fund (VGTSX)
- bonds - Total Bond Market Index Fund (VBMFX)
- real estate - REIT Index Fund (VGSIX)

Before I get inundated with hate mail, I get no compensation, incentives, or other benefits from steering TMF members towards Vanguard, and nobody has ever so much as suggested that I do so. I've been a Vanguard investor for almost 20 years, and my only regret has been that I didn't stumble across them sooner. Some other companies that offer index mutual funds include (but are not limited to) Fidelity, TIAA-CREF, T. Rowe Price, and USAA.

One thing you may consider doing is having a third-party do a portfolio analysis for you. If you check the web site for your 401(k)/403(b) account or the web sites of any of the larger mutual fund companies in your portfolio, you may discover you have access to an automated portfolio analysis tool. If so, then I suggest you use that tool.

If you can't find that you have access to a portfolio analysis service, then I suggest you call the customer service departments of your 401(k)/403(b) account and the larger mutual fund companies in your portfolio to confirm that fact. These tools are prevalent, and I would be surprised if you really do not have access to a tool already.

If you really do not have access to a tool, then I am fond of the service offered by Financial Engines (for a fee):
http://www.financialengines.com/

At the point that we retire, I would like to have 5 years of living expenses in laddered CDs. I guess when I get within 5 years of retiring (age 51) I will reduce the amount I put in the 401k/403b and in the after tax (Total Market Index) accounts and start buying CDs. I will also use the former mortgage money (12k per year) to buy the CDs.

Five years living expenses is a very generous cash allocation. If you have reasons for committing that much money for cash, then you should do so. However I think you may discover that five years living expenses will take too much of your wealth away from better performing investments and expose you to interest rate risk and potentially reduce your buying power.

Most financially aware individuals keep between three months expenses and six months income in cash. They allow their cash hoard to swell towards a year's gross income when they approach life events. Examples of life events include graduating from school, marriage, birth of a child, purchase of a home, change of job, retirement, and serious illness or impending death of a loved one.

I would suggest that a better strategy would be to figure out the percentage of your portfolio that equals one year's expenses, and then revise your asset allocation strategy to incorporate that allocation to cash. When you rebalance your portfolio you'll exchange your most highly appreciated assets for cash.

I have one final thought. TMF was founded on the idea that if you're smart enough to read, write, and do simple sums, then you're smart enough to make your own investing decisions. However there's a cliche that when a man of means meets a man of experience, the man of experience acquires means, and the man of means acquires experience. If you think you might benefit by having someone with experience working with you, rather than against you, then you may find this reply to another post helpful:
http://boards.fool.com/Message.asp?mid=20070678

David Jacobs
TMFDj111

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2656 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 2:55 PM
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Wow, what a marketing snowjob! I expect better from TMFers, although I guess I don't really know why any more.

Instead of shelling out for TMF "seminars" and advisor services, try going to www.retireearlyhomepage.com Check out the safe withdrawal studies and maybe download one of the spreadsheets. You could also mosey over to www.early-retirement.org and play with the firecalc withdrawal tool to see what you can reasonably take out of your portfolio.

One statement that the TMFer made is pretty egregiously wrong/misleading: "Your gross annual income will be in the neighborhood of $67,000. This money is mostly taxable, so you should plan to have a net annual income in the neighborhood of $36,000."

This is highly unlikey. A much more reasonable estimate could be gotten by filling out a dummy tax return with what you believe to be about the right numbers. I would be shocked if you even came close to a $31,000 tax bill.


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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2657 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 3:59 PM
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"From the information you provided in your post, you can plan to have an annual income of something like $32,000 from your portfolio, something like $20,000 from your pension, and I'll guess something like $15,000 from your Social Security retirement benefits. Your gross annual income will be in the neighborhood of $67,000. This money is mostly taxable, so you should plan to have a net annual income in the neighborhood of $36,000."

Yikes - that's a 54% tax bracket ...


"I would suggest that as you approach five to seven years from retirement, you SLOWLY adjust your portfolio allocation so that at retirement you have a 50/50 mix of stocks and bonds. Since you chose to invest with mutual funds, I would suggest that you could implement this asset allocation strategy by adding a bond index mutual fund that tracks the Lehman Brothers Composite Bond Index. Since you chose to invest with Vanguard, I would suggest you should chose Vanguard's Total Bond Index Fund (ticker symbol VBMFX)."

I'm counting the pension portion of my portfolio as my bond fund. My plan is to have 5 years living expenses in laddered CDs and the rest 100% in equities. If the market is down I will not sell any stock that year, instead I will live off a CD. The five years worth of CDs will give me a cushion against the down years and will guarentee the income I need for the short term. At the same time it will allow me to stay invested in the asset that has historically had the best returns. Why do you think a 50/50 stock/bond mix is a better idea than that ?

"As you read about asset allocation strategies, you might conclude that you want to invest in many sectors, including large stocks, small stocks, international stocks, bonds, and real estate. Since we're talking about Vanguard, you could implement a sophisticated asset allocation strategy using Vanguard's index mutual funds:
- large stocks - 500 Index Fund (VFINX)
- small stocks - Small-Cap Index Fund (NAESX)
- international stocks - Total International Stock Index Fund (VGTSX)
- bonds - Total Bond Market Index Fund (VBMFX)
- real estate - REIT Index Fund (VGSIX)"

I am using VTSMX for my after tax account because it is tax efficient and spreads my money accross a large number of companies. I would not want to put NAESX, VGTSX, VBMFX or VGSIX into a taxable account. I have my small caps and international funds in my 401k/403b. As I stated I don't want to use bonds. I don't have a option of putting REITs into my 401k and I don't want it in a taxable account, so I am going with out that asset class.

"Well-performing portfolios have low costs. Low costs are more important than asset allocation, and they are much more important than individual securities selection."

I couldn't agree more. I did a cost benefit break down of my partner's 403b and found it financially better to use an after tax account. They have since lowered their fees so we are now contributing. My 401k is the Government's TSP which is the best run 401k plan around. As I also mentioned I am using Vanguard because of their low costs funds.

"I have one final thought. TMF was founded on the idea that if you're smart enough to read, write, and do simple sums, then you're smart enough to make your own investing decisions."

I have been studying this stuff intensely for a long time. The thing I like about managing my own money is that the mistakes I made are my own and not someone elses.

"If you think you might benefit by having someone with experience working with you, rather than against you, then you may find this reply to another post helpful:
http://boards.fool.com/Message.asp?mid=20070678"

I remember a time not so long ago when the MF talked about stock valuations being meaningless. AOL, Amazon, etc. It was all different this time. I tend to ignore the MF advice anymore and pay attention to the board members who have actually accomplished ER and those like myself who are working hard at it. I also have a CPA/CFP who I use on occassion for an hourly fee.

Thanks for your post,

-helen


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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2658 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 4:09 PM
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Hi Brewer !

I've enjoyed your many great posts and thanks for replying. I lurk on the two boards that you have mentioned and have found them to be very, very helpful.

I also use morningstar's diehard forum:

http://socialize.morningstar.com/NewSocialize/asp/AllConv.asp?forumId=F100000015

and 403bwise:

http://socialize.morningstar.com/NewSocialize/asp/AllConv.asp?forumId=F100000015

Also, the firecalc has been very useful. Thank God for these tools and message boards or I probably would have plugged away untill I was 65 !

-helen



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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2659 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 4:09 PM
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"I'm counting the pension portion of my portfolio as my bond fund. My plan is to have 5 years living expenses in laddered CDs and the rest 100% in equities. If the market is down I will not sell any stock that year, instead I will live off a CD. The five years worth of CDs will give me a cushion against the down years and will guarentee the income I need for the short term. At the same time it will allow me to stay invested in the asset that has historically had the best returns."

I think this is pretty reasonable. If you have a target asset allocation, you may wish to quantify the notional amount of your pension by figuring out what it would cost you to buy an equivalent payout annuity. Then you could add some additional bond exposure if you are not up to your target. I think the CDs are an excellent choice for "sleep at night" factor. They also get you exposure to fixed income.

"I don't have a option of putting REITs into my 401k and I don't want it in a taxable account, so I am going with out that asset class."

Considering how expensive REITs have gotten, this probably isn't a bad idea.

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2660 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 4:52 PM
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My partner's parents are getting up there in age and have very few years left where they can travel. I want her to take the nice vacations with them while they are able to go.

So you're talking between now and when you two retire, right?

Do you have any similar considerations w/ your parents?

We also have three dogs (two of which are Great Danes) which are expensive to care for (vet bill this morning was $100).

Be sure to factor in extra for care of the pets AND for boarding them when/if you travel. That boarding cost can sure add up. (My partner & I "out-pet" you but, luckily, most don't need boarding.) :)

jmc, 2 birds, 2 cats, 3 toads, 1 goldfish

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2661 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 5:13 PM
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Hi JMC,

Thanks for the post !

"My partner's parents are getting up there in age and have very few years left where they can travel. I want her to take the nice vacations with them while they are able to go.

So you're talking between now and when you two retire, right?"

Yes, I'm trying to balance between enjoying the present and saving for the future.

"Do you have any similar considerations w/ your parents?"

My Father passed away at age 96 last Thanksgiving. He was a great man !!! My Mother, Brother, Niece and Nephew & I are taking a two week vacation together during Christmas. My Mother is footing the bill. We all talked as a family and decided the best way to spend some of the money my Father amassed is to spend it together as a family. So we are going to try and take some great vacations together as long as my 81 year old Mother is able. My Dad didn't like to travel and my Mom is deciding that she does. This trip is giving us all something to look forward to as the one year anniversary of this death approaches.

"Be sure to factor in extra for care of the pets AND for boarding them when/if you travel. That boarding cost can sure add up."

Wow, are you right there. We have a pet sitter come in to take care of all but one. My youngest Dane, Stanley, is too protective of the house. I just don't trust that he wouldn't bite the pet sitter. We just found a new kennel by the airport. It isn't cheap, ($19 - $24) per day, but it is really convenient.

-helen


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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2662 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 5:19 PM
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Helen,

I think you've got it well under control. DW and I are looking at ten years and have been going through some of the same issues.

We're currently in a basket of diversified Vanguard funds that align pretty well with the Coffeehouse Investor allocation except at the moment we're WAY underweighted in bonds. That will slowly be corrected over the next several years.

If you haven't been over to the Retire Early FIRE board, you should go just for the FAQ and visit www.retireearly.com Since there's an election coming up, the board is just about unreadable but at one time it was a great source for info.

BTW, I love REITs but they're pretty expensive right now. Keep them in mind for a "someday" purchase. 9% yeilds used to be pretty common. Maybe we'll get back to those levels some day.

Best of luck and keep us posted.

nmckay

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2663 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 5:54 PM
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Hi nmckay,

I've enjoyed a lot of your posts around the Fool, thanks for sharing your thoughts and wisdom.

I'm curious why you are choosing bonds over laddered CDs ? I'm thinking I like the safety that CDs offer over bonds. Plus, five years is a fair amount of time to outlast a bear market, yet is a pretty small percentage of our portfolio.

I also am looking at having as simple a portfolio as possible. Therefore I'm pretty much looking at the following asset allocation:

- small cap index
- international index
- total US stock mkt. index
- 5 years living expenses in laddered CDs

I wish I could have only one account, but that isn't possible. Here are our accounts:

1 401k
1 403b
2 Roths
1 taxable account

I think this is as simplified as I can get.

-helen

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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2664 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 6:17 PM
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I hope I didn't leave the wrong impression. I'm all for laddered CDs. I'm just not there, yet. I'll move into that phase once DW and I get down to the wire. Right now we have several sources for funds in case of an emergency so the CD ladder doesn't make a much sense to us. We have quite a bit in I-bonds (six months expenses worth) from back when they were a better deal. I'd love for those days to return, btw.

I will look at TIPS and Munis when the time comes just to see if there are better places for secure money. But I have no problem with CDs. And like anything else, I have to tweak everything. So I'll probably come up with a "go/no go" test to decide when to extend the CD ladder, when to wait it out a year and when to double up. I just can't follow simple directions.

nmckay

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2665 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 6:36 PM
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"I'm all for laddered CDs. I'm just not there, yet. I'll move into that phase once DW and I get down to the wire. Right now we have several sources for funds in case of an emergency so the CD ladder doesn't make a much sense to us."

So will you have bonds and laddered CDs once you hit retirement ?

I really agree with you on the emergency funds and CDs. My partner likes the safety of cash and CDs. So, we have 12k in a CD plus about 15k in savings accounts. That's a lot of money given that we both have fairly secure jobs. But, that helps her sleep at night and other than that she has no opinions on retirement savings & strategies. The upside is that she's scottish and very frugal, so what more can I ask for !!!!

I keep thinking that I want to come up with one strategy and stick with it but I am realizing that that isn't going to happen. If interest rates take off like they did in the Carter years I'm sure I will change my tune about bonds. I guess the best thing I can do is be educated and flexible so that I can change with the environment.

Well, if I ever come up with a plan to move money into the CDs I'll post it.

-helen

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2666 of 5069
Subject: Re: 8 years till ER Date: 10/11/2004 10:45 PM
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I also am looking at having as simple a portfolio as possible. Therefore I'm pretty much looking at the following asset allocation:

- small cap index
- international index
- total US stock mkt. index
- 5 years living expenses in laddered CDs

I wish I could have only one account, but that isn't possible. Here are our accounts:

1 401k
1 403b
2 Roths
1 taxable account


1. Looks like you've read up on asset allocation. Good!

You might want to ask the TMF bonds board about the laddered CDs. I assume part of what you want is an emergency fund as well as $$$ to live on. For the e-fund a lot of folks on the bonds board like the humble savings bond. (Search for threads on e-funds.)

2. I think anytime you have two working adults, you're going to have separate retirement accounts. And I think the same is true of IRAs (whether or not one legal spouse is working.)

jmc

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Author: TheBreeze Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2668 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 8:29 AM
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Investors can safely withdraw a maximum of 4% annually from a well-performing, well-balanced portfolio without cannibalizing their principal. Withdrawing less is better, and withdrawing much less is much better. Investors can withdraw more than 4% annually from their portfolios, but they will raise their vulnerability to outliving their money -- or they will find that the only way they can maintain their standard of living is to die early...I would suggest that as you approach five to seven years from retirement, you SLOWLY adjust your portfolio allocation so that at retirement you have a 50/50 mix of stocks and bonds

Just some thoughts--

1. The 4% withdrawal rate is based on a 75%/25% to 80%/20% mix of stocks/bonds, with the stock portion being a stock index like Total Stock Market or S&P500 (all US stocks). The withdrawal rate is less than 4% for other asset mixes. So 50-50 does NOT give a 4% withdrawal rate based on past performance.

2. Re: "withdrawing much less is much better": If you can withdraw your money at a miniscule rate, you may have worked too long! If you loved your job, no problem, but if retiring early is your goal (and calling yourself a "FIRE Wannabe" sure sounds like that category), then you worked longer than you needed to get to a "safe" withdrawal rate + a little headroom to account for unanticipated expenses.

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2669 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 9:43 AM
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helen,

Plus, five years is a fair amount of time to outlast a bear market, yet is a pretty small percentage of our portfolio.

Can you please clarify that statement for me? If I am not mistaken, you indicated that you wanted to have an income of $70k annually. If you put 5 years worth of that into laddered CDs, that would be a rather large percentage of the $800k - $1million portfolio you were looking to have, would it not?

I assume that I have missed something as I have read over this thread but I just wanted to ask.

dt

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2670 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 10:20 AM
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I really agree with you on the emergency funds and CDs. My partner likes the safety of cash and CDs. So, we have 12k in a CD plus about 15k in savings accounts. That's a lot of money given that we both have fairly secure jobs. But, that helps her sleep at night and other than that she has no opinions on retirement savings & strategies. The upside is that she's scottish and very frugal, so what more can I ask for !!!!

************************

I am wrestling with the whole issue of cash balances in the run-up to ER at the moment. Frankly, tying up a chunk of dough earning virtually nothing is pretty hard to swallow. I am starting to think that with my fairly stable job I really could probably aford to invest much of my cash balance in higher return assets. Like yourself, I also have a taxable account, and in my case it is large enough that we could live on it for years without any other income (pretty unlikely scenario). If I didn't want to sell at a particular time, there is always a margin loan for the short term.

I haven't decided yet, but I am really thinking about putting cash to work.

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2671 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 11:27 AM
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Hi dsemmler,

"Can you please clarify that statement for me? If I am not mistaken, you indicated that you wanted to have an income of $70k annually. If you put 5 years worth of that into laddered CDs, that would be a rather large percentage of the $800k - $1million portfolio you were looking to have, would it not?"

Good point. You are correct, it would be a large percentage of $800k - $1 million. I switched trains of thought mid stream. Here is my logic, when I think of retirement savings, I try and consider all sources of income into one big pot. Therefore, I would quantify the value of the $20k+ pension to be worth over $500k since it would take $500,000 to generate $20k annually at the 4% withdrawl rate. Social Security would also generate about $20k per year between my partner and I (the real numbers from SS are $26k per year but I'm going conservative. This is if we stop working at 56 and start collecting at 62).

Between the ages of 56 - 62 we will need to draw $50k per year to supplement the $20k+ pension. So, 5 years times 50k = 250k.

If I count SS + pension + $1 million in savings I would have roughly $2 million dollars.

So 250k / 2,000,000 = 12.5%

However, your point was

250k / 850k = 30%

If I plug the numbers into FIRECALC at:

http://www.fireseeker.com

This is what I get for a 40 year survival, with 70% of $850k in the stock market and 30% in commercial paper:

*****

You have proposed a withdrawal of 8.24% of your starting portfolio.

We looked at the 91 possible 40 year periods from 1871 until 2002, and the 40 partial periods from 1962 until 2002, starting with a portfolio of $850,000 and taking out $70,000 the first year, and the same amount after adjustments for inflation (PPI) each year except as follows:

Starting in year 6, the withdrawal was decreased by $13,000 (your Social Security; adjusted for inflation).

Starting in year 6, the withdrawal was decreased by $7,000 (spouse's Social Security; adjusted for inflation).

Starting in year 0, the withdrawal was decreased by $23,000 (adjusted for inflation).

Your Success Rate is 99.2%

******

The interesting thing is that the outcome from FIRECALC doesn't vary if I use 250k/2 million for 88% in the stock market and 12% in commercial paper. Either way I get 99.2% a success rate.

Thank you for asking this question. I hadn't tried FIRECALC with different percentages of a stock/paper mix.

-helen



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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2672 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 11:33 AM
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Hi Brewer,

"If I didn't want to sell at a particular time, there is always a margin loan for the short term."

I hadn't thought of that. We could take out a home equity loan if we didn't want to sell for the short term due to market conditions. Also, we could just stop contributing some or all of our after tax retirement savings if we had an emergency.

It does hurt to have a lot of cash tied up in assets that barely keep up with inflation while busting to grow our retirement nest egg.

-helen

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2673 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 11:40 AM
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Thebreeze,

Great points !!! I really think for a 30 - 40 year horizon 50% bonds is way too conservative.

"2. Re: "withdrawing much less is much better": If you can withdraw your money at a miniscule rate, you may have worked too long! If you loved your job, no problem, but if retiring early is your goal (and calling yourself a "FIRE Wannabe" sure sounds like that category), then you worked longer than you needed to get to a "safe" withdrawal rate + a little headroom to account for unanticipated expenses."

I get hung up on this exact point. If I go too conservative I will never retire. We have to make some assumptions in order to move forward.

For example, there is a good chance that Social Serurity won't be around or will be greatly reduced for those of us who planned and saved. In my case there is also a good possibility that I will receive inheritance money. So what I do is plan on something from SS and ignore the inheritance.

Thanks for your post, I really liked your two points.

-helen

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2674 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 3:16 PM
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helen,

Thank you for asking this question.

And thank you for the detailed answer. Personally I am a ways from my FIRE goal but I always enjoy looking at how others are approaching the date of FIRE.

dt

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2675 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 3:32 PM
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For example, there is a good chance that Social Serurity won't be around or will be greatly reduced for those of us who planned and saved. In my case there is also a good possibility that I will receive inheritance money. So what I do is plan on something from SS and ignore the inheritance.

Although it might be a good idea to plan on very little from SS if you think it won't be around -- and even if you think it'll be greatly reduced. And I agree that you shouldn't count the inheritance. Your mom might live much longer travelling with your family and spend it all. ;)

jmc

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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2676 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 3:32 PM
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With any luck, inside of eight years we'll get a better deal in one of the more conservative asset classes. You may get a chance to conservativly lock up some money at a 4% rate or better.

Also, I think REITs could offer a good return at some point. They've been in the 9% yeild range in the past. If I could lock up a diversified basket of them somewhere around there, I'd essentially be done worrying.

Other opportunities may present themselves as well. Best of luck.

nmckay

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2677 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 4:47 PM
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brewer:
I am wrestling with the whole issue of cash balances in the run-up to ER at the moment. Frankly, tying up a chunk of dough earning virtually nothing is pretty hard to swallow. I am starting to think that with my fairly stable job I really could probably aford to invest much of my cash balance in higher return assets. Like yourself, I also have a taxable account, and in my case it is large enough that we could live on it for years without any other income (pretty unlikely scenario). If I didn't want to sell at a particular time, there is always a margin loan for the short term.

I haven't decided yet, but I am really thinking about putting cash to work.


I've been thinking along the exact same line. I still have approximately 7-8 years to go, but I don't like the idea of putting that big of chunk in cd's at 1-2%. As long as my job is stable as I near my FIRE date, I'll probably do the same.

No guts, no glory!

decath

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2678 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 5:29 PM
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Hi Helen,

You said: I'm counting the pension portion of my portfolio as my bond fund. My plan is to have 5 years living expenses in laddered CDs and the rest 100% in equities. If the market is down I will not sell any stock that year, instead I will live off a CD. The five years worth of CDs will give me a cushion against the down years and will guarentee the income I need for the short term. At the same time it will allow me to stay invested in the asset that has historically had the best returns.

I agree with David Jacobs that 5 years living expenses might be too high, but perhaps 1 years expenses might be too low--that will have to be your decision.

My only suggestion would be that you investigate EE or I Bonds instead of a CD ladder. Reason? It sounds like you might be in a high fed tax bracket (even after retirement). First, there are no state taxes on the income on these bonds. In addition, the interest on these bonds is not federally taxable until maturity (about 30 years), or until you trade them in, whereas the interest on CD's is taxable upon maturity at both the state and federal level. On these bonds, the money is truly tied up for the first year (you can't trade in), after that you can trade in at any time and only forfeit 3 months interest. I myself am laddering into these for my emergency fund. I'm buying bonds that will cover one months of expenses each month out of my cash account, until I will have one years expenses in these bonds. You will have to compare the interest rates on CDs to the interest payable on these bonds at the time you buy, taking the tax advantages into account also. You can check these out at www.treasurydirect.gov

2old


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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2679 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 6:19 PM
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Very good point about EE and I Bonds. Keep in mind that you can only sock away so much a year into I Bonds (not sure about EEs). IIRC, it's 30K or so in each person's name. You can designate your SO as having rights of survivorship (gets them if you die) and vice versa to up your stash pretty quickly.

Check out the website to verify my info since I haven't touched my I Bonds in a few years.

nmckay

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2680 of 5069
Subject: Re: 8 years till ER Date: 10/12/2004 8:11 PM
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Very good point about EE and I Bonds. Keep in mind that you can only sock away so much a year into I Bonds (not sure about EEs). IIRC, it's 30K or so in each person's name. You can designate your SO as having rights of survivorship (gets them if you die) and vice versa to up your stash pretty quickly.

It's $30,000 in each type.

Helen's I $30,000

Helen's EE $30,000

H's SO's I $30,000

H's SO's EE $30,000

AND maybe, H & H's SO can be joint owners on a set but I'm really not sure about that.

There was just a post about I vs. EE bonds on the bonds board. 'Though the I bond is currently yielding more, several people (recent poster & past posters) have suggested that the EE will do better under current interest rate conditions. I'm not entirely convinced of this but the gov't shifted how I bonds beat inflation and it does NOT seem to be as favorable in rising interest rate conditions as what the EE bond is tied to. (oh my, that was about the worst run-on sentence ever! With goofy syntax to boot.....)

jmc, been reading to many undergrad papers


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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2681 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 10:02 AM
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2old,

Thank you very much for the information. I will start investigating the different types of bonds over the next few years. For some reason I have always found bonds to be boring, but I guess I'd better learn to find them interesting.

You made an excellent point about taxes as I live in Oregon. I believe our state income tax is around 9%.

Best regards,

-helen

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2683 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 12:39 PM
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The link below is better for research purposes than the first link I gave you:

http://www.publicdebt.treas.gov/sav/savinvst.htm

There's a link on the page that explains the difference between Series EE and I bonds. Series I bonds are currently paying 3.39%, while Series EE is paying 2.84%--not bad for only having to tie up your money for one year. The yields will change on 11/1, but they won't announce the new rates until then.

I'm in New York City, so my combined local tax rate is about 11%. I also like the built-in federal tax deferment--you're only taxed at the federal level when you trade them in (or they mature).

For some reason I have always found bonds to be boring, but I guess I'd better learn to find them interesting.

They're at least as interesting as CDs ;-) (Maybe more so, since the yields change and they're tax deferred)


2old


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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2684 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 12:55 PM
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They're at least as interesting as CDs ;-) (Maybe more so, since the yields change and they're tax deferred)

:) Although you could buy CDs for your IRA. Though why bother?

jmc


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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2685 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 2:58 PM
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:) Although you could buy CDs for your IRA. Though why bother?

True, why bother? I try to save my IRA trades for stuff I hope I might make a killing on, so I get to use the tax liability dollars for 20 years or so. :-)

However, only 1 'killing' to date :-(

2old





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Author: DrZenRoot Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2686 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 4:58 PM
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1. The 4% withdrawal rate is based on a 75%/25% to 80%/20% mix of stocks/bonds, with the stock portion being a stock index like Total Stock Market or S&P500 (all US stocks). The withdrawal rate is less than 4% for other asset mixes. So 50-50 does NOT give a 4% withdrawal rate based on past performance.

Where's hocus when you need him?
Don, ducking and running

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2687 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 5:29 PM
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I try to save my IRA trades for stuff I hope I might make a killing on, so I get to use the tax liability dollars for 20 years or so. :-)

However, only 1 'killing' to date :-(


Well, 2old, you're never 2 old to make more killings. ;)

I've done best in REITs. In my taxable account. I make so little money that my REITs' distributions enjoy a 15% tax. But, yeah, I try to keep my IRA trades for those big cap. gains winners.

jmc, there are a few tax advantages to being a full-time student :)


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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2688 of 5069
Subject: Re: 8 years till ER Date: 10/13/2004 9:21 PM
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2old,

Thanks for the link it has very helpful information. I went to my credit union this afternoon and I can buy both the I and the EE bonds through them. When the CD matures in March I'll switch it over. We had that money in the CD for emergency use for probably 6 years and have never touched it.

Thanks to you and everyone here, this has been very helpful to me.

-helen

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2700 of 5069
Subject: Re: 8 years till ER Date: 10/14/2004 8:04 PM
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Unless you have way more money than you can possible spend in retirement, you are probably better off keeping some diversification in your investments. 100% CD's is actually riskier (when you consider the risk of outliving your funds) than a mix of stocks, bonds, Cd's, REIT's, Real Estate, etc.

You will have earned income even after you retire. Dividends and capital gains from your assets outside your tax protected stuff. Thus you will still be able to and probably should continue to contribute to your Roth IRA. Moving an investment from a taxable state to a Roth IRA state is advantageous as long as you are going to keep it there for awhile.

People will argue but I would tend to access 401k funds first (they will be taxed at full income rates) up to the amount which doesn't raise me above the lowest bracket. I would then access the normal taxable stuff, selling as necessary and paying capital gains taxes, and only then access the tax free Roth IRA funds. Of course this is all on an as necessary basis. The idea is to keep the tax free stuff compounding as long as possible and minimize current tax rates. Thus having money in various investment vehicles (normal taxable investments, 401k & IRA's, Roth IRA's ) can be used to your advantage.

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2701 of 5069
Subject: Re: 8 years till ER Date: 10/14/2004 8:07 PM
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Saving 37% of gross for retirement not counting company match.

WOW! I'M IMPRESSED!!!

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2706 of 5069
Subject: Re: 8 years till ER Date: 10/16/2004 3:54 AM
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<Very good point about EE and I Bonds. Keep in mind that you can only sock away so much a year into I Bonds (not sure about EEs). >

An individual can buy $30,000 each of:

I-Bonds, via paper application
EE-Bonds, via paper application

I-Bonds, via Treasury Direct
EE-Bonds, via Treasury Direct

This is $120,000 per person, per year. A trust can buy, separately, $30,000 each of I-Bonds and EE-Bonds, but only via paper applications (there is a special form for trusts). Only individuals, not trusts, can buy Savings Bonds via Treasury Direct.

Unlike CDs and TIPS, taxes are not due on savings bonds, until they are redeemed.

I am a big fan of savings bonds. The income is not reportable on the 1040. Health care costs are deductible only if they exceed an income threshold (I think it's 7%). This threshold is easier to reach, if income is not reportable.

Wendy (retired)

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2707 of 5069
Subject: Re: 8 years till ER Date: 10/16/2004 10:07 AM
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Thank you, retired Wendy !!!!

<<Unlike CDs and TIPS, taxes are not due on savings bonds, until they are redeemed.>>

After reading through this thread I have changed my mind. I will look at laddering bonds instead of CDs, it makes a lot more sense.

Thank you very much !!!!

-helen


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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2708 of 5069
Subject: Re: 8 years till ER Date: 10/16/2004 1:02 PM
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Helen, I am not a regular on this board, since I am already FIREd...a Wannabee for patient, thrifty decades, though :-). However, I am impressed by the knowledge and thoughtful planning that is displayed by this thread. Your board has some very intelligent people!

Your explanation of how you have invested your money for growth has intrigued me, to the point that I may change my strategy.

I am much, much more conservative than you are. Since I am already retired (age 50), I need to protect my assets from erosion.

I have bought Savings Bonds, instead of CDs, because interest rates have been kept artificially low by the Federal Reserve, and must rise. Savings Bonds' interest, unlike most CDs, are adjusted every 6 months (I-Bonds to keep up with inflation, EE bonds to peg to the 5-year T-Bill).

I have been a bond investor for over 10 years. I would not buy corporate bonds, at this time. When interest rates go up, the value of bonds go down...except for Savings Bonds, whose principal is guaranteed, regardless of prevailing interest rates. At this particular time, I am especially avoiding long-term bond funds, since these cannot be held to maturity, like an individual bond can, and will drop in NAV (share price, Net Asset Value). Furthermore, yield spreads (the interest rate of rated bonds over the T-Bond) are very low, and do not compensate investors for the level of risk, in my opinion.

Where you have influenced me is the concept of holding 5 years of living expenses in more liquid assets, and investing the rest in stocks. Your premise is that a drop in the market will be over, by the end of 5 years, and during that time, you can live on your liquid assets.

You may be correct in this. However, not all market drops recover in 5 years. The 1929 market drop did not recover, until the 1950s (I was close with my grandmother, a longtime investor; our family was badly hurt by the 1929 crash). Japan's stock market crash (accompanied by the popping of a real estate bubble - sound familiar?) has still not recovered, 10 years later. Because of this, I am very cautious about committing a significant portion of my assets to the stock market, which still has historically high P/E ratios, and historically low dividend yields.

I would like to discuss this more, with you, and with people who have participated in this thread. The question for FIRE people is: without the cushion of an income, to pay the bills in the event of market losses, how to maximize safety, while getting a better yield?

Wendy

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2709 of 5069
Subject: Re: 8 years till ER Date: 10/16/2004 7:22 PM
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<<<<Unlike CDs and TIPS, taxes are not due on savings bonds, until they are redeemed.>>

After reading through this thread I have changed my mind. I will look at laddering bonds instead of CDs, it makes a lot more sense.

Thank you very much !!!!

-helen
>>


Just keep in mind that deferring income can create problems eventually. Half of Social Security income is subject to income taxes, and after age 70.5 you must begin redeeming IRAs and 401Ks. If you redeem savings bonds that have a lot of taxable income to those facts, you might wind up paying more in taxes.

These kinds of interactions become complicated in a hurry, so it's hard to predict what will really work well for people. But you should probably keep them in mind.


And of course, we don't know what the Congress may have in store for us in the future.



Seattle Pioneer

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2710 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 10:46 AM
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<<Just keep in mind that deferring income can create problems eventually. Half of Social Security income is subject to income taxes, and after age 70.5 you must begin redeeming IRAs and 401Ks. If you redeem savings bonds that have a lot of taxable income to those facts, you might wind up paying more in taxes.>>

This is when I start to feel like Linda Blair in "The Exorcist", with my head spinning around ...

There are so many unknowns like future income tax, social security tax, captial gains tax. Then there is the gay marrigage debate (at this point I could go off on a tangent when I think about how my partner or I could have to pay estate taxes when one of us dies on money we've aquired through a lifetime together - not to mention all the other issues like lack of survior benefits ....). It makes planning very difficult.

Here's another question, since my salary is higher than my partners, should we list her name first on the joint brokerage account so that we get taxed at her rate of income instead of mine ? I'm really hoping I am not creating a tax nightmare when we go to withdrawl our savings. I
I think I'd better get in and talk to our CPA.

Sorry for rambling. This stuff seems overwhelming at times.

-helen



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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2711 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 11:32 AM
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sailrmac,

<<Unless you have way more money than you can possible spend in retirement, you are probably better off keeping some diversification in your investments. 100% CD's is actually riskier (when you consider the risk of outliving your funds) than a mix of stocks, bonds, Cd's, REIT's, Real Estate, etc.>>

I agree. I was talking about putting 5 years living expenses in CDs and keeping the rest in the market.

<<You will have earned income even after you retire. Dividends and capital gains from your assets outside your tax protected stuff. Thus you will still be able to and probably should continue to contribute to your Roth IRA.>>

Are you saying that I can use interest and capital gains to count as earned income and therefore fund a Roth contribution ?

http://www.fool.com/taxes/2002/taxes020809.htm

"To make a Roth IRA contribution, you must have earned income. Earned income is generally income you receive from working -- as compensation for your labor in one form or another. It's reported to you on a W-2 form, or you report it on Schedule C (Business Income) or Schedule F (Farm Income) with your normal tax return. Earned income generally does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains."

-helen

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2712 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 12:02 PM
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Hi Wendy,

You brought up some very interesting topics:

<<You may be correct in this. However, not all market drops recover in 5 years. The 1929 market drop did not recover, until the 1950s (I was close with my grandmother, a longtime investor; our family was badly hurt by the 1929 crash). Japan's stock market crash (accompanied by the popping of a real estate bubble - sound familiar?) has still not recovered, 10 years later. Because of this, I am very cautious about committing a significant portion of my assets to the stock market, which still has historically high P/E ratios, and historically low dividend yields.>>

I think my interest in finance is partially influenced by my Father. He graduated from college in 1930 (yikes !!!) and retired in the early 70's when inflation was through the roof. He really saw the two extremes and talked about it a lot. I remember all his lectures about inflation. I didn't realize why he was so freaked out, but he had just retired at age 65 and had a 15 and 17 year old to put through college. I'm sure he was worried about his pension, social security and dividends keeping up with the cost of living.

Anyway, I have thought a lot about what I think your point is. Do we invest for the worst case, invest for the best case or invest somewhere in between. I think the answer is a very individual thing which I think our posts reflect. You tend to invest heavily in bonds, in part due to your Grandmother's tales of the depression. I tend to invest heavily in the market, in part due to my Father's tales of inflation.

If we invest too conservatively, we run the risk of inflation eroding our money. Bonds may be indexed for inflation, but is the index a true measure of inflation ? Here's an interesting article on the notion that the CPI does not keep up with true inflation:

http://www.pimco.com/LeftNav/HomePageAnnouncements/IO+Con+job+redux+04.htm

If on the other hand, we take on too much risk, we could run out of money during a crash/depression.

I do find comfort in using the FIRECALC

http://www.fireseeker.com/

in that I think it takes more of a balanced approach of a stock to bond mix and uses historical data to regression test the amount of retirement savings. Of course this by no means guarentees success in the future, but I don't think anything could do that.

These are very interesting points that you have brought up. I hope that others will join in on this.

Best regards,

-helen



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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2713 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 12:47 PM
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<Just keep in mind that deferring income can create problems eventually. Half of Social Security income is subject to income taxes, and after age 70.5 you must begin redeeming IRAs and 401Ks. If you redeem savings bonds that have a lot of taxable income to those facts, you might wind up paying more in taxes.>

You are correct, as usual, SP.

Planning for what might happen 20 or more years ahead is always tricky. It also depends upon personal circumstances.

For example, I expect to have high healthcare costs, as I age, despite taking care of myself throughout my lifetime. Both my parents died at age 70; my mother died of cancer. My grandmother, whose physique I seem to have inherited, lived to age 89, but she had a variety of annoying chronic ailments, such as arthritis and fibromyalgia.

I expect to cash out the Savings Bonds to pay for healthcare costs, as needed, a little at a time. Under current law, healthcare costs are tax deductions, if they exceed 7% of income. Therefore, if I cash out savings bonds to pay for healthcare, I will be able to deduct the interest.

Wendy

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2714 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 1:10 PM
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<Then there is the gay marrigage debate (at this point I could go off on a tangent when I think about how my partner or I could have to pay estate taxes when one of us dies on money we've aquired through a lifetime together - not to mention all the other issues like lack of survior benefits ....). It makes planning very difficult.

Here's another question, since my salary is higher than my partners, should we list her name first on the joint brokerage account so that we get taxed at her rate of income instead of mine ? I'm really hoping I am not creating a tax nightmare when we go to withdrawl our savings. I
I think I'd better get in and talk to our CPA. >

Helen, I strongly suggest that you speak with a good estate lawyer, about getting each of you a Living Revocable Trust, separately, for you and your partner. A CPA would be less aware of the legal ramifications and protections than a lawyer.

Gay or straight unmarried partnerships, even more than conventional marriages, require the 5 basic estate documents: a Will, a Revocable Living Trust, a Durable Power of Attorney, a Healthcare Power of Attorney, and a Living Will. I became familiar with non-marriage estate planning, as we were organizing my mother's financial documents, after her diagnosis of lung cancer. A daughter, like a partner, does not have the legal recognition/protection of the law, which is granted to married couples. Without these essential documents, a non-spouse may not even be able to visit a person in the hospital, let alone make life-or-death decisions. A Power of Attorney will give you the status to do so.

It is even more important for you to have good estate planning than most. If you were to die, with a conventional will (or worse, intestate <shudder>), your estate would be probated. Probate is a public process, which invites challenge. Relatives could crawl out of the woodwork, to make claims on your estate. Your partner would have no legal standing.

An acquaintance was recently involved in probate, where her gay middle-aged, healthy cousin was killed in an automobile accident. Her gay cousin's long-term (essentially married) partner received nothing. During probate, the court directed all of the substantial estate to my acquaintance, as the only remaining blood relative. She did not request or sue for it, and felt guilty accepting it. However, that is the legal situation.

Only a trust, which is completely private (trust assets do not go through probate), can distribute your possessions, without challenge. Only a trust can provide for your partner's needs during her lifetime, then direct the remainder back to your own family.

I recommend that you read the slim, but informative and rather humorous book, "Complete Guide to Wills, Estates, and Trusts," by Alexander A. Bove.

http://www.amazon.com/exec/obidos/tg/detail/-/080506298X/qid=1098032345/sr=1-1/ref=sr_1_1/002-5492035-5668051?v=glance&s=books

If you and your partner design complementary Living Trusts, you will have to title your assets separately. Then, the tax implications will be clearer, as will ownership and inheritance.

Wendy





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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2715 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 1:24 PM
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< I tend to invest heavily in the market, in part due to my Father's tales of inflation.

If we invest too conservatively, we run the risk of inflation eroding our money. Bonds may be indexed for inflation, but is the index a true measure of inflation ? >

The CPI-U is manipulated by the government, to dramatically under-report the rate of inflation. I am deeply angry about this, because it cheats people who get their income from inflation-adjusted bonds and Social Security...and also because it brings blatant politics -- low inflation, over-reported growth in the GDP (which is inflation-adjusted) -- into a process that is supposed to be objective and apolitical.

I agree with everything you have said. However, recall that the 1970s were not a great time for the stock market. Take a look at the 1973-4 bear market (right after the Nixon re-election, while the Vietnam War was still raging).

A conventional asset allocation may work best, as you say. Everyone must judge her own risk tolerance. Personally, I am very worried about imbalances in today's economy, with the current balance of trade deficit and the federal government deficit eachover 5% of GDP, and staggering, unfunded future liabilities for the long term.

Yes, I am afraid of inflation eroding my nest egg. I am even more afraid of a vicious bear market, in 2005-6. When the S&P 500 drops to 700, I will buy stocks.

The scary thing is that our future security depends upon making real money bets on events over which we have no control.

Wendy

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2716 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 1:43 PM
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Wendy,

Thank you for your informative post. My partner and I have set up wills and have power of attny for both financial and health. We haven't amassed enough yet for a trust to make sense. As things change I will revisit the legal issues, especially once our savings grow and if inheritances come into play.

Right now I am more concerned with taxation while we are alive. I need to make out a list of issues and sit down with my CPA.

Thanks again for your post !

-helen

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2717 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 3:08 PM
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<We haven't amassed enough yet for a trust to make sense. >

You mentioned, in your first post in this thread, that your assets are $800,000 - $1,000,000. You definitely have amassed enough for a trust to make sense. This is especially true, given your personal situation.

I addressed these issues on the LBYM Board, recently. Read the thread that begins with this post, by Rosietomato.

http://boards.fool.com/Message.asp?mid=21336183&sort=whole#21339273

This is Post # 559365 on the LBYM Board. The key to affording a trust is to manage your own assets, once the trust is set up, rather than turning it over to a high-cost financial advisor. Since you do that, anyway, having a trust doesn't cost any more than the initial expense of setting it up. Believe me, that cost is nominal, compared to the mess of settling your estate, if one of you should die -- or, even worse, managing the finances, if one of you became disabled.

Wendy

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2721 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 5:17 PM
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Hi Wendy,

Nope we don't have that much yet. Here's from my first post:
"My really rough figures are that we will have $800k - 1 million in the combined accounts"

Thanks for your link to the Living Below Your Means board, it's another informative post !!!

-helen




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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2722 of 5069
Subject: Re: 8 years till ER Date: 10/17/2004 7:29 PM
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<<I expect to cash out the Savings Bonds to pay for healthcare costs, as needed, a little at a time. Under current law, healthcare costs are tax deductions, if they exceed 7% of income. Therefore, if I cash out savings bonds to pay for healthcare, I will be able to deduct the interest.

Wendy
>>


Well... then I'll hope you have to pay taxes on every nickel of interest you earn. Some things are worse than paying taxes.



Seattle Pioneer

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2723 of 5069
Subject: Re: 8 years till ER Date: 10/18/2004 1:05 AM
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<Well... then I'll hope you have to pay taxes on every nickel of interest you earn. Some things are worse than paying taxes.>

Thanks, SP. It took me a couple of seconds to realize that you are wishing me well ;-).
Wendy


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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2725 of 5069
Subject: Re: 8 years till ER Date: 10/18/2004 2:05 AM
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<<Are you saying that I can use interest and capital gains to count as earned income and therefore fund a Roth contribution ?

http://www.fool.com/taxes/2002/taxes020809.htm

"To make a Roth IRA contribution, you must have earned income. Earned income is generally income you receive from working -- as compensation for your labor in one form or another. It's reported to you on a W-2 form, or you report it on Schedule C (Business Income) or Schedule F (Farm Income) with your normal tax return. Earned income generally does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains." >>


I was but apparently I was wrong.

Sounds like if you had a business (e.g. rental properties, jakes fishing service, etc.) you could still possibly contribute.


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Author: foolkath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2727 of 5069
Subject: Re: 8 years till ER Date: 10/18/2004 11:08 AM
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"I get hung up on this exact point. If I go too conservative I will never retire. We have to make some assumptions in order to move forward."


What we did was "junp" as soon as we qualified for early retirement. When ever we want that "extra" money we take on temporary work.

We feel pretty confidence that we'll get some ss and medicare. But if we don't we are trying to just let our 401k grow. We do pay our own medical. This is the challange. We never know how much the premiums may increase.

Fool Kath



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