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Retirement Discussions / FIRE Wannabees
|Subject: Re: 8 years till ER||Date: 10/11/2004 2:48 PM|
|Author: TMFDj111||Number: 2655 of 5129|
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":
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:
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:
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 o