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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5082  
Subject: Re: Funding future needs Date: 8/8/2003 2:05 PM
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And my goal is to be able to do this without dipping into the principal. If we have to, so be it, but I want to plan conservatively.

It's good to plan conservatively but you have to be careful to not plan too conservatively. It's not just abstract things that are being exchanged but real years of life for more dollars. I would make sure that your budget estimates aren't too inflated when planning.

I'm figuring on trying to get out much younger. If things go well I'll retire in about 8 years while I'm in my mid-40's. I could wait longer but there comes a point when I won't be as able to do the activities that I want to do in retirement. I'm acutely aware of this risk as I am worrier and a planner. Those attributes have served me well but there also comes a time when enough is enough.

I'm planning for a number of risk reduction measures though as well. I will be using a base + %age of gains system - that means I will take a smaller base %age (e.g. 2% rather than 4%) along with say 50% of the real gains in the portfolio each year. That will reduce the risk of outliving the portfolio. It will also bring a much more variable yearly withdrawal. To reduce the variability some we will have a fixed income buffer in front of the equity portfolio. For more details see http://home.golden.net/~pjponzo/sensible_withdrawals.htm This discusses the fixed+variable withdrawal system but doesn't discuss the fixed income buffer.

Another risk reduction measure is that we will still be young enough to pick up some kind of work early in our retirement if the portfolio drops too much too soon in value. Even a small amount of added money early on would shift a "loser" portfolio over into a survivor. It would be posible to take up some contract work in my profession (less likely and at less dollars the longer I'm retired), perhaps pull a few dollars from a "hobby" activity, or even something like being a greeter at Walmart or a barrista at a coffee shop.

Yet another risk reduction measure is to have some flexibility in your spending. If you can cut back even by 10% or so on the yearly expenses this could shift a "loser" portfolio over into a survivior. That could mean cutting back on meals out that year, driving to stay with relatives or camping instead of jetting off to Europe/Asia for vacation, delaying a car replacement, etc.

The riskiest years are likely to be the early years. If the early years bring good returns then the likelihood of outliving your portfolio decreases. If the early years are bad then the likelihood of outliving the portfolio increases. With either case there is still no guarantee just probability. Changes made in those early years (income increase or withdrawal decrease) will have the most effect on survival.

Hyperborea
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