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I finally downloaded the spreadsheet provided in the recent F4 retirement series (thanks Ann) and was surprised to find out I would run out of money if I pulled out 8% a year (S&P returns scenario).

Then I realized the spreadsheet was designed to pull out a percent of the *original* amount, not of the "current" balance. After I changed the formulae to the latter, 8% kept me safe and happy.

Now, the caveat and the question: I am hoping to live on approximately 8% of the balance each year and supplement when necessary (i.e., when returns are down) with outside work/income. Is anyone else using this strategy, and how does it work for you?

I'm 38 and hope to start substantially equal withdrawals when my balance is around $500k (about 5-7 years from now), thereby providing for about $40k a year to start.
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loringf Date: 8/2/99 4:31 PM Number: 12721
Now, the caveat and the question: I am hoping to live on approximately 8% of the balance each year and supplement when necessary (i.e., when returns are down) with outside work/income. ... I'm 38

At 38, the only recession you have seen in your working lifetime is the mild downturn around 1992. My fear is that the only time you are looking for work is when none will be available. I've a bit of grey in my beard, and have seen several periods where 50% of engineering school graduates didn't have a job by the Winter after graduation, and even MacDonald's weren't hiring. My advice is to be less sanguine about how easy it will be to supplement income with work.
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Now, the caveat and the question: I am hoping to live on approximately 8% of the balance each year and
supplement when necessary (i.e., when returns are down) with outside work/income. Is anyone else using this strategy


I wish I could say that I did. I envy you to be able to start so soon.

Anyway, why would you want to live on a variable income by taking a fixed percentage of the current balance, and being forced to find work, instead of starting with a steady income, adjusted for inflation yearly? You apparently have 40k as a retirement income in mind.

BTW, I missed the Ann's post with the spreadsheet. Could you post the URL?

Thx
Zev

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WilliamLipp writes,

At 38, the only recession you have seen in your working lifetime is the mild downturn around 1992. My fear is that the only time you are looking for work is when none will be available. I've a bit of grey in my beard, and have seen several periods where 50% of engineering school graduates didn't have a job by the Winter after graduation, and even MacDonald's weren't
hiring. My advice is to be less sanguine about how easy it will be to supplement income with work.


I agree with William on this one, caution is called for.

The worst 30 year period for the S&P500 was the years 1929-1959. To survive that period with a portfolio of 71% stock/29% fixed income, you would have had to limit your inflation-adjusted withdrawals to 3.81% of your original balance. See link:

http://www.geocities.com/WallStreet/8257/restud1.html

If I'm not mistaken, Ann Coleman's work uses data from 1961-1998. I believe you need to examine the period after the Crash of 1929 to come up with a really "safe" withdrawal rate in retirement. After all, look what has happened in Japan over the past 10 years. From a high of almost 40,000 the Nikki average has dropped as low as 11,000. Even super bull Harry S. Dent is predicting a 70% drop in the US stock market for the years 2008 to 2022.

intercst
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Anyway, why would you want to live on a variable income by taking a fixed percentage of the current balance, and being forced to find work, instead of starting with a steady income, adjusted for inflation yearly?

To be able to go sooner, before the capital has reached a high enough balance to be able to support a fixed withdrawal at my level of income need. BTW, if my income is more than I need, I will of course invest the difference which will help for rainy days in the market.

"...forced to find work" sounds so unpalatable - I don't think it would be so bad to work a few days here and there at something like substitute teaching, temping, etc. Part of the problem with full time work is it's just that - full time.

BTW, I missed the Ann's post with the spreadsheet. Could you post the URL?

You can find it at:
http://www.fool.com/DDow/1999/DDow990712.htm

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To be able to go sooner, before the capital has reached a high enough balance to be able to support a fixed withdrawal at my level of income need. BTW, if my income is more than I need, I will of course invest the difference which will help for rainy days in the market.

Money is like my computer's disk space. No matter how much I have, I always need all of it. :)

I have a big question though: how are you paying for health insurance? I'd be kind of worried that you'd get something nasty that takes $150K to cure...and that could eat up your nest egg in a jiffy if you don't have insurance. Similarly, what happens if you become disabled and can't work to supplement your income in a down year?

"...forced to find work" sounds so unpalatable - I don't think it would be so bad to work a few days here and there at something like substitute teaching, temping, etc. Part of the problem with full time work is it's just that - full time.

The problem with casual part-time work is that it isn't always there. It's real easy to be glib about it now, but what happens if bad years on the market force you back to work after 20 years of retirement? Will you have marketeable skills?

If you're willing to work part-time, why don't you just do it now and minimize your draw-down on your investment balance over the next few years? Semi-retire now, fully retire in a few years.

JDOyster
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I finally downloaded the spreadsheet provided in the recent F4 retirement series
(thanks Ann) and was surprised to find out I would run out of money if I pulled out
8% a year (S&P returns scenario).

Then I realized the spreadsheet was designed to pull out a percent of the
*original* amount, not of the "current" balance. After I changed the formulae to
the latter, 8% kept me safe and happy.

Now, the caveat and the question: I am hoping to live on approximately 8% of the
balance each year and supplement when necessary (i.e., when returns are down)
with outside work/income. Is anyone else using this strategy, and how does it work
for you?

I'm 38 and hope to start substantially equal withdrawals when my balance is
around $500k (about 5-7 years from now), thereby providing for about $40k a year
to start.


I have been trying to come up with a withdrawl percent. From my reading 4% is very safe. From playing with the spread sheets I can see 5% or 6% safe for me. Don't think I can get to 8%. Since you can supplement your income with work maybe it will work. The probelm I have is what happens if the first few years of return are bad. (Is the market going to keep following?) Also, I think about 10% - 11% return after expenses is tops for planning.

Also, as the years go by make sure your purchasing power is keeping up with inflation.

I would lower the 8% to 6%. You have a large risk because you will be retired for maybe 50 years.









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