Author: TMFDavidG Date: 12/2/02 3:05 AM Number: 8182 I am therefore very interested in your individual perspective on how handling your investments and your money either should or just naturally does change, once retiredDavid,I had been planning for at least ten years to retire at 55 from my job of 27 years at Texas Instruments, but I was forced to take early retirement in the spring of 2001 at the age of 53. TI provided a 'bridge' to 55, which allowed me to remain as an employee on Leave of Absence until my 55th birthday (in Aug 2002). This allowed me to get my pension at 55.Anyway, for years I had been investing in the stock market prior to my early retirement, and had been reading every bit of information I could find, including The Motley Fool website. My plan was to follow the basic approach as discussed on the Retire Early board here on the fool; ie, to set aside three (to five) years of expenses in cash and bonds and put the rest in equities (S&P 500).This plan would have worked well except for the severity of the bear market. I had not counted on three years of decline which consummed all my cash and left me with less than a third the portfolio I started with.So, here is how my perspective has changed:1. I am far more conservative now than prior to my retirement. I no longer handle the high volatility of an S&P 500 Index very well.2. I have developed a deep understanding of why my father (who lived through the Great Depression) was so timid about investing in stocks. He would only buy blue chips that paid dividends. I really understand that thinking now.3. I also now truly understand the reason that volatility is equated with risk. Until you are withdrawing from a portfolio for your daily needs, volatility seems a non-issue. Now, I have personal experience of being forced to liquidate stock to meet my living expenses when my stock price is way down. I don't know if I will have enough to live on in the future because of this. In fact, I am working at a part time job to minimize the impact as much as possible.4. I have a much stronger respect for dividends. Dividends greatly reduce the volatility of the portfolio, and they are a repeating indication that the company is financially sound. As a retiree, dividends are psychologically soothing. I feel terrible when forced to sell shares, but the dividend seems almost free somehow. They are real, and they reduce the amount of shares I have to liquidate. There is much less doubt about my portfolio for the dividend payers. I only wish they would do something about the double-taxation issue.5. I have learned the importance of proper portfolio diversification. I now see that the goal in retirement is to reduce portfolio volatility and one of the best ways to do that is by diversifying into non-correlated asset classes (a great book on this is William Bernstein's 'Intelligent Asset Allocator'). This technique preserves growth and reduces volatility simultaneously. The net effect is that the 'safe' withdrawal rate for the properly diversified portfolio is higher than with an S&P 500 Index Fund plus bonds alone. The best asset class for this diversification that I have found is REITs (blue chip REITs only). They have high dividend yields, and total return is approximately equal to the S&P 500, but they are nearly totally uncorrelated with the S&P 500.6. My expenses in retirement have turned out to be nearly exactly what I had calculated. There were no surprises, but I attribute this to the information gained from The Motley Fool for those several years prior to my retirement. For some, I think the surprise is that you can live on quite a bit less income after retirement than before, due mainly to the fact that you stop saving and stop contributing to SS, after you retire. Of course, for many, this is offset by greatly increased medical insurance costs. This all speaks to the utmost importance of fully understanding and budgeting your expenses after retirement.7. Prior to my retirement, lots of people talked about the possibility of a serious bear market right after retirement, and what it could do to your plans. However, knowing about this and living through it are beasts of a different color! I had no idea how seriously affected I would be by the constant, relentless, losses in my portfolio. It has changed my entire perspective on the stock market. I now truly know why the phrase "past performance is no guarantee of future performance" is attached to nearly every research report. I am much less trusting now of my future portfolio performance. I want to make sure that I never even come close to the 'safe' withdrawal rates as published (around 4% per year). My goal is to never withdraw more than 2.5% of my portfolio in any one year. If this means I need to work, like right now, then so be it. It is far more important to feel good about your financial situation than to be constantly worrying.Needless to say, this bear market has had a profound affect on me, and I will never again view things with the statistical trust that I once did.RK
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