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Author: SoftSimp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5084  
Subject: Funding future needs Date: 8/8/2003 9:36 AM
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OK, I took some time with my budget this morning and projected it into retirement. Assuming my house and the one rental property (I hope to have more than one by then, but I'm not counting unhatched chickens) are paid off, we will need about $35,000 in today's dollars. I figured this using a much more detailed version of the first chart in my "Estimating Future Needs" post (http://boards.fool.com/Message.asp?mid=19429269).

We'd like to retire in about 20 years - I'll be 57 and DH will be 62. If I figure inflation to be about 5%, then the multiplier from the "Estimating Future Needs" post would be 2.6. So we'll need about ($35,000 x 2.6 = 91,000) $91,000/year in 20 years.

Our rental property, if I remove the outstanding debt (which will be paid off) currently brings in about $9,000 annually, after expenses. Since I'm multiplying my future expenses by 2.6, I'm going to go ahead and multiply this current income by 2.6 to come up with a future figure: $23,400 annually. I'll call it $23,000. So I can count on an income from our rental property of about $23,000/year.

That means I'm going to need to come up with ($91,000 - $23,000 = $68,000) $68,000/year from somewhere.

On DH's most recent Social Security statement, they said that if he stops working today he'll be entitled to $921/month at 62. Since he plans on continuing to work, I'm going to estimate that at $1,000/month (as you can see, I'm very conservative - but I am hoping that SS will still be around in 20 years). So there's another $12,000/year in income.

So, taking SS into account, we're going to need ($91,000 - $23,000 - $12,000 = $56,000) $56,000/year from somewhere.

If I figure the typical stock/bond investment combo to yield about 8% annually, and figure inflation to remain at 5%, then I need to figure out how much needs to be invested in order to generate $56,000 at a 3% rate of return (8% - 5% = 3%).

If I don't want to dip into my principal (and I don't), I'll need ($56,000 / .03 = $1,866,667) $1,866,667 to generate $56,000 in investment income per year. So it looks like yesterday's estimate of $500,000 - $600,000 was a bit off.

At our current savings rate, we can't get there. At our current earnings rate, we can't increase our savings rate. So, are we up a creek without a paddle? NOOOO! I refuse to have to work any longer than absolutely necessary. Which means I'll just have to be smarter. ;)

Let's take another look at that rental property. All by itself, it's generating ($23,000 / $91,000 = 25%) 25% of the income we need to retire in the style we want. So, if we had 3 more just like it, we wouldn't need anything invested in the stock market! Now, that particular property happens to be a cash cow (mortgage is $400/mo, rents are $1,150/mo). We paid $68,500 for it in 1999. We found a motivated seller and I did a very good job of negotiating. I don't think it's realistic to believe that all the properties we buy will do as well, so I'll be happy if they just pay for themselves over time, so that when we're ready to retire we can have them all paid off.

I think it's more realistic to expect a rental property to generate about 15% of what we'll need, which would be roughly $5,250 in today's dollars. So if the one property is generating 25%, in order to make up the other 75% we'll need 5 more properties.

If I figure on them costing roughly $90,000-100,000 each, then in order to put 20% down on each, I'll need to save up about $100,000. This is in the realm of possibility for us, whereas saving up $1,866,667 is not. So this is what I'm going to try to do in order to fund our retirement in 20 years. And doing this will also mean that if SS disappears between now and then, we'll still be OK.

Then anything that we manage to sock away into the stock market is just gravy. :) And there's the chance that I'll continue to work a little bit, too. I'm currently a database consultant and work our of my home. I don't see any reason I couldn't continue that after FIRE, on a smaller scale. Plus the tax benefits are phenomenal.

I hope my illustration helped some of you look at funding your FIRE creatively. It doesn't have to be XX dollars in the market earning XX return for XX years - it just has to be something you're comfortable with.

I was pretty conservative in my calculations, figuring a pretty high inflation rate (5%) and a pretty low investment return rate (8%), but I figured it's better to over-estimate what we'll need than to under estimate. If you believe these figures will be different, then you'll come up with very different results.

SS
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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: 198 of 5084
Subject: Re: Funding future needs Date: 8/8/2003 11:04 AM
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I was pretty conservative in my calculations, figuring a pretty high inflation rate (5%) and a pretty low investment return rate (8%), but I figured it's better to over-estimate what we'll need than to under estimate. If you believe these figures will be different, then you'll come up with very different results.

Using historical data to test portfolio withdrawal survival the number is only 4% for a 30 year withdrawal not running out of cash and about 3.8% for the ending balance to be the same as the starting balance. This is a bit higher than you estimate but not by much. Now this would survive the worst time periods in the historical record but most time periods are not the worst and the probability is high (though not guaranteed) that your portfolio after 30 years would be quite a bit larger than at the start.

This would cut your stash down to $1.47M if you aim to keep the start and end values the same as the worst case.

http://rehphome.tripod.com/moresafe.html

Hyperborea

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Author: SoftSimp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 200 of 5084
Subject: Re: Funding future needs Date: 8/8/2003 11:51 AM
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This would cut your stash down to $1.47M if you aim to keep the start and end values the same as the worst case.

Thanks, Hyperborea. It's good to know that I was at least close, considering I was using numbers based on my gut, as opposed to a statistical analysis. It's still way more than the $500,000 - $600,000 I thought we'd need yesterday. Looks like I should've multiplied that times 2.6, too.

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.

SS

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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: 214 of 5084
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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Author: SloanT Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 216 of 5084
Subject: Re: Funding future needs Date: 8/8/2003 2:42 PM
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Hyperborea: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.

I always appreciate your math-grounded approach to SWR's and retirement. It's so refreshing to work with logical assumptions and real numbers rather than emotions about what will last.

My feelings about how much is enough is pretty similar to yours. I think the risk of continuing to work is as great as the risk of running out. Primarily because you can always take steps to avoid running out, but you can't go back and start earlier if you worked too long.

I think for many periods a WR of 6% or more will be succesful, you just won't know until that period has already passed. But, you can start out at 4% and adjust up, or you can go with the method you suggest.

Being conservative is a double-edged sword. I think it is smarter to be daring when you choose to retire (do it early!) and then be conservative with your money after you retire to make sure it lasts. For example, if you find that healthcare is eating you up then get a PT job with health benefits. There is so much you can do after retirement to control your expenses that you don't have to sacrifice another year of your life just to be 'conservative.'

st

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Author: tmeri Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 265 of 5084
Subject: Re: Funding future needs Date: 8/9/2003 5:25 PM
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SloanT advises:

I think it is smarter to be daring when you choose to retire (do it early!) and then be conservative with your money after you retire to make sure it lasts.

This is really a sharp insight, and one that I've just come to myself, but mostly because of a miserable work situation that is forcing me out of my comfort zone. My natural inclination is to take "less risk" and retire a little later. The job is making me rethink that strategy.

For example, if you find that healthcare is eating you up then get a PT job with health benefits.

Are PT jobs with health benefits readily available? I have a big concern that such jobs are hard to come by.

-

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Author: SloanT Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 266 of 5084
Subject: Re: Funding future needs Date: 8/9/2003 5:51 PM
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tmeri asks:Are PT jobs with health benefits readily available? I have a big concern that such jobs are hard to come by.

I know that Starbucks and Wal-Mart both provide health benefits to PT workers who work at least about 25 hours per week. I am sure that most national retail stores are similar. I know this isn't an ideal scenario, but it's a far cry from going hungry or liquidating your investment portfolio.

st

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Author: Crazyinlovefool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 274 of 5084
Subject: Re: Funding future needs Date: 8/10/2003 4:30 AM
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Are PT jobs with health benefits readily available? I have a big concern that such jobs are hard to come by.

I've noticed that businesses that hire alot of college students tend to offer benefits for p/t work. Probably because most students don't use them. For instance in NYC, most large bookstore chains and theater companies.

Crazyinlovefool

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Author: cattleman22 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 328 of 5084
Subject: Re: Funding future needs Date: 8/12/2003 2:50 PM
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{{My feelings about how much is enough is pretty similar to yours. I think the risk of continuing to work is as great as the risk of running out. Primarily because you can always take steps to avoid running out, but you can't go back and start earlier if you worked too long. }}

I do not think these risks are the same. I think the risk of running out is much greater. If a person runs out of money when they are reaching the end of their life, they ar facing increased health costs, increased nursing home costs and very fews way to go back to work. I think it is irresponsible to quit work one year earlier if it dramtically increases your chances of having to freeload off of society to pay for your late stages of retirement.


c

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Author: SloanT Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 331 of 5084
Subject: Re: Funding future needs Date: 8/12/2003 3:32 PM
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c:I do not think these risks are the same. I think the risk of running out is much greater. If a person runs out of money when they are reaching the end of their life, they ar facing increased health costs, increased nursing home costs and very fews way to go back to work. I think it is irresponsible to quit work one year earlier if it dramtically increases your chances of having to freeload off of society to pay for your late stages of retirement.

I agree that the downside of running out is far greater than of working another year. However, it is also very controllable and I think it's a calculated risk. There is ample evidence that the returns on your portfolio in the first 5-10 years pretty much dictate your survivability. So, you will know pretty early on whether or not it's smooth sailing or whether you need to go find a job with benefits. Working part-time at even a minimum wage job can really help your portfolio survival, I think its a valid option if things start to fail. Now, blindly staying put in retirement when you know your portfolio will probably not survive is irresponsible, but that's a different issue.

If you work 3-4 years extra to be more comfortable with your decision you can never have those 3-4 years back. If you retire too early and you have to go back to work for 3-4 years it's essentially a wash.

st

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