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Author: TMFDavidG Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: How does your perspective change? Date: 12/2/2002 3:05 AM
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As some of you may know, Tom and I are in the midst of writing our next book, essentially a money guide for those 45 and over. Toward the end, I want to focus on helping those who are ALREADY retired. I say "toward the end" because most of our readers will be baby boomers still a decade (or more, in this market!) away from retiring, so this section speaks to a minority (but an important minority) of readers, but is still highly worthy of inclusion.

I am quite far away from retirement age, so 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 retired.

In the process of researching and writing this chapter, I'm also happy to track down answers to any questions you may have, though I don't claim to be half the help Pixy is. Otherwise, any and all perspective you can offer, particularly that guided by your own personal experience, or your observations about friends or acquaintances, is most appreciated.

What lesson would you teach a fellow retiree who knows LESS about money and investing than you do?

Foolishly,

David
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Author: 5633 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8183 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 7:10 AM
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Good morning David,

What lesson would you teach a fellow retiree who knows LESS about money and investing than you do?

Perhaps most importantly - be prepared for Murphy to come and visit.

I am 69 and doing the RYR seminar, again. Didn't finish the first time thru because I have a small manufacturer's rep business and was challenged in finding the necesary time. Still challenged in getting the necessary time but am taking it from other, also important activities. Back in 1987 my position as Dir Business Planning was elimated in an acquisition and I "retired" at age 55 - no insurance and a small pension. That was the time of the R/E and S&L crisis. If we had had access to the MF at that time we wouldn't be where we are today - I invested in a business brokering franchise (I had been acquiring and divesting small businesses as part of my responsibilities), and that was not a wise choice in that business climate.

So much for the past. Today we are working thru a market recovery, at least I hope so. Our personal situation was that we had a cash cushion sufficient for 5+ years drawdown back in 2000. We still have much of that cash, but the other part of our future is in dire need of rehabilitation. In 1997/98 I was planning to maintain a rolling 5+years forward in cash equivalents and the remainder in Vanguard's 500 and blue chips. Today I am "just a tad" shaken by the market, but not so much so that I am out of equities. I am looking at a portfolio built, in part, in fact mostly on Vanguard funds modeled along the lines of Dan Weiner's (FFSA) "Conservative Growth" or his "Income" portfolio. Maybe a blend of those. The other, smaller part of our investments will likely be in a very few equities such as CAT, JPM, SBC and ???. This model does not approach the 50/50 or 60/40 ratios so often suggested. Today we are closer to 90/10 equity/cash, and probably will not move far off that for the immediate future. Still trying to make the rolling 5 years forward model work and need to replenish the cash portion of the portfolio. Am I nuts?

My current challenge is getting a forecasting model I feel comfortable with. I would like one that takes into account varying cashflows, both + and -, at varying times in the future, and that can accomodate a variety of growth assumptions for different classes of securities. Maybe I am trying to be too analytical. Don't know. Currently I am trying Bill Swerbenski's "Portfolio Survivor Simulator" <http://www.portfoliosurvival.com/index.htm>, and also building my own model.

Any suggestions.

Ed

PS Used, fully functional, 100% accurate crystal balls always welcomed :-)

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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8184 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 7:27 AM
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Basically, our lifestyle is less expensive than it was before we retired, and we enjoy knowing that we can live comfortably on our retirement and social security income. Using the 4% safe withdrawal rate often recommended, it would take over $1.5 million to generate that income, yet we had more or less discounted it before we retired. It's a comfort to know that we can supplement this income by drawing on our investments, but we don't need to do so. Earlier this year, I did inherit an IRA that carried a MRD.

I wish our financial planner had told me the following before I retired 10 years ago:

1. Start by getting a good grasp on where your money goes. Keep all of your accounts in Quicken and develop detailed categories, with minimal reliance on miscelleaneous.

2. Learn the joy of building simple Excel spreadsheets, beginning with one that projects income from all sources for at least five years. Include a column for expenses that's generated from the budget you make using Quicken. Use a realisitc or conservative ROI (e.g. 7-9%), CPI (at least 3%), and withdrawal rate (3-4%). Try changing the ROI assumption and see the result trickle down the spreadsheet, but don't forget to reset it to conservative before saving -- of course you can save multiple spreadsheets.

3. Learn some of the basics of investing: Read the usually recommended books by Bernstein, Bogle, and Malkiel, lurk on the TMF boards, especially the index and fixed income boards, and question anything you don't understand.

4. I think the Vanguard Balanced Index Fund would be an excellent core investment for most retirees, with small diversions into REIT and EAFE funds as confidence builds.

5. Keep at least a one year draw (3-4%) in a money market fund or one-year CD, or whatever else is safe and liquid at the time the draw will occur.

Most important: Even if you plan to leave the driving to something like the Vanguard Balanced Index Fund, read enough so you understand why that might be a smart thing to do. That is, retirees should understand and be able to defend their investment decisions; especially understand the beneits of asset allocation.

Unfortunately, our financial planner didn't tell us these things -- or I wasn't listening, and it cost a few hundred thousand dollars to learn. I paid little attention to our money, except to earn it and spend it. Did owning six cars really make me happier? No!

db

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Author: jstone02 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8186 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 8:03 AM
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David:

I am 75 and am drawing MRD's from three sources beginning this year. From 70-1/2 up to now I drew from a variable annuity (VALIC) which has been the least productive of my tax shelters. I would not choose annuities if I had it to do again. Perhaps I simply chose the worst one; however, it was the only one offered to us in 1979. Also, it would be nice if we did not have to draw this money in down years like the last two unless we needed it to live on. I'm hoping for changes in that direction. I never know for sure where to reinvest the distributions, so I've simply been putting them in CD's. js

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8187 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 9:36 AM
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I'll agree with the other comments posted about investing, but for me the biggest change has been my attitude about what is essential to my happiness.

Before I took early retirement I had a plan to work another five years and then retire to a life of semi-luxury, spending several weeks a year at high priced resorts. When I decided I wanted out of the rat race early I thought I'd just spend the first five years living a bit less high on the hog and then kick into high gear when I reached my orginally planned retirement age.

With the market drop I've had to tighten my belt a bit more than I'd planned. But I'm enjoying retirement so much that I'm willing to do that rather than go back to work. Also, those expensive resorts, where I loved spending a week when I was still working, don't look nearly as inviting now that my stress level has been reduced. My priority now is to enjoy the life I have, which is pretty good really.

One piece of financial advice. If you're planning to retire early and use SEPP withdrawals as your main income, be sure you have substantial assets outside your retirement plans to cover shortfalls. When I retired I expected SEPP to exceed my cash needs by the third year. Instead with the drop in market value my SEPP is about 20% less this year than in the first year. Fortunately I have good investments outside the retirement plan to make up the difference.

Bill


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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8189 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 10:40 AM
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Stick with the plan that made it possible in the first place. With life expectancy getting longer and long-term care getting more expensive, retirees can't afford to jump in a hole with their retirment funds simply because they've reached retirement age. Yes, retirees should put aside enough of their stash in low risk fixed asset-type investments to shield them from prolonged down markets, but the bulk should remain in equities. For the most part, equities made retirement possible, and it will be equities that keep it enjoyable and secure. In addition, it's even more important for retirees to worry about expenses, since expenses really eat into the income stream from their portfolio.

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Author: 8128 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8190 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 1:12 PM
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RE: Toward the end, I want to focus on helping those who are ALREADY retired. I say "toward the end" because most of our readers will be baby boomers still a decade (or more, in this market!) away from retiring, so this section speaks to a minority (but an important minority) of readers, but is still highly worthy of inclusion.

My wife and I are in the process of retiring and will be retired in July, 2003. I can certainly relate to the "toward the end" treatment of retirement investing. Almost nowhere is this the focus of anyones attention, except those of us facing this problem. Practically all that is written is about how to accumulate wealth for retirement, and almost nothing about how to manage and live off your nest egg. It's not the same and I am somewhat put off by being ignored by the financial writers. How you make your nest egg last as long as you do when you don't know how long you and your spouse might last is not a simple problem and I think it deserves much more attention.

Particularly with today's market I have shifted almost totally to a "live off the dividends" approach. I realize that capital appreciation can provide income also i.e. sell as you need to. However, I have found over and over that for me it is much easier to predict future dividend flows than it is to predict future capital appreciation. Stable dividends free you from the trauma of wild swings in stock prices. There is, of course, real risk in investing for dividends in that dividends are not guaranteed. However, it has been my experience that they are much more stable than the underlying stock prices. I feel more confident with the dividend approach than I would depending on the historical growth of the S&P 500 via an index fund to provide my retirement income needs. Why is there so much confidence that the past record of S&P 500 will continue into the future, some even use the word guarenteed? The past doesn't guarantee the future, certainly not the next 5 to 10 years.

Just one persons opinion.

Jim Sullivan aka 8128

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Author: gapfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8192 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 5:15 PM
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David, you state in #8182:

<<<<<I am quite far away from retirement age, so 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 retired.>>>>>

Shortly after age 40, I made a serious hobby of stock market investing so by the time it came to retirement at age 55 I was both knowledgeable and familiar with some behaviors of the stock market. In fact, by age 47 I was spending more time on studying the stock market than in my regular job and switched to a "half-time" job at my regular employment in R&D. I had intended to "retire" to investing.

This combination makes me quite different than many retirees, in that I did not make use of IRAs or any of the tax deferred plans beyond the stock purchase plan where I removed all stock once it was vested. Until retirement I was about 130% in equities (i.e. I used margin). As I announced (in Oct. '87) my upcoming retirement, the market dropped drastically, especially for me on margin. Thus, the first major policy shift was to get off margin by retirement in January of 1988. Since my pension would only be $250 a month, I looked to secure alternate income and settled on a 7.75% unitrust through a major charity. That was a bad choice in that the charity did not follow my instructions. (See postings #10, 11, and 14 in this thread for details.) I later used pooled income funds in another charity to provide an income stream greater than our needs.

My primary point is that because I devoted time PRIOR to retirement to retirement financing I have not had concerns in retirement. My "success" has been 'long term buy and hold' with Gap, Inc. stock, putting some into pooled income funds each year. Once retired, I put most new investments into stock or bond funds, but it has been the individual stocks that provided the growth and security. Unfortunately, as far as investing goes, I stopped treating it like a business as I had done before retirement. Instead of valid research as I had done before, I have "played" at it and have made numerous poor decisions. That is what happens if you treat a 'business' like a 'game.' However, as in '87, I did not decide to 'switch' holdings just because of a drop in the market. I have been tempted to sell the bond funds in the last two months, but have not done so yet.

David, I hope that the emphasis can be made in the book that it is perhaps as important to plan retirement as another "business" as much as one's career is. My financial rewards from 33 years in business was that $250 per month pension, health insurance, and eventually social security coverage. My "hobby" income is above $5,000 a month. For me it was a very enjoyable hobby, and I appreciate what the people here at the Motley Fool teach. It is "investing" in our future in many different ways.

Gapfan :-)

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Author: crh310 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8193 of 19380
Subject: Re: How does your perspective change? Date: 12/2/2002 9:11 PM
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Particularly with today's market I have shifted almost totally to a "live off the dividends" approach. I realize that capital appreciation can provide income also i.e. sell as you need to. However, I have found over and over that for me it is much easier to predict future dividend flows than it is to predict future capital appreciation. Stable dividends free you from the trauma of wild swings in stock prices.

I have a position in the American Funds "Capital Income Builder" fund, which has the philosophy of buying only stocks which have increased dividends for the past five years. I don't recall the exit strategy. This fund has done well the last three years, when several others have done a belly flop. It is front-loaded (I was innocent, ok?), and actively managed, but I find I am glad I have it. Confession: The bulk of my "fortune" <sardonic laugh> is in several American Funds. Income Fund of America, New Perspective, New Economy, and CIB are the largest positions. All together, I have done better than the S&P and better than my Vanguard VEXMX over the past three years. (not good, but better than bad, no?)

At any rate I would appreciate comments from oters on the CIB. Anyone have any? What of the concept of buying dividends?

cliff

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8194 of 19380
Subject: Re: How does your perspective change? Date: 12/4/2002 6:41 PM
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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 retired

David,

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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Author: TMFDavidG Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: How does your perspective change? Date: 12/5/2002 2:19 AM
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First: Great thread, everyone. I have learned a lot. I'll probably have more questions! I'll also try to answer a few, where I can. Now....

Ed,

You're both brave and (I think) smart to be maintaining that equity percentage even after this brutal market. Not many 69-year-olds who were invested at that ratio in stocks have maintained their allocations, I can tell you! I think you're well-served to continue the investment into Vanguard Funds. I hadn't known about Dan Wiener (www.adviseronline.com), but I see his Income portfolio has been quite stable through the market downdrafts. Of course, you were sacrificing return during the market updrafts, though that's the idea of an income-based portfolio. As I look over his 10 year returns, I think I understand better now how you've managed to keep a steady hand on the wheel.

I'm not quite clear on what you mean by your "rolling 5+years forward in cash equivalents and the remainder in Vanguard's 500 and blue chips." I understand the 5+ years' worth of cash available to meet living expenses, but if you already had/have the 5+years forward, why are you saying that you're "still trying to get the model to work"?

Have you tried out the planning capabilities of our TMF Money Advisor service, and if so, has that been helpful for forecasts? If not, please tell my why not, as we're always looking to improve our stuff.

Thanks for your perspective, and it seems to me you're doing quite well despite one of the worst 3-year periods in U.S. market history.

Fool on,

David Gardner

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Author: TMFDavidG Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: How does your perspective change? Date: 12/5/2002 2:33 AM
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DB,

That is outstanding advice. What makes it so good is that it was fought for and won... even if, as you say, the fight early-on was costly.

I like the way you closed: That any retiree should be able to "defend," as you put it, his/her chosen financial approach to the post-salary era. Very rationalistic, which I applaud.

It's a pleasure to make your acquaintance and to know that your good sense truly graces these Foolish halls and study carrels!

Best,

David Gardner

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Author: TMFDavidG Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: How does your perspective change? Date: 12/5/2002 3:05 AM
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JStone,

Thanks for sharing your experience. What about the variable annuity has most left you frustrated:

Did you not fully understand annuities as a category when you purchased in 1979?
Or, by contrast, was it the particular annuity that you picked out of the category?

Just trying to figure out whether you don't like them (I don't either, in many cases) because of improper expectations on the front end that have left you disappointed, now that you're better educated (or at least experienced!)... or whether you went in eyes wide open but watched your particular selection disappoint you. I'm also curious who sold you the annuity. I spoke to a 29-year-old female employee of a North Carolina PBS station last year who had been sold one by a good salesman... good in one sense, anyway, as it strikes me as an uncannily pricey and restricting investment for someone her age!

By the way, how has the annuity done relative to your other investments making minimum required distributions this year? Worse, way worse, mildly so, etc.? I'm curious about the ballpark numbers. (Annuities, as you may know, are plagued by what we in Fooldom consider unreasonably high fees, so you may wish as well to familiarize yourself with how much you've been paying in annual fees on this investment, since fees are often a big reason why annuities underperform.)

A final note/thought for you: I don't know if you're familiar with our Short Term Savings Center here in Fooldom, but we obtain what are generally very good rates on CDs via our chosen partner, MBNA. Perhaps you're already opting this way. If not, take a moment out to compare what rates you're getting on those CDs vs. the rates we're getting for participating Fool members:

http://www.fool.com/savings/savings.htm

Probably goes without saying, but I'll say it anyway: When it comes to reinvesting your distributions, I think:

(1) You should consider diversifying a bit more (i.e. taking a bit more risk) with a portion of the money. Some other good investment ideas have been presented in this thread -- think of the Vanguard Balanced Index Fund, for instance. You will be better protected against inflation, which is another way of saying you'll very likely wind up with more money... and

(2) At the same time, you should do with your money only what makes you comfortable. Comfort comes out of the confidence that one understands the choices and has made a good one, the "right" one that fits your psyche, time horizon, risk profile. Despite what I wrote in #1 above, CDs may be the best investment for you.

Foolish very best,

David

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Author: 8128 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8201 of 19380
Subject: Re: How does your perspective change? Date: 12/6/2002 11:05 AM
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Re: rkmacdonald post 8194

Your post clearly illustrates the potential downside of depending on captial appreciation for income in retirement. History has led us to believe that a 4 percent withdrawal rate is sustainable forever if you invest in the broad market. Unfortunately, the folks who claim this failed to believe the warning that past market performance does not guarantee the future. And who knows, the market may recover nicely and prove that a 4 percent withdrawal rate is O.K.

I, for one, am not willing to risk my financial future on that theory. I, like you, have much more faith in dividends than in captial appreciation. My nest egg is currently yielding well above 4 percent in dividend income with a mixture of what I hope turn out to be high quality utilities and REITs. I realize that there is risk in this approach but, like you, I feel that I can be much more assurred of dividends than I can of captial appreciation, particularly in a 5 year or less time frame. As to keeping up with inflation, I have hopes that increases in dividends will at least keep up with inflation. But I know that I need to keep up with what is going on and I may need to restructure my portfolio if and when conditions warrant. Nevertheless, count me as one who clearly falls well on the dividend side of the fence, at least in this market.

Best of luck to you.

Jim Sullivan aka 8128

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Author: buy2win6 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8202 of 19380
Subject: Re: How does your perspective change? Date: 12/6/2002 12:32 PM
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As to keeping up with inflation, I have hopes that increases in dividends will at least keep up with inflation.

Did you choose the dividend paying companies based upon their ability to raise dividends during inflationary times, then ?

b2w


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Author: 8128 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8203 of 19380
Subject: Re: How does your perspective change? Date: 12/6/2002 4:19 PM
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RE:Did you choose the dividend paying companies based upon their ability to raise
dividends during inflationary times, then ?

I would never claim to have the ability to pick companies who could increase dividends during any particular type of economic period. I am not that good. My criteria in general is to choose companies with a past history of both paying and increasing dividends over time. Risk is still there, which is why I said that I expect to have to make adjustments over time as conditions change. I certainly run the risk of investing in companies that might decrease or even eliminate dividends. Should this happen, it won't be the first bad investing choice I have ever made. That's why diversification and/or asset allocation is important, not all your eggs in one basket. I have invested long enough to know that there is no one simple approach that will work for all people in all conditions. I have to keep on learning and adapting. I have only stated what seems to be working for me presently and what looks like to me today will have a decent chance of working into the near term future. My crystal ball has very limited reach into the future.

I share these thoughts because I know how much knowledge I have gained by learning from others and I have enough ego to think that someone might be able to learn from my experiences and opinions. Free advice that may be worth no more than it cost. Use it at your own risk.

Jim Sullivan aka 8128

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Author: buy2win6 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8204 of 19380
Subject: Re: How does your perspective change? Date: 12/6/2002 5:48 PM
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I share these thoughts because I know how much knowledge I have gained by learning from others and I have enough ego to think that someone might be able to learn from my experiences and opinions. Free advice that may be worth no more than it cost. Use it at your own risk.

Jim Sullivan aka 8128


I appreciate your willingness to share. I'm going to be retiring in the next six months, and I have to think seriously about how to generate the 4% income number from my portfolio. Other alternatives seem to be:

1. Convertible bonds - safer yield because debt is always paid before dividends, yet the equity kicker is there.

2. Growth/Bond combination - so called blended portfolio. Problem is, bonds are at the dear end of the price scale right now.

3. Dividend paying stocks - this seems to be a good time because stock valuations are low and yields are up. Downside is that dividends are riskier than bond interest.

4. All Equity/5 year stash - use laddered CDs to create a safe income stream from 20 % of the portfolio 4%x5 years. Historically very safe, but what does the future hold. Good moderate inflation hedge, but high inflation ala '80s is risky.

5. Writing covered options to generate income. Downside equity risk here, and potential loss of upside as well. Generates a healty income stream however. Perhaps the income stream overcomes the disadvantage of limiting upside.

So what to do ? What to choose ?

b2w


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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8205 of 19380
Subject: Re: How does your perspective change? Date: 12/6/2002 6:19 PM
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Author: 8128 Date: 12/6/02 11:05 AM Number: 8201

As to keeping up with inflation, I have hopes that increases in dividends will at least keep up with inflation.

It is my contention that if you choose your dividend stocks properly, you can expect to achieve both dividend increases and equity growth. If you choose correctly, the equity growth and dividends can be both expected to keep up with inflation, and then your portfolio will not suffer loss of inflation adjusted value.

I think if you choose stocks that pay dividends that are too high (ie, much higher than 4%), the underlying stocks won't be able to appreciate in value, and eventually, the dividend will stop growing and then even decrease. Then, you will be left with an equity value too low to generate the income you need and you will be forced to deplete your portfolio.

RK

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Author: TMFDavidG Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: How does your perspective change? Date: 12/7/2002 12:20 AM
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Cliff,

The only additional thought I have for you with your Capital Income Builder fund is just to keep an eye on the turnover ratio. Pop a second browser and look at this page:

http://www.americanfunds.com/servlet/ContentServer?pagename=afweb/shareholder/fund/fundDetail/body&fundNumber=12&title=Capital%20Income%20Builder%20-%20Class%20A

We see the fund has a below average expense ratio (good: 0.67%), and a below average portfolio turnover (listed in the box just below that -- it was 36% for 2002). I don't think you're getting as hurt as so many other mutual fund investors are by the massive hidden cost of capital gains distributions generated by daytrading fund managers, but a 40ish% turnover is still not nearly as good as a Vanguard index fund (typically 10% or below).

As you probably know, the turnover ratio shows the portion of a fund that is "turned over" (i.e. sold and reinvested), and therefore the percentage of the asset base you may be paying cap gains taxes on, assuming the investments were profitable.

Americans investing outside of tax-deferred plans get their savings eaten up every year -- especially good years -- by Uncle Sam, due to this circumstance beyond their direct control: the manager's trading frequency.

Of course, you can control that somewhat. You do so by avoiding investing in funds that turn over, say, 70% or more of their assets.

The 36%-41% turnover that the Capital Income Builder fund has been sporting over the past three years is below average, but still indicates that investors are paying a full capital gains tax on, in effect, the entire 100% assets of the fund over that 3-year period.

Seeking funds that turn over less (i.e. index funds) is the quickest easiest way to avoid this asset "death magnet."

This post was a bit of a digression, just to make a general point -- I don't think the dividend-generating fund you're investing in is any egregious example of what I'm discussing above.

Thanks for your perspective, and your question.

David Gardner

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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8221 of 19380
Subject: Re: How does your perspective change? Date: 12/15/2002 11:01 AM
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As a recent retiree I would make several suggestions to those planning for retirement.

1. Bankers, mortgage companies, credit companies and the like will treat you differently once you are no longer employed. After retiring we moved to a new location and after debating the pros and cons of holding a mortgage in retirement applied for a mortgage. Despite the fact that we have a top credit rating, no debt, and more than enough assets to purchase a home outright, many institutions did not want to extend a mortgage to retired persons or wanted to charge us a higher rate. After much searching we found a mortgage co. willing to give us the normal rate but the paper work was far more extensive than any mortgage we had ever held. What aggrevated the process was that mortgage companies considered retirees with verifiable assets and proven track records more of a risk than young couples with large debt, growing families, and unproven track records.

2. Retirement will cost you more than expected especially in the first few years.
a.We moved to a new location and incurred costs in moving, buying a home, adding improvements and landscaping, buying furniture,decorating, registering vehicles etc.
b.We have spent more on entertainment, joining clubs and groups to meet new friends, and getting to know our new community. More friends come to visit adding to our living expenses.
c.We live near the coast and want to purchase a boat. The costs of owning a boat - gas, insurance, docking, upkeep, safety equipment -increase each year.
d. More free time to enjoy hobbies also increases the $$ spent on those hobbies
3 Unexpectedly family members return home for extended periods of time.
4. Uncontrolable health problems have a nasty way of devasting the best retirement plans.
5. While we consider ourselves as young, active, and interesting others consider retirees as old. A young City Planner when reviewing our new deck plans referred to us "the elderly couple"!. We are not yet 60! We do feel elderly yet others classify us in that manner.

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Author: gym0 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8222 of 19380
Subject: Re: How does your perspective change? Date: 12/16/2002 1:06 AM
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Your note on retiring was right on the
money. The part about the city clerk
calling you an "elderly couple" was his
error, not your age. Remember when you
thought anyone over 35 was way over the
hill.

Wait till young women start opening store
doors for you. That'll really sting!(:

enjoy--------------------gym0

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8223 of 19380
Subject: Re: How does your perspective change? Date: 12/16/2002 9:42 AM
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I don't know your situation, and you may have had very good reasons for relocating, but you could have eliminated most of your first two points if you'd stayed where you were.

Having developed roots here I never considered moving when I retired. So I'm still dealing with the same banker I've dealt with for years. I still have a circle of friends. And I still retain membership in the golf club, etc. where I've belonged for many years.

Winter doesn't bother me anymore. If I want to get away from winter I have the option of traveling south for awhile. If we have a blizzard I have the option of staying home for the day.

I do spend more in retirement because I have more time to travel and for hobbies. Plus I now pay my own health insurance.

As for being called elderly, most people think I'm too young to be retired (I retired at 55). Of course, I wasn't too pleased with the 16 year old at MacDonalds who asked me if I wanted my senior discount. But then I'm part of the generation who said never trust anyone over 30 so what did I expect.

Hope you're enjoying your retirement as much as I'm enjoying mine.
Bill

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Author: Bob91977 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8224 of 19380
Subject: Re: How does your perspective change? Date: 12/16/2002 12:29 PM
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Good topic, David. Changing perspectives.

I retired just over a year ago at age 62. Only 12% of our income comes from the portfolio, a rollover IRA. 47% from pensions and 41% from SS.

1. The primary change is the realization that every nickel withdrawn from the IRA is gone forever. No new money goes in. The only new money within the IRA comes from dividends, interest, or capital gains. In other words we are in the distribution phase. I probably read that before I retired but I guess it didn't sink in.

2. The conventional wisdom is a retiree needs 75% of his pre-retirement income. I found that to be way off the mark. A large part of my working income went to savings, taxes, and job-related expenses (but not tax deductible). We live comfortably on about 40%. Nothing goes to savings or job-related expenses. And taxes are much lower.

3. Getting a handle on expenses helps a lot. I tracked every dollar of cash flow using Quicken for one year. This shows how to economize. For example, do we really need a cell phone that costs $35 a month? Do we really need that second (or third) car?

4. The 4% mantra on withdrawals may be good general advice. But I dunno, that figure may have been invented by hopeful heirs. We withdrew 5.2% this year and our portfolio had a positive return. I could have withdrawn 6%. I think it's important to live well in the Golden Years. That is the period of time in retirement when you still enjoy good health and are able to travel and engage in an active lifestyle. Not to try to maximize a death benefit to some grandkids.

Regards, Bob


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Author: Grumpybiker Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8225 of 19380
Subject: Re: How does your perspective change? Date: 12/16/2002 12:36 PM
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<...Wait till young women start opening store
doors for you. That'll really sting!(:
>

Not really, Jim!
A lot of young women think I'm jolly and my whiskers are cute. Maybe they confuse me with that other guy!
I've always enjoyed having young women open doors for me.

Regards,

Grumpy
http://highwaypoets.org/0011-1.jpg


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