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Author: warrl 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: of 5069  
Subject: Re: Investment target for FIRE Date: 1/27/2004 7:53 PM
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I have assumed returns of inflation + 2% on my invbestments while planning my FIRE goals. From that point of view, I have invesetd mostly in index funds since over the very long period, they should provide returns better than inflation. What do you think of this number? Too aggressive? Too defensive?

Quite defensive.

Whether it's TOO defensive is up to you. The more defensive you are, the more money you have to save up before you're ready to retire = the longer you have to keep working. The less defensive you are, the more chance that you'll have to go back to work sometime after you retire.

With a portfolio of 70% (plus or minus 5%) S&P500 index funds, and the balance in a Treasury index, you can draw something like 3.9% of your initial portfolio balance - adjusted for inflation - each year. On that basis you're in excess of 99% likely to survive the worst 40-calendar-year period in the last 120+ years. In the average case you'll be getting steadily richer, AFTER adjusting for inflation.

(That's the optimum with Treasuries as your keel. Using in their place about 40% I-bonds will allow a higher withdrawal amount with equal safety - but with a lower expected balance at the end of the period.)

And who says you have to adopt ONE level of safety for ALL of your portfolio?

You figure you need $25K to just get by, and want to be paranoid - sure, build up the $1.25Million portfolio to provide it with a 2% withdrawal.

But you think another $25K would be comfortable, yet you are willing to take some risk there - so build up an ADDITIONAL $625K to provide it on a 4% withdrawal.

And another $20K for luxuries would be nice, but you're prepared to skip it some years or see it deplete. So add another $350K to support that on a 6% withdrawal - reduced by some factor to improve this segment's ability to recover.

In good years you're looking at $70K, in bad years $50K, and if things take the proverbial handbasket cruise for a couple of decades running you might eventually be left with only $25K a year. All adjusted for inflation. Yet the EXPECTED outcome is that you just keep getting richer and richer FOREVER. With a portfolio of $2.225Million.
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