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Author: CarefreeCat Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: On the Brink of Retirement Date: 5/26/1999 12:53 PM
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We will retire in 4 months...85% of retirement funds are in a Growth Dividend fund, 15% in tech stocks. Over the past 5 years we have done EXTREMELY well, and are very happy with the results...but now on to the future of a fixed income, ..ah...What to do, what to do....Do we leave it all there, expecting the normal ups and downs, (the downs affecting our confidence considerably) or do we place 85% of it in tax free triple A insured Bonds??? Any advice??
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Author: Dylander One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10786 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 1:47 PM
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I did a little math concerning retirement financing and came up with a rather interesting observation. It is interesting in that I didn't see it earlier, and that it is applicable no matter how much you have to retire on. There appears to be a magic number to determine if you have saved enough to retire on, and/or how aggressively do you have to invest what you currently have. You need to know the following:

1) What percentage of what you have are you going to withdraw per year.
2) What is the rate of inflation per year.

Now we all know that #2 is pretty hard to calculate, but on a year by year basis you can make a pretty good guess. If you add #1 and #2, then that is the rate of return you must achieve with your investing to 'break even'. Of course, this doesn't take into consideration the fact that some people would like to 'spend down' some of the principle, but what it will give you is a ball park value to determine if you have saved (or are saving) enough for retirement, or are you spending your retirement funds too quickly. Hope this helps.

Dylander


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10792 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 2:01 PM
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Greetings, CarefreeCat, and welcome. You wrote:

<<We will retire in 4 months...85% of retirement funds are in a Growth Dividend fund, 15% in tech stocks. Over the past 5 years we have done EXTREMELY well, and are very happy with the results...but now on to the future of a fixed income, ..ah...What to do, what to do....Do we leave it all there, expecting the normal ups and downs, (the downs affecting our confidence considerably) or do we place 85% of it in tax free triple A insured Bonds??? Any advice??>>

Such is the dilemma of the retiree. What you do is strictly a personal choice no different than any other you have made with your investments throughout your life. You pick the vehicles that allow you to sleep at night. For many, having three to five years' income in "safe" vehicles like bonds, CDs, etc., makes sense in retired life. But it's stictly a personal choice we all have to make for ourselves. There just ain't no magic, "One Size Fits All" answer to that question.

Regards..Pixy

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Author: jocave One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10797 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 2:35 PM
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<<<<<
We will retire in 4 months...85% of retirement funds are in a Growth Dividend fund, 15% in tech stocks. Over the past 5 years we have done EXTREMELY well, and are very happy with the results...but now on to the future of a fixed income, ..ah...What to do, what to do....Do we leave it all there, expecting the normal ups and downs, (the downs affecting our confidence considerably) or do we place 85% of it in tax free triple A insured Bonds??? Any advice??
>>>>>

I'd think that 85% in AAA bonds would be a little drastic. Of course, if you have enough retirement assets to generate sufficient income and growth above inflation with 85% bonds...

I'm assuming that you plan on living in retirement for 20-30 years or more. If that's the case, it's quite reasonable to be invested mostly (or even fully) in stocks. Many people suggest cushioning the volitility of this sort of portfolio by holding 3-5 years worth of money in cash (CD's or money market). In good years, you can draw from the stock portfolio to replenish the cash-- in bad years, you withdraw nothing.

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Author: rhecker One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10798 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 2:41 PM
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One thing to keep in mind is that you will need to keep at least some of your savings invested for the long term (at least at first). So don't take it all out of the stock market just because you're retiring.

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Author: Beaver56 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10808 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 9:09 PM
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I suggest you check message 20709 in the Dow Investing/ Foolish Four board. I also found an interesting article at www.efficientfrontier.com titled "The Retirement Calculator from Hell". It is the most conservative I've read. www.morningstar.net has several message boards dealing with investing before and during retirement. Good Luck!

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10809 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 9:10 PM
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If one assumes inflation of 2.5%/year for the next 25 years, basically prices will double. Personally I don't see how it is possible to avoid increases in federal tax rates (someday the economy will go south & politicians will give away money. There is this little problem of social security - despite claims to the contrary the federal budget is "balanced" only because the social security taxes exceed the payouts. This will change in about 15 years.)The cost of living for retired people is reported to rise faster then the cost of living increases the government uses. Health care is one reason.

So I would suggest you get a copy of Quicken Financial Planner. It allows you to change the rate of cost increases, income increases, in corporate 1 time events (like an inheritance), etc. If you find you can get by with no growth investments great. If you do need growth investments the tax consequeneces of the changes you mention may be very significant.

I expect there are other pieces of software that do the same thing, I just happen to know the one I mentioned.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10814 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 11:07 PM
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Lost somewhere in here is an article by Robert Sheard discussing this question and recently revisited by Ann C. Basically, you need 20x's yearly expenses for retirement and withdraw 5% per year. This allows your investments (assuming stocks) to grow and outpace inflation and also gives you a cost of living raise along the way. For example, if you live off of 50k/yr, you need 1M saved. (However, if you have a pension or such that says gives you 40k/yr, you only need to come up with the 10k/yr or 200k saved.) That first year you would withdraw 50k and invest the rest Foolishly. Next year, rinse, repeat, ad nauseum, till death do ye part.

JLC

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10816 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 11:27 PM
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You might look at the Retire Early Study on Safe Withdrawal Rates at the following link:

http://home.earthlink.net/~intercst/reindex/html

The maximum "100% safe" inflation adjusted withdrawal as a percentage of your inital balance varies with the length of your pay out period. If you want to make your money last 50 years, it's 3.37%. A 20 year pay out period allows for a 4.75% "100% safe" withdrawal rate.

If you want to accept some risk, the "90% safe" values are 4.56% for a 50 year pay out period and 5.26% for a 20 year pay out period.

intercst

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Author: zgriner Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10817 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 11:30 PM
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I would like to tie a few of the posted ideas together.
- Some research has shown that a portfolio, fully-invested in stocks, using historical inflation and stock return numbers, will last forever if you don't draw more than 5-7% a year from it. The best way to do this is to start with a fixed amount that is 5-7% of the current portfolio value. This amount does not change from year-to-year, except to be adjusted for inflation.
- If you are wary of cashing in when the market is down, keep a year's draw in cash and CDs, and 2-4 years draw in CDs/bonds/T-notes, staggering the maturities each year. You live off your cash, leaving your investments alone. Each year you will either replenish your cash if the market is up, or use another year's worth of cash if the market is down.
- If you use the above cash method, you can concentrate on total return, and worry less about income and volatility.

Your investment in a Growth Dividend fund is certainly conservative enough, as long as the dividends are growing, at least as fast as company profits. You may want to consider a Foolish 4 and/or Rule Maker portfolio. The Foolish 4 portfolio is a value/contrarian portfolio, whereas the Rule Maker portfolio is a long-term growth portfolio.

Zev

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10819 of 75335
Subject: Re: On the Brink of Retirement Date: 5/26/1999 11:44 PM
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Zev wrote,

- Some research has shown that a portfolio, fully-invested in stocks, using historical inflation
and stock return numbers, will last forever if you don't draw more than 5-7% a year from it.
The best way to do this is to start with a fixed amount that is 5-7% of the current portfolio
value. This amount does not change from year-to-year, except to be adjusted for inflation.


Zev,

I'd be very interested in looking at this research that shows a 5%-7% inflation adjusted withdrawal allows your money to last forever. Could you provide a link to the article?

I am aware of studies that show 7% withdrawals are sustainable as long as you let your annual withdrawal rise and fall with the Dec. 31 balance of your portfolio and don't adjust for inflation. (See the Efficient Frontier's "Retirement Calculator from Hell")

Regards,

intercst

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10820 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 12:25 AM
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intercst Date: 5/26/99 11:44 PM Number: 10819
I am aware of studies that show 7% withdrawals are sustainable as long as you let your annual withdrawal rise and fall with the Dec. 31 balance of your portfolio and don't adjust for inflation.

I must be missing something here. It seems to me that 90% withdrawals would be "sustainable" under those rules. The amount of the annual withdrawal would decrease rapidly, but ...

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10821 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 12:39 AM
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William Lipp wrote,

I am aware of studies that show 7% withdrawals are sustainable as long as you let your annual
withdrawal rise and fall with the Dec. 31 balance of your portfolio and don't adjust for inflation.

I must be missing something here. It seems to me that 90% withdrawals would be "sustainable"
under those rules. The amount of the annual withdrawal would decrease rapidly, but ...


You're correct! But your portfolio would dwindle quickly in any market.

Here's the link to the "Retirement Calculator from Hell" article:

http://www.efficientfrontier.com/ef/998/hell.htm

intercst



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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10828 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 1:03 PM
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I believe the best way to draw down from a retirement account is to remove a fixed % instead of a fixed amount. You may cap withdrawal at a fixed amount if it goes too high. However, if you withdraw a fixed %, then you must have other means to make up for shortfalls when your account value drops, and you should replenish those other means when your account value and withdrawal raise about what is needed.

Because you are withdrawing a fixed %, you will never draw your account to zero, because after a withdrawal you will always have "100% - withdrawal%" left in your account. I would suggest a withdrawal % of 5-9%.

As long as your investment return averages higher than your withdrawal % your portfolio and withdrawal amounts will increase.

Z-Bar

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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10830 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 2:02 PM
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I pretty much disagree with ZBar's #10828 and with everybody else who advocates that the retired remove a fixed percentage from their retirement reserves each year.

Evidently, unless you want to leave a bunch of money to those ungrateful leeches, your children, you want to make sure the money runs out just shortly after the heartbeats do. The trouble is, if you follow a percentage rule, once you have spent yourself down to $2000 and have to live on 5 - 9% of that for the next year, them extra heartbeats may be onerous.

ZBar's last paragraph is saying, effectively, live off the growth and dividends. That's fine, except most people are not that wealthy.

It seems to me that most retired people need an absolute dollar amount. Of this will be adjusted for inflation and special circumstances like sickness. And, you can argue that the excess of percentage withdrawals will be transferred somewhere else and not spent. Nevertheless, it seems to me the percentage withdwawal idea is bad conceptually.

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10831 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 2:20 PM
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ZBar Date: 5/27/99 1:03 PM Number: 10828
if you withdraw a fixed %, then you must have other means to make up for shortfalls when your account value drops, and you should replenish those other means when your account value and withdrawal raise about what is needed. ... I would suggest a withdrawal % of 5-9%.

I'm assuming the "other means" would be cash equivalents. To implement this strategy, you would need to know how much of the portfolio should be in the cash equivalent account. Have you made any effort to determine the size of this account yet? And would 9% mean 9% of the stock portfolio, or 9% of the whole portfolio?

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10832 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 2:40 PM
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JABoa Date: 5/27/99 2:02 PM Number: 10830
It seems to me that most retired people need an absolute dollar amount.

Most people are retired on barely enough to get by, so most need an absolute dollar amount. It is my hope to retire on an income much larger than I need. I think most Fools are aiming for this, too - the good life in retirement.

So I see a two-tier approach. For those just getting by, your absolute dollar amount is probably right. For those of us expecting to be able to adjust to fluctuations by cancelling the Australian part of our trip and coming straight home after the annual month in Europe, I think a fixed percentage makes more sense.

There is another psychological effect, though. Most people are accustomed to a job with fairly constant income. I've been consulting for 13 years, and often see income drop by substantial amounts. People new to the phenomenon may find it disconcerting.

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Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10835 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 2:46 PM
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"Evidently, unless you want to leave a bunch of money to those ungrateful leeches, your children, you want to make sure the money runs out just shortly after the heartbeats do."

Wow! Someone doesn't like his children =)

But in all seriousness, how do you know how long you're going to live? What if you think you're going to live 25 years and you live 30? Do you want to have no assets for the last five years? And what about medical technology, and the advances they've made? What if they extend your life even longer?

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Author: vargaj Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10837 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 3:47 PM
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This is my take on the problem: As far as how long will I live. I don't even care to speculate. I will chose a strategy that allows my nestegg to remain at least constant (inflation adjusted) or grow. I don't think very many people want to put a date on it.

From there, I will plan on spending 5% of my nest egg each year, assume I will make 10%, which allows a 5% increase for inflation. i think the 4% number recommended by the retire early web page people is too conservative and does not take into consideration the fact that adjustments can be made for a bear market, such as getting job, cutting back expenses, and realistic notion that the older you get, the less money for travel etc.

Finally, I will add 1% for a total of 6% because when SS kicks in I estimate that it will be 20% of the amount from my nestegg (20% of 5% = 1%). The rationale is that when SS kicks in at 62, I will have 5% + SS, so instaed of waiting I will start spending that amount now, with an increased chance losing ground in my nestegg before 62, but a reasonably good chance of maintaining after 62.

Joe Varga



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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10839 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 3:51 PM
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I think Tonyw44 makes a good point in #10835. I also agree to a certain extent with WilliamLipp. Certainly, in planning your expenditures in retirement, you have to make an educated guess as to how long they will be needed. I haven't made such a guess for myself yet, but my expectation is that I will look at the mortality tables and my family history and plan to be a 90th percentile survivor. I happen to have enough wrong with me that this is probably a conservative estimate.

Regarding extension of life for its own sake, this strikes me personally as nuts. It seems to me all those gerontology doctors trying to extend life should be forced to read Swift's story of the Struldbruggs, it is in the 3rd book of Gulliver's Travels. Then they should have their NIH grants terminated.

Regarding nasty children, I am a bachelor and have none that I have been told about. I am just extrapolating.

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Author: GrayWulff Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10843 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 6:25 PM
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Wow! This thread really got my attention!

With just two years to go before I retire at fifty-five, I've been looking fairly hard at this problem. I've run a number of spreadsheets trying different withdrawl formulas and different growth parameters. I used normally distributed random growth rates with a standard deviation of 3X the growth rate. For example, an average growth rate of 1% +/- 3% per month. Next I ran a 50 year simulation a couple thousand times. (Mrs. W plans to live forever--I'll be lucky to see 75)

What I found was that a flexible strategy works best. As someone else said here, as long as your growth rate exceeds inflation + withdrawls, you're in fat city. If you control your withdrawls in the first 10 years, that long term growth rate takes over and even a string of bad years won't touch your basic security.

In concrete terms, I plan to start by withdrawing 4% for the first 5 years or so, bumping the amount up to compensate for actual inflation. If money feels tight, we'll work about 6 months a year. That should allow us to get our fill of travel during our 55-60 years. If our investments do well, we can work less. By age 60 it's highly likely that our lump will have grown well beyond our needs. If not, then SS will suplement our income in another two years.

For me, happiness is not spending lots of money. It's having the time to do what I want. As someone else said, we can always come straight home from our summer in europe.

Cheers!
GW

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10848 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 8:51 PM
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<<<ZBar's last paragraph is saying, effectively, live off the growth and dividends. That's fine, except most people are not that wealthy.>>>

You don't have to be that wealthy, just have started early and Foolishly to start with. If you live off a fixed percentage, your yearly income will fluctuate, however, it has a greater chance of growing (as long as the percentage is less than the investment return). If one were to live off 5% and recieved 11% (avg. S&P 500 over past several years), after a few years, that 5% is much more than the fixed amount adjusted for inflation.

JLC


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Author: Eski3 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10851 of 75335
Subject: Re: On the Brink of Retirement Date: 5/27/1999 11:37 PM
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<<<ZBar's last paragraph is saying, effectively, live off the growth and dividends. That's fine,
except most people are not that wealthy.>>>

Wealthy or poor, it has no bearing on whether a fixed amount or a percentage is advisable. If your nest egg is small, you'll have to make due with either a small fixed amount or a percentage that nets a small amount.

On the other hand, someone with a smaller amount saved is more likely to be forced to consider a fixed amount or percentage that will end up depleting capital if the income just doesn't pay the bills.

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Author: 4814R Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10859 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 10:35 AM
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I'm in the same boat, 64, retiring in 7 months, near to 7 figures in Folish Four and 55% in Gro Inc. Last year Gro Inc did 28% while Dogs of Dow I had did only 15. Fortunately this year I changed to FF and cashed it out in april at about 23% and went to money market for rest of l999 or will reenter if major correction occurs. I don't like the idea of bonds but with no pension , investing in 100% stocks might give me indigestion. Long term stocks average gain 12%. 5 years you refer to were unprecedented, so to return to market average (according to the efficient market principles), we'll se some -5 to plus 3 maybe in next 5 years. I think I'll stick with foolish four and when I get 24% or so during the year cash out to money market and reenter every January.

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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10862 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 12:04 PM
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For the average American, this thread is almost a moot point. I am looking at the Statistical Abstract of the United States for 1993 (it's the latest year I have, sorry). Table 753 says that the median net worth of white families in 1989 was $58,500 in 1989 dollars. For nonwhite and Hispanic families it was $4000. For retired people over 55, it was $94,100.

To convert to today's dollars you probably want to multiply by 1.5.

Even so, it is clear that the median couple cannot live an expected lifetime on their assets, no matter what the withdrawal schedule. That is why Social Security is still so important.

Of course, Fools are planning to be up there in the 90th percentile, not at the median.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10864 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 12:16 PM
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JABoa wrote,

Even so, it is clear that the median couple cannot live an expected lifetime on their assets, no matter what the withdrawal schedule. That is why Social Security is still so important.

Of course, Fools are planning to be up there in the 90th percentile, not at the median.


Actually it's probably more than the 90th percentile.

The median family income is somewhere around $45,000 per year. If we assume that a 4.5% withdrawal rate is "safe", then you'd need $1 million in assets (in addition to your home) to replace your income (assuming no social security or pension.) I suspect the $1 million mark would put you in the 97th to 98th percentile in terms of "investable wealth."

intercst

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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10866 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 12:39 PM
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<<ZBar's last paragraph is saying, effectively, live off the growth and dividends. That's fine, except most people are not that wealthy.

It seems to me that most retired people need an absolute dollar amount. Of this will be adjusted for inflation and special circumstances like sickness. And, you can argue that the excess of percentage withdrawals will be transferred somewhere else and not spent. Nevertheless, it seems to me the percentage withdwawal idea is bad conceptually. >>

If someone has been following and investing using the Motley Fool's methods then I feel that they can use the fixed percentage. If you do not have enough to use the fixed percentage then I feel you need to work longer. Because if you use a fixed amount, you may end up drawing down your principal and then you are simplly gambling on how long you are going to live. Perhaps a life annuity might be best (I hate annuities).

However, for anyone who has a long time to live (I am planning on retiring next year at 45), I believe I must plan on retiring on a fixed percentage.

Z-Bar

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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10867 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 12:42 PM
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<<ZBar Date: 5/27/99 1:03 PM Number: 10828
if you withdraw a fixed %, then you must have other means to make up for shortfalls when your account value drops, and you should replenish those other means when your account value and withdrawal raise about what is needed. ... I would suggest a withdrawal % of 5-9%.

I'm assuming the "other means" would be cash equivalents. To implement this strategy, you would need to know how much of the portfolio should be in the cash equivalent account. Have you made any effort to determine the size of this account yet? And would 9% mean 9% of the stock portfolio, or 9% of the whole portfolio? >>

I will be withdrawing a fixed percentage of my retirement account (IRA). The "other means" will be money available outside my retirement account.

I feel I will need 1-2 years income in this account to make up for shortfalls from my IRA).

Both of these investments will be primarily invested in stocks.

Z-Bar

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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10868 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 12:50 PM
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<<For the average American, this thread is almost a moot point. I am looking at the Statistical Abstract of the United States for 1993 (it's the latest year I have, sorry). Table 753 says that the median net worth of white families in 1989 was $58,500 in 1989 dollars. For nonwhite and Hispanic families it was $4000. For retired people over 55, it was $94,100.

To convert to today's dollars you probably want to multiply by 1.5.

Even so, it is clear that the median couple cannot live an expected lifetime on their assets, no matter what the withdrawal schedule. That is why Social Security is still so important.

Of course, Fools are planning to be up there in the 90th percentile, not at the median.>>

I believe that people retiring will have more than an average American. Also someone following this board should have even more. In addition, company pension plans are moving away from defined benefit plans and more to defined contribution plans (401k's, etc.)

I agree that the amounts listed above do not provide enough to retire on. If someone is to retire they will need much more. Only the indiviual will be able to determine if they have enough to support the lifestyle they want in retirement. But unless you want to gamble on how long you are going to live, I feel the safest bet on withdrawing from your retirement funds is to withdraw a fixed percentage ( and then I hope you are invested so your investments exceed that percentage so you can live a long life).

Z-Bar

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10869 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 1:09 PM
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Intercst sez:

<<I suspect the $1 million mark would put you in the 97th to 98th percentile in terms of "investable wealth.">>

Ain't no doubt in this Fool's mind about that.

This is a most interesting thread. The arguments have been cogent and to the point. All viewpoints seem to have been presented to date. Therefore, I'll make my only comment:

Ya makes your choices and ya lives with the results. :-P

Seriously, though, it is an issue that each of us has to think through. We may fear running out of money before we do time yet we wish not to curtail current consumption needlessly. Those are not necessarily mutually exclusive desires. IMHO they simply mean that income withdrawal rates must be examined every year in the context of realized and projected returns, expectations of remaining time on this plane, and income needs/desires for the new year. I just don't see the issue as a one-time decision.

Regards..Pixy

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Author: dickie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10872 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 1:26 PM
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I have been retired 16 years and spent all my working and earning life working as a sole proprietor. This is by way of saying whatI have (no real estate), I saved myself. I am fortunate to have retired at a time when the economy was starting an upward trend, and the only thing I did right was to stay invested upon retirement. Our asset allocation has been 50% fixed and 50% stocks. Do not retire to an all cash equivalent position. You may live longer than you think.

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Author: gg361 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10875 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 1:41 PM
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You have to continue to let a large portion of your investments grow, which means you can't withdraw them now and stash them in a bank CD. You should plan as though you will live another 25 years, but enjoy life as though you will only live two more years.

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10878 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 3:15 PM
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ZBar Date: 5/28/99 12:42 PM Number: 10867
I would suggest a withdrawal % of 5-9%.

I will be withdrawing a fixed percentage of my retirement account (IRA). The "other means" will be money available outside my retirement account.

I feel I will need 1-2 years income in this account to make up for shortfalls from my IRA).

Both of these investments will be primarily invested in stocks.


If I understand this correctly, at the "extreme edge" of your suggestion, to get $100,000 per year I would start with $1,111,111 in the IRA and $150,000 in the taxable account, both invested in stocks. This would not have survived without modification if you had started in 1973 and the portfolios matched the S&P500. I took S&P500 total returns from here:

http://www.fool.com/DDow/FoolFourHistory.htm

Late 1972 $1,111,111 $150,000
Jan 73 take 9% $1,011,111 $150,000
1973 -14.66% $ 862,882 $128,010
Jan 74 9% + short$ 785,222 $105,669
1974 -26.47% $ 577,374 $ 77,699
Jan 75 9% + short$ 525,410 $ 29,662
1975 +37.20% $ 720,863 $ 40,697
Jan 76 9% + short$ 655,986 $ 5,574
1976 +23.84% $ 812,372 $ 6,903


In January of 77 I will take 9% of 812,372 = $73,114. I don't have enough money left in the other account to bring the total up to $100,000.

Inflation was non-trivial in this time period, and has been ignored in this analysis. If actually living this, there are many adaptation you could make. But I wouldn't want to start with a strategy that, in my lifetime, would have required you to break with the strategy.

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Author: donniboy Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10886 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 8:49 PM
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If you think your in a risky situation, read on. I am 55 years old and retiring from The Boeing Company. One of the stocks in my portfolio is AOL. Less than a year ago I took around $54,000 out of MSFT stock and put it all in AOL. At one point it had grown to close to $300,000 but has now dropped back to a little over $200,000 (from a hi of $175 a share to about $117 last time I looked). So what to do?

Here's the point. If you believe the country is going to be here tomorrow or 5 or 50 years from now then stock mutual funds are the place to be. Admittedly I am a bit of a 'gunslinger' at my age but if I were you I would divide my resources between an S&P index fund, the Rydex OTC fund and if must have have and income fund the Vanguard GNMA fund is a good choice (currently paying around 6%). I would do it in the following proportions of 50%, 40% and 10%.

Enjoy retirement. I intend to.

don in seattle

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10887 of 75335
Subject: Re: On the Brink of Retirement Date: 5/28/1999 9:04 PM
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donniboy wrote,

If you think your in a risky situation, read on. I am 55 years old and retiring from The Boeing Company. One of the stocks in my portfolio is AOL. Less than a year ago I took around $54,000 out of MSFT stock and put it all in AOL. At one point it had grown to close to $300,000 but has now dropped back to a little over $200,000 (from a hi of $175 a share to about $117 last time I looked). So what to do?

I have also worried about the risk of holding some of the more volatile stocks in a retirement portfolio. See "Safe Withdrawal Rates for Concentrated Portfolios" at the following link:

http://home.earthlink.net/~intercst/reindex.html

intercst

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10907 of 75335
Subject: Re: On the Brink of Retirement Date: 5/29/1999 4:46 PM
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One thing I find ammusing about all these 40-50 year olds taking early retirement, they all talk about living off their money and no work period. What about a part time job? I know that sounds funny at first but you can't play golf 5 days a week. I've been on vacation this past week and it got kind of stale, can't see doing that all year.

What about those part time/volunteer jobs to keep you busy? I'm sure they'd supplement any shortfall.

JLC

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10909 of 75335
Subject: Re: On the Brink of Retirement Date: 5/29/1999 5:01 PM
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JLC wrote,

One thing I find ammusing about all these 40-50 year olds taking early retirement, they all talk about living off their money and no work period. What about a part time job? I know that sounds funny at first but you can't play golf 5 days a week. I've been on vacation this past week and it got kind of stale, can't see doing that all year.

What about those part time/volunteer jobs to keep you busy? I'm sure they'd supplement any shortfall.


I can't speak for those 40-50 year olds taking early retirement, but as someone who retired in his 30's, I don't see anything wrong with playing golf 5 days a week (although I usually only play 2 or 3 times.)

As far as a part-time job goes, the one real luxury I've found in early retirement is not having to "report" to anybody. Having a part-time job kind of puts an end to that.

intercst

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Author: yr2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10913 of 75335
Subject: Re: On the Brink of Retirement Date: 5/29/1999 11:14 PM
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At age 51, I'm going on my second retirement (first one was at age 42). I still have plenty to do, with a large farm, animals and crops. Not at all bored with the lifestyle. Can't fish or play golf all the time, but it's nice not having a boss anymore!

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Author: CJMURPHY Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10923 of 75335
Subject: Re: On the Brink of Retirement Date: 5/30/1999 9:41 AM
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Dear Carefree:

Your message does not indicate your age, nor other aspects of your financial situation, but many of the folks, folks not Fools, I know move too quickly to more conservative investment options on retirement.

If you are not too old, or too dependent on the assets in your 401k then you should at least consider remaining as aggressively invested as previously. Fortune favors the bold. Not the stupid, but the bold.

If you must rely on your 401k alone then perhaps a more conservative posture should be assumed, but if like many folks you also have a seperate pension perhaps you can remain more aggressively invested longer. You don't want to outlive your resources but then again you don't want to OUTLIVE them either!

Murf

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Author: larrydanny Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10927 of 75335
Subject: Re: On the Brink of Retirement Date: 5/30/1999 12:21 PM
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I'm close to retirement, myself. I'm fairly educated about the options. My own personal view is to keep about 36 months of assets in a money market fund, or GNMA income fund such as the BGNMX fund(American Century BGNMX), for a rainy day, with the rest in the market in the form of stocks and bonds(or bond funds). The 36 month account would serve as your living expense account, so that you wouldn't have to sell depreciating stock or bond assets during a bear market. But keep a significant amount of stocks to protect from inflation(it's not dead), in the form of a mutual fund with low expense ratio(I like Vanguard Total Stock Market Portfolio index fund, with a .19% expense ratio).If stocks continue to go up, like they have in the past, you can liquidate these appreciating assets to live on while they appreciate, and use your Cash money market account or BGNMX fund if the market is heading down. Doesn't this make sense. Keep 10-15% in Europe, 5% in Asia(excluding Japan), and the rest of your stock portfolio in the US, dividing the US portion into whatever makes you comfortable so as to sleep at night. I've been watching and investing in the NASDAQ 100 index fund that can be bought very cheaply on line( symbol: QQQ) which represents the biggest Nasdaq companies such as MSFT and INTC, and other high techies.

Let me know if this sounds reasonable.

Thanks.

larrybrotman1@att.net

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Author: jvanscoy Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10929 of 75335
Subject: Re: On the Brink of Retirement Date: 5/30/1999 6:41 PM
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<<My own personal view is to keep about 36 months of assets in a money market fund, or GNMA income fund such as the BGNMX fund(American Century BGNMX), for a rainy day,>>

If you mean to keep 36 months of income needs in a money account, that is an excellent strategy. I believe 3-5 years of income needs should be kept in a money account. More aggressive personalities would be comfortable with 3 years, more conservative types would favor 5 years. Some people even suggest 7 years, but I think that is too conservative.

Regards, Jim

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Author: amessofcat Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10931 of 75335
Subject: Re: On the Brink of Retirement Date: 5/30/1999 10:17 PM
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I'm getting really confused. Although I'm a new Fool, I have been reading "You Have More..." and have learned one thing. KISS..Keep It Simple Stupid. All the responses I have seen regarding the brink of retirement are anything but KISS. Are you Fools or fools?

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10932 of 75335
Subject: Re: On the Brink of Retirement Date: 5/30/1999 10:22 PM
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amessofcat Date: 5/30/99 10:17 PM Number: 10931
KISS..Keep It Simple Stupid. All the responses I have seen regarding the brink of retirement are anything but KISS.

Criticism is much easier than invention. What do you propose as a simple solution?

I believe in keeping things as simple as possible. But no more so.

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Author: kb9134 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10950 of 75335
Subject: Re: On the Brink of Retirement Date: 5/31/1999 5:45 PM
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I like the fools plan, Rule of 20. Contact Puck for specifics, but basically you figure your costs of living, multiply by 20. Thats how much you need and hopefully how much you have. Leave your funds in stocks, have faith and you just draw out the amount you need each year. That is it in a nutshell, but get the full plan from fools. Good luck.

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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10969 of 75335
Subject: Re: On the Brink of Retirement Date: 6/1/1999 11:14 AM
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<<ZBar Date: 5/28/99 12:42 PM Number: 10867
I would suggest a withdrawal % of 5-9%.

I will be withdrawing a fixed percentage of my retirement account (IRA). The "other means" will be money available outside my retirement account.

I feel I will need 1-2 years income in this account to make up for shortfalls from my IRA).

Both of these investments will be primarily invested in stocks.

If I understand this correctly, at the "extreme edge" of your suggestion, to get $100,000 per year I would start with $1,111,111 in the IRA and $150,000 in the taxable account, both invested in stocks. This would not have survived without modification if you had started in 1973 and the portfolios matched the S&P500. I took S&P500 total returns from here:

http://www.fool.com/DDow/FoolFourHistory.htm

In January of 77 I will take 9% of 812,372 = $73,114. I don't have enough money left in the other account to bring the total up to $100,000.

Inflation was non-trivial in this time period, and has been ignored in this analysis. If actually living this, there are many adaptation you could make. But I wouldn't want to start with a strategy that, in my lifetime, would have required you to break with the strategy.>>

You are correct that at the "extreme edge" this strategy did not work. Starting at the worse possible (historical) point, with the highest %, the plan did not provide enough. That is why any plan must continually be monitored. I am retiring next year and am using 8% and the amount being withdrawn exceeds what I will need. In other words I will be contributing right away to the "other means" pot. If, like in 1973, returns are immediately negative, the amount withdrawn may not be enough and I may need to return to work (after all I am only 45). But much more likely, as long as I'm not starting at the worse possible time, returns will be enough to meet my needs and provide for increases to keep up with inflation.

Z-Bar

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Author: ZBar Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10971 of 75335
Subject: Re: On the Brink of Retirement Date: 6/1/1999 11:19 AM
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<<One thing I find ammusing about all these 40-50 year olds taking early retirement, they all talk about living off their money and no work period. What about a part time job? I know that sounds funny at first but you can't play golf 5 days a week. I've been on vacation this past week and it got kind of stale, can't see doing that all year.

What about those part time/volunteer jobs to keep you busy? I'm sure they'd supplement any shortfall.>>

I do plan on playing and working on golf (and tennis) 2-3 times a week. I also plan on being active at church and in the community with kids sports programs. I also will have time to be able to follow my own kids activities (2 are in sports, 1 in singing and plays). I had a little time off between jobs 4 years ago and (without golf, tennis, and being online) I was plenty busy. It was anything but stale.

Z-Bar

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10973 of 75335
Subject: Re: On the Brink of Retirement Date: 6/1/1999 12:39 PM
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ZBar Date: 6/1/99 11:14 AM Number: 10969
You are correct that at the "extreme edge" this strategy did not work. Starting at the worse possible (historical) point, with the highest %, the plan did not provide enough. That is why any plan must continually be monitored.

I'm still a few years from retiring, but I'm taking an interest in draw down plans ways to evaluate them. I've been leaning toward plans that are completely safe in terms of the historical performance, reserving the monitor and adjust capability to cope with scenarios even worse than history. I've even been pondering the meaning of "20% worse than history." If I understand your attitude, you are comfortable with a strategy that would only have worked unmodified 80-90% of the historical start dates, and dealing the the other 10-20% if they arise. I'll be pondering that tradeoff.

I am retiring next year and am using 8% and the amount being withdrawn exceeds what I will need. In other words I will be contributing right away to the "other means" pot.

You probably have not cast your plans into a set of rigid rules, so my attempt to capture your rules is probably futile. I think the hard part of the plan, whether rigid rules or flexible guidelines, is figuring out when you have enough safety and can
increase the spending amount. I had thought that your rule was that as long as there was 1-2 years money in the 'other' account, you were safe to spend the rest of the draw down. It sounds your real plan may be that 1-2 years is good enough to start, but you need more before you increase the spending.

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Author: Moneymoover Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10974 of 75335
Subject: Re: On the Brink of Retirement Date: 6/1/1999 8:50 PM
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Wow! Several interesting posts on this subject. The bottom line of everyone is "I don't want to run out of money". A financial planner showed me a very interesting program using life expectancy, inflation, all sources of retirement income, what you want for an after tax income. You supply your own rate of inflation and rate of return figures. An asset base of $1.2 million, 3% inflation, and 8% annual rate of return will provide $100,000 AFTER TAX income. Altho I'm 53 and retired, I plan to keep fully invested with 90% in stocks. I learned a long time ago you want short term money, intermediate term money, and long term money for building wealth. I think this concept makes a lot of sense in retirement as well. I like the idea of developing a process of pulling out a percentage of funds over and above an established base of say $1.2 million. I will likely use mutual funds and index funds for the short term pools of money. This is also a method of building up a cash reserve to buy back in during market retreats. Obviously your strategy will mirror or comfort zone with being in the market. I think it is imperative that we think in terms of after tax income.
Just some thoughts-
John

John

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