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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41634  
Subject: Re: Early retirement planning Date: 2/6/2007 11:20 PM
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"Let's for fun assume you were 50 years old when you officially retired. Then, when you retired, you could expect to live another 35 years or more. How in the heck do you figure out that you can do that? How do you take the plunge and say, um, yeah, I can live for 30 years on the money I have right now...." - auctionnoodle

It all come down to how much faith you have in the BMW Method. That will come to you over time as you invest sucessfully. It would surprise you how little money I had to begin with, but I was a true believer.

The number of years that I had to live had nothing to do with it. Let's say you can live comfortably on $60,000/year and inflation is 2.5%. That means you will need $142,000/year of income 35 years from now to keep the same standard for yourself. If you can grow your nestegg at 15%/year, you can withdraw 10% per year and also grow your portfolio faster than inflation will devalue it. Thus, a $600,000 portfolio is adequate today for your retirement and you will still have some safety factor.

The problem is in believing that you can gain at that 15% rate. That is something you will need to prove to yourself.

"BMW, you have talked a little about this before, but I would like to hear more - so maybe others would too. Anyone else that's retired, please pipe up as well. I would feel so much better if there was a concrete number that I could say, ok, we've got that number saved up so we're ready. But, I don't believe it's that simple. There are too many variables and those variables are somewhat unpredictable. So, how can you predict that?" - Noodle

The more I study the history of the stock markets, the more I believe the variables are not that unpredictable. They may be wild and crazy for short periods, but they plot a very consistent curve over time. The trick is to stay away from the irrational periods. Better yet, recognize when we are in one and get out before a crash. I think there are far too many people who go burned in the latest bust that the will be hard pressed to get suckered again any time soon. People are doing all sorts of due diligence right now and they are far more conservative than they have been in the past. Look at the NASDAQ chart...it is still under-valued and so is the DOW and S&P 500. The last two are not undervalued by much, but the super-high growth NASDAQ stocks were selling at P/Es of 15 to 17 just a few months ago. That is irrational in the other direction.

Anyway, as I became more confident that I was able to grow my CAGR at above 15%, I felt that I was able to go it on my own with far less Capital than anyone on the Retire Early Board would ever accept. They talk about a maximum of a 4% withdrawal rate. Thus, for a $60,000/year income, you would need to have $1.5 million or more to also have some safety factor built in.

I will tell you about my mother's retirement later. I was sort of forced into the BMW Method by her. I looked at her situation in 1994 and she was in a terrible state. Her estate had a total value of under $300,000 and her house was 50% of that. Meanwhile, she needed to go into a retirement home because she was not able to take care of herself. I sold her house for $152,000 and had to pay $98,000 to get her into an assisted living facility. Her S/S checks paid most of her monthly fees, but I had to generate about $20,000/year in addition.

The first years were easy because she needed about 10% without getting into her principle. In 2001 she fell and broke her hip. She had no Medicare part B, so that took $20,000 out of her nestegg. I will not go into the details, but by 2003, her needs were $6500/month more than her S/S check and she died with an estate of $120,000 in late 2005. I can try to do the math, but I know that her CAGR was well over 15% and the BMW Method showed me how to do it.

I have been meaning to go back over the numbers to establish the way her CAGR varied by year. Of course, from 1995 to 2000 we had that booming market working for us, so Mom was at the right place at the right time. But, I needed more than a 20% CAGR to keep her solvent and the crash of 2000 had to be dealt with. Caterpillar and Philip Morris figured greatly in her survival.

A normal fiduciary would have died if he could have seen what I was doing, but the BMW Method was my guide. All's well that ends well. I will try to put the numbers together and give you better details later...if it would be worthwhile.
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