Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (21) | Ignore Thread Prev Thread | Next Thread
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Rate of withdrawal Date: 2/8/2005 9:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
This article suggests that you can withdraw up to 6% a year if you have a substantial percentage in stocks. For the risk inclined I suppose. (or desparate?)



This is from this source:

http://money.cnn.com/2005/02/04/pf/magpl_monday_updegrave_0503/index.htm






Make sure your money lasts

A new strategy to tap extra cash in retirement is appealing -- but may be risky.
February 7, 2005: 10:18 AM EST
By Walter Updegrave, MONEY Magazine




Monte Carlo Analysis Trading Software
Test your trading systems and methods with greater accuracy using Monte Carlo...
www.adaptrade.com

Financial Planning - J&L Software
Excellent financial and retirement planning software utilizing Monte Carlo...
www.jlplanner.com

DecisionPro - Monte Carlo Analysis
Download a free trial copy. Monte Carlo simulations run 60 times faster than...
www.vanguardsw.com

@RISK - Risk Analysis Software
Palisade @RISK adds Monte Carlo simulation to Excel for powerful risk analysis...
www.palisade.com


Too racy for retirement?
Safely boosting initial withdrawals to around 6% vs. 4% would require investing 80% of your portfolio in stocks, with significant amounts devoted to volatile small-cap and international issues. By contrast, a more typical retirement allocation might have 50% or less in stocks.


Cash 10%
Bonds 10%
REITs 10%
International stocks 20%
Small-cap growth 10%
Small-cap value 10%
Large-cap growth 15%
Large-cap value 15%



Source: Jonathan Guyton, Cornerstone Wealth Advisors.


NEW YORK (MONEY Magazine) - When it comes to tapping your retirement savings, conventional wisdom holds that you should limit yourself to modest withdrawals of just 4 percent of your portfolio's value a year, adjusted for inflation.

So if you have, say, $1 million socked away and inflation is running at around 3 percent, you'd take out $40,000 during your first year of retirement, $41,200 the following year, about $42,440 the next and so on.

That way you can keep up with increases in the cost of living yet still be reasonably sure your savings will support you over a retirement that could last 30 to 40 years.

Too stingy?
But do you really need to be so parsimonious? A recent, intriguing article in the Journal of Financial Planning by Minneapolis planner Jonathan Guyton suggests you do not.

By boosting the amount that older investors typically keep in stocks and applying strict rules about how money is withdrawn, Guyton's system could allow retirees to tap as much as 6.2 percent of their savings annually without running out of money for at least 40 years.

What's more, he tested this more generous withdrawal rate against one of the most volatile economic environments imaginable -- a stretch starting in 1973 that included a long period of exceedingly high inflation and two punishing bear markets but that also boasted nearly two decades of some of the best stock returns in history. (Guyton projected results for the remaining nine years to conclude that the draws would last 40 years.)

But are you comfortable with it?
Figuring out a way to boost income from savings during retirement is certainly a worthy exercise. But before you start loosening the purse strings, consider whether you'd really be comfortable with the strategy Guyton outlines.

Sustaining that higher 6.2 percent withdrawal rate, for instance, demands that you hold as much as 80 percent of your assets in stocks -- and a pretty volatile mix of stocks at that (see the chart, right). Even a more modest boost to a 5.4 percent withdrawal rate would still require devoting half your portfolio to stocks.

You'd also have to hold a very broadly diversified portfolio, with eight different asset classes. While I'm a big fan of diversification, most retirees, I suspect, aren't quite this meticulous about spreading their money around.

Adding another layer of complexity, Guyton's system involves strict adherence to a particular pecking order for withdrawals: First you sell off gains in profitable investments; then you pull money from bond holdings; as a last resort, you draw money from stocks that had a losing year.

"You want to avoid selling equities after a down year so you can give them a chance to recover," explains Guyton.

If your overall portfolio suffers a loss in any year, you'll also have to forgo your inflation increase the following year. And no matter how much the consumer price index might rise, you can never boost your draw by more than 6 percent in any year.

Nice theory, but in practice?
In theory, I agree with these rules. Limiting withdrawals during tough economic times, for example, makes perfect sense. I'm just not sure how diligently investors will follow them year in and year out.

I'm also wary of drawing conclusions from research based on any historical period, even one as challenging as 1973 through 2003. Before I considered using any system to tap more cash from my savings, I'd want to see what's known as a Monte Carlo analysis, basically a stress test of that withdrawal rate performed by running it through thousands of computerized simulations of different economic and investment conditions.

Guyton has told me he's considering doing just that. Until we see this more nuanced research, however, I suggest sticking with the traditional 4 percent withdrawal rate.

True, by limiting your draw you might end up spending less money in the early stages of retirement than you could have afforded in retrospect. But I'd much prefer to take that chance than run the risk that my savings might simply run out late in my life, just when I need the money most.


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: ziggy29 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: 3062 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 9:39 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
>> Guyton has told me he's considering doing just that. Until we see this more nuanced research, however, I suggest sticking with the traditional 4 percent withdrawal rate. <<

He claims 6.2% could do it, though. It's not clear to me from the article if this 6.2% is also adjusted for inflation.

Also, instead of starting the retirement "test" in 1973, starting in 1966 might have been more interesting.

#29

Print the post Back To Top
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3063 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 9:47 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1

I am thinking that 6% is a safe withdrawal rate if you start at the right time of the market cycle.. where this is I am not sure, but probably at the start of a secular bull (where P/E's are at or near historic lows). Then the compounding growth will raise much faster than your equity withdrawals.

Some other thoughts related to this:

- If you own a property outright, one could accept downsizing this property to raise equity in the event of overwithdrawal from the stock equity account. If this is acceptable to one, then a higher withdrawal rate may also be acceptable (you are essentially taking on risk in your living conditions to have a higher rate of withdrawal- or earlier retirement date)


The difference between 4 and 6% is huge. If you are aiming for $40,000 a year it is 1,000,000 vs 660,000.

$30,000 a year is $750,000 vs $500,000

I'd be interested in looking at some of these withdrawal calculators more closely. 6% would put FIRE much much closer.

Print the post Back To Top
Author: ziggy29 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: 3064 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 9:56 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
>> I am thinking that 6% is a safe withdrawal rate if you start at the right time of the market cycle.. where this is I am not sure, but probably at the start of a secular bull (where P/E's are at or near historic lows). Then the compounding growth will raise much faster than your equity withdrawals. <<

The problem with this is that if you retire at the start of a secular bull, your portfolio has probably been mauled by bears in the months/years just before your retirement date. So the withdrawal amount which would be 6% at the start of this secular bull might have been 4% before the bear market began, especially if the bear is accompanied by high inflation.

Unless, of course, your crystal ball was working flawlessly and told you to move everything into bonds and cash just ahead of the bear market just before your retirement. I don't think mine works that well. :-)

#29

Print the post Back To Top
Author: Volucris Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3065 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 10:58 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 5
You need to read the entire article:

http://www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm

There are some other things you need to do to guarantee a SWR of 6%, such as not increasing your withdrawal in a down year.

A lot of what he says seems to makes sense, but you would be wise to perform the same analysis Intercst did with his SWR research; i.e. run Guytons scenario on numerous 30 year periods.

I like William Berstein's theory of safe SWRs, paraphrased he said it was pointless to shoot for better than 5% because there were to many other things that could go wrong in the world to screw up your plans.

Volucris

Print the post Back To Top
Author: prometheuss Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3066 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 1:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I prefer the good sense of gummy:

consider a different scenario where we decide upon some Minimum annual withdrawal rate ... just enough to pay the bills (and live on bread and water) ...then only withdraw beyond that if the market is good to us.

http://www.gummy-stuff.org/sensible_withdrawals.htm

I am shooting for a little better than bread and water, but my lifestyle includes a number of expenses that I can take or leave (or at least control the costs) like vacation travel and entertainment.

Regards,
Prometheuss




Print the post Back To Top
Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3073 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 4:20 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
That guy truly amazes me. I'm so glad there are folks who like to slog through stuff like that. I also like the "get to spend more up front" approach. We can play now and pay later. I'm all for that.

nmckay

Print the post Back To Top
Author: TheBreeze Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3075 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 7:00 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 7
You need to read the entire article:

http://www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm

...I like William Berstein's theory of safe SWRs, paraphrased he said it was pointless to shoot for better than 5% because there were to many other things that could go wrong in the world to screw up your plans.


I recced your response because it pointed to the article, but I DON'T agree that it's "pointless to shoot for better than 5% because there were to many other things that could go wrong in the world to screw up your plans." The 4% SWR with the 80/20 stock/bond mix (or was it 75/25?) was the one where you didn't run out of money in the 30 year period even if you retired at the worst possible time. Anything else, and there's money left at the end. There was a link recently on REHP where using I-bonds got to 6%, although some assumptions were made. It looks like there are several things that would make 6% possible. Things that jump to mind are:
-Plan to work part time if there's a portfolio hit in the first few years of retirement. If the markets are up over those first few years, no need to work.
-Reverse mortgage the house if absolutely necessary. If you happen to retire the day the bear market starts, you're on the hook. Otherwise, you come out OK.

Things to realize:
1. You don't have to put an immutable plan in place the day you retire, and keep your fingers crossed that everything will be OK. You can make decisions along the way.
2. We take 1% and 2% risks all the time. What's the risk of a heart attack if you stay at your job a few years longer than necessary? If it's greater than 1%, why be paralyzed at the 1% risk in the SWR?

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: moxiepal Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3076 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 7:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I've been wrestling with this question in terms of how it affects paying off my mortgage. At my current projections, I will have four years left on my mortgage when I reach FIRE. If I stick to my safe withdrawal rate of just a smidge over 4%, those first four years are a little tight. If I pay my mortgage off early, I get a lousy "return" on money that would otherwise be going into investments. Instead, my plan is to put the mortgage payoff money straight into my investments and increasing my total goal and my withdrawal percentage for the first four years-- 5.5, 5.4, 5.3, 5.2 is my plan for right now. Then I drop down to 4% and get a raise (if the market is half way cooperative).

This is my plan as of this weekend anyway-- it is a work in progress!

Print the post Back To Top
Author: ziggy29 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: 3077 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 7:26 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
>> The 4% SWR with the 80/20 stock/bond mix (or was it 75/25?) was the one where you didn't run out of money in the 30 year period even if you retired at the worst possible time. <<

I suppose it depends on the age at which you retire and/or the number of years you assume you have left, but it seems like the "sweet spot" in the stock/bond mix is anywhere from 60% to 75% in stocks.

>> There was a link recently on REHP where using I-bonds got to 6%, although some assumptions were made. <<

That requires a lot of assumptions, IMO.

I have about $5,000 (current value) in I-bonds which I purchased in January 2000. At that time, the fixed rate component alone was 3.4%. Today, they yield about 6% with no realistic risk.

Yes, if you can get that kind of deal, assuming you were allowed to buy enough of it, I'd bet it's possible to notch up the SWR to 5% if not 6%. I wish I had another crack at that today with the cash I have ready, believe you me. If only that would have held until I sold that California real estate. Talk about a supercharged emergency fund...

But what's the fixed rate today? 1%, I think? It's a lot harder to make a higher SWR hold up with only 1% above inflation. Even then, it's not a bad place to put a percentage of your worth when you're older and weigh more toward capital preservation, but still...

What a strange world we live in. In January 2000, before the dotcoms popped, people laughed at a guaranteed inflation-plus-3.4% return. Yikes.

#29

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: 0gre Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3078 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 10:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I prefer the good sense of gummy

Good link, this was more or less what I had planned to do on my own but I never really mathed it out the way he did. Although I would probably not withdraw a set % of the "Extra" every year, instead I would simply use the "Extra" as a cap. So I would withdraw 3% for expenses + whatever play money I decide to spend. Alternately dropping the unspent overage into a fixed return account to bank for down years.

I did have a spreadsheet floating around with some of this stuff, I'll have to look it up again.

-- Dennis

Print the post Back To Top
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3079 of 5068
Subject: Re: Rate of withdrawal Date: 2/8/2005 11:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I've been wrestling with this question in terms of how it affects paying off my mortgage. At my current projections, I will have four years left on my mortgage when I reach FIRE.

I dump a lot of money in my mortgage. It is probably stupid, but here is my rational:

1) Any fixed and forced withdrawal requires a huge capital base to support it. Lets suppose the mortgage is $800 a month. This is $9600 a year or at a 4% SWR is 240,000 dollars in equity to support it, assuming no taxes. If you assume 25% taxes then you are looking at 320,000 of capital base to pay for this mortage.

A 30 year mortgage at 5.5% costs $800 a month to pay for a $142,000 house. So you have to have $320,000 in equity to pay for $142,000 of assets. This seems a bit wacked. (Of course, the converse is that at the end of the 30 year period you still have your equity building bigger and bigger). However, if you go through a down market- you can not reduce your mortgage payment and you are forced to withdraw out of your equity base.

2) The house can be downsized and free up cash (or reverse mortgages in emergency old age scenario)

3) If I fail to FIRE, I still want to survive. My wife could work, and I could stay home and do contract work. Having no mortgage would really, really, really help this plan along. I could take a job doing whatever I wanted (still need to work though).


This possible freedom seems worth it... but there is a real cost to it. It is going to take me a couple extra years to FIRE, assuming the markets have anything like the historic 10% growth, compared to the mortgage.

So at the moment, the mortgage is still being paid down quickly (it is a 10 year mortgage with 6 years left).. obviously we could switch to a 30 and get a lot of free cash flow for the stock market, but at this point in time it doesn't make sense to me. Please feel free to convince me otherwise.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
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: 3080 of 5068
Subject: Re: Rate of withdrawal Date: 2/9/2005 12:44 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
1) Any fixed and forced withdrawal requires a huge capital base to support it. Lets suppose the mortgage is $800 a month. This is $9600 a year or at a 4% SWR is 240,000 dollars in equity to support it, assuming no taxes. If you assume 25% taxes then you are looking at 320,000 of capital base to pay for this mortage.

...

So at the moment, the mortgage is still being paid down quickly (it is a 10 year mortgage with 6 years left).. obviously we could switch to a 30 and get a lot of free cash flow for the stock market, but at this point in time it doesn't make sense to me. Please feel free to convince me otherwise.


I am going to adjust your calculations a bit.

The 4% withdrawal rate is the historically-safe INITIAL withdrawal rate for an inflation-adjusted withdrawal that must continue for 30 years.

The portion of your withdrawal that must go to mortgage payments (principal and interest only), need only go for the life of the mortgage. And if you have a fixed-rate mortgage, it need not be inflation-adjusted.

So with only six years of mortgage life yet, you could safely use a MUCH higher withdrawal rate. Probably in excess of 8%.

Now that is for when you are living off your prior savings.

If you're not near retirement, the expected amount you will draw from your investments each year to pay your mortgage, for the next six years, is zero. Even using your overly-conservative 4% withdrawal rate, this means you must allocate $0.00 to the purpose.

The optimum approach is to either:
(1) Refinance your mortgage such that your NORMAL payments will pay it off just before you plan to retire, and toss any savings on your mortgage payments (and any cash you take out) into an investment account; or
(2) Figure out how much extra you would have to pay each month, in order to pay it off just before you retire. Pay that much extra each month, like clockwork, into an investment account.

Safety, in case you lose your job or something?

If your monthly mortgage payment is $800 and you've paid $5000 extra to date on your mortgage, you can use those savings to pay the mortgage for ... um... you can't. You still have to come up with the $800 each month from your income.

But if you've paid the $5000 into an investment account, you have savings. Suppose you've done horribly badly and are down 50%. You still have three months of mortgage payments in the account. On the other hand, if you're up 50%, you have nine months of mortgage payments.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3081 of 5068
Subject: Re: Rate of withdrawal Date: 2/9/2005 4:45 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0

The portion of your withdrawal that must go to mortgage payments (principal and interest only), need only go for the life of the mortgage. And if you have a fixed-rate mortgage, it need not be inflation-adjusted.

Good point. This is where prepaying a mortgage is really a bad idea- before a lot of inflation.

So with only six years of mortgage life yet, you could safely use a MUCH higher withdrawal rate. Probably in excess of 8%.

True. My FIRE date is past the end of the mortgage payments, I wish it were otherwise!

If you're not near retirement, the expected amount you will draw from your investments each year to pay your mortgage, for the next six years, is zero. Even using your overly-conservative 4% withdrawal rate, this means you must allocate $0.00 to the purpose.

I don't think 4% is overly conservative for someone who has a 30 year mortgage. If I were planning the finances of an elderly person, I would not plan for an 8% withdrawal rate from their equity base. The fact is- every financial scenario assumes that in the worst case one could cut back on some expenses. A fixed expense is, by definition, not cuttable. Therefore, an overly aggressive withdrawal rate will severly punish the portfolio in a protracted bear. The mortgage would basically kill their entire savings with an 8% withdrawal rate.

I would be curious to see some more robust data on this- anecdotally though much of the retirement literature I read recommends strongly to pay off the mortgage. Curiously, I never see studies to back this up, and I have accepted it as truth due to the severe punishing nature of high fixed withdrawals against an equity portfolio. Obviously if you got a government backed security at higher than the mortgage rate that would be preferable, but good luck finding that.

You are questioning this presupposition which is a good thing to do from an intellectual framework, but I am not convinced that a high withdrawal rate for a mortgage is a good thing, it seems much better to pay off the mortgage than assuming that risk.

The optimum approach is to either: (1) Refinance your mortgage such that your NORMAL payments will pay it off just before you plan to retire, and toss any savings on your mortgage payments (and any cash you take out) into an investment account;

Here it seems you are implicitly agreeing that paying off the mortgage before retirement is a good thing.

In any event, I wholeheartedly agree that maximizing portfolio gain will take place with a large stock component, and further one can normally beat the return from a mortgage within the market.

Your use of the term optimimum I have to add the caveat: from a particular perspective of risk is true. I look at the mortgage as a bond- it is returning me a fixed rate of return which reduces overall portfolio volatility. It also serves as a job hedge in multiple ways. I perceive my employment to be unstable- every month the mortgage drops allows a better opportunity to sustain our lifestyle without moving and with a lower salary. If I do get cut and finances get squished- it will be refinanced out to a 30 year loan.


If your monthly mortgage payment is $800 and you've paid $5000 extra to date on your mortgage, you can use those savings to pay the mortgage for ... um... you can't. You still have to come up with the $800 each month from your income.

However, the new refinanced rate is much lower for lower cash flow.


But if you've paid the $5000 into an investment account, you have savings. Suppose you've done horribly badly and are down 50%. You still have three months of mortgage payments in the account. On the other hand, if you're up 50%, you have nine months of mortgage payments.

True enough. The horrible loss may not be that horrible after all, and this is worth considering seriously. That is to say- it may be preferable to lose half the equity in the market and still yank it out to pay off the mortgage if it is a large enough pot and it gives a much pulled in target date for FIRE. From my perspective though, it will bring in the FIRE date about 2 years to perform such a stunt. Since I am supporting a family, this risk seems too high. If I were single, I would consider it in a heartbeat.



Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: alstroemeria Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3083 of 5068
Subject: Re: Rate of withdrawal Date: 2/9/2005 8:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
There's another way to handle the mortgage issue: by the time you retire, sell your home and buy another for less than the existing equity. In our case, at age 52 we sold our San Francisco condo and bought a house between Charleston SC and the beach (from one great place to another!).

Although we can just about afford to retire (5% WR would give us the income we desire, 3% would be adequate), we're concerned about lower returns and the rising costs of health care, local taxes & fees, travel, and new inventions we might want to take advantage of in the future. So we decided to work slow-lane jobs and let our investments grow untouched until we reach 4% WR for the desired income and 2.4% for adequate (this requires increasing our stash by 25%). DH went from engineering management to college teaching (from 3 weeks off to 4 months off, from 60-hr weeks to 40, from dragging his @ss into work to confessing that he'd do his job for nothing!). His salary is about our desired income. I'm working part time from home for my Silicon Valley employer and told my boss just yesterday that I want to downsize further to emergency backup status, which will probably work out to something like 5, 20-hour weeks per year.

Print the post Back To Top
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: 3084 of 5068
Subject: Re: Rate of withdrawal Date: 2/9/2005 10:27 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I don't think 4% is overly conservative for someone who has a 30 year mortgage.

It is, slightly, if the mortgage is fixed-rate.

In your case I think you said you have 6 years left.

Print the post Back To Top
Author: 0gre Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3090 of 5068
Subject: Re: Rate of withdrawal Date: 2/9/2005 1:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I dump a lot of money in my mortgage. It is probably stupid, but here is my rational:

<SNIP>

3) If I fail to FIRE, I still want to survive. My wife could work, and I could stay home and do contract work. Having no mortgage would really, really, really help this plan along. I could take a job doing whatever I wanted (still need to work though).


This is my thought as well. Most likely you will get better returns by putting money in the market but I figure if my house is paid for that gives me a LOT of security and flexibility. Lose my job? we can live on wife's income and still add to our FIRE account while I look for work. Stocks go up and down (A lot lately) usually more up than down but stuff happens and if something big and nasty happens to the economy and the stock market gets trounced as a result you can't make a house out of the stock certificates in your Freetrade account.

I don't expect this is something that you can really quantify. Personally I prefer the security of being 100% debt free and am willing to sacrafice some amount of my returns to acheive that.

-- Dennis


Print the post Back To Top
Author: WeeBeastie Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3099 of 5068
Subject: Re: Rate of withdrawal Date: 2/10/2005 5:56 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
So we decided to work slow-lane jobs and let our investments grow untouched until we reach 4% WR for the desired income and 2.4% for adequate (this requires increasing our stash by 25%). DH went from engineering management to college teaching (from 3 weeks off to 4 months off, from 60-hr weeks to 40, from dragging his @ss into work to confessing that he'd do his job for nothing!). His salary is about our desired income. I'm working part time from home for my Silicon Valley employer and told my boss just yesterday that I want to downsize further to emergency backup status, which will probably work out to something like 5, 20-hour weeks per year.

Ohhhh I am jealous! I'm slogging out my next two years in full-time employ. It seems that it's worth it to keep going at my high earning full-time job than to try and move into a slower paced job for much, much longer. DH loves his job, so I still have the gargantuan SF bay area mortgage to service, though we will leave the area in the next few years.

Very recently, I have begun to really hate my mortgage.


MortgagedBeastie (2 years, 2 days to FIRE)



Print the post Back To Top
Author: WeeBeastie Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3100 of 5068
Subject: Re: Rate of withdrawal Date: 2/10/2005 6:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I don't expect this is something that you can really quantify. Personally I prefer the security of being 100% debt free and am willing to sacrafice some amount of my returns to acheive that.

This is true. I also think people overlook diversfication when considering mortgage prepayment. Yes, all the historic studies show the market returned 10% blah, blah, blah so you are better off investing the money in the market. But when one already has thousands of dollars a month going into the market, it may make sense to throw a few hundred a month at the mortgage for that "guaranteed return".

If someone had only a few hundred dollars a month for long term investment, I would stongly suggest investing in the market. But when thousands of dollars are already being deposited in the market, it makes sense to evaluate whether any futher "savings" could be put against the mortgage.


DiversifiedBeastie (468 days of work remaining)

Print the post Back To Top
Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3101 of 5068
Subject: Re: Rate of withdrawal Date: 2/11/2005 10:11 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Another consideration to having your home paid off after you FIRE is that if we did have another depression style meltdown of the economy like the 1930's, at least you still have your home. You may loose all your investments and have to work again (if you can find work) but at least you won't be evicted. Sure, you still have to pay property taxes but I seriously doubt the local goverment would kick an elderly couple out in the street if they could not pay. If things got that bad, then deliquent property taxes of senior citizens would be one of the last things the fed, state and local governments would be worried about.

My current FIRE plan is to be able to draw 4% from my designated FIRE investments with a typical 80/20 stock/cash plan as suggested on the REHP board. But I want some additional security all outside of my FIRE investments.

- I plan on having another 5% in natural resource investments (gold, oil etc...).

- I plan on having my mortgage paid off before FIRE'ing

- I plan on having around 30k - 50k in an HSA account

- I plan on having an E-fund of another 30k - 50k that some of which will be kept outside of a bank for easy access. This will serve as my emergency fund to fix things that break but also for big ticket purchases.

If I have to work a few extra years to obtain that, providing I still enjoy my job or at least can tolerate it, then I'm comfortable with that. My time horizon is 7-10 years. A lot can happen in between that time to change my mind but mine too is a work in progress since I have a ways to go.

decath

decath

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: qaddy Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3102 of 5068
Subject: Re: Rate of withdrawal Date: 2/11/2005 2:14 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
>> Another consideration to having your home paid off after you FIRE is that if we did have another depression style meltdown of the economy like the 1930's, at least you still have your home.

Weren't morgtages in the 20's callable? A bank could demand the balance at anytime. This is has is no longer the case and is one item in a large list of precautions to protect against a 30's style depression. A couple of other items include: the automatic exchange freezes that if a percentage threshold is reached by major indexes, and the increased equity requirement to maintain margin borrowing.

qaddy

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (21) | Ignore Thread Prev Thread | Next Thread
Advertisement