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Author: xhail One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 748890  
Subject: Retire on $500,000 or less? Date: 2/18/2000 6:11 AM
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We often here of retrirement goals of 1mil, 2mil, 5,even 10, but what about less than $500,00 for those who live below their means and don't need much?That is $12,500-$25,000 personal expenses per year.Anyone with lower goals 0f $250 - 500g? It certainly seems more attainble woth the possibility of attaining more.What if you didn't care about larger returns in the stock market and treated this amount as cash reserves in safer but lower returns like cd's at say a low average of 5% interest and you planned on withdrawing 2 1/2,3, 4 or even 5% each year?
Is this safer or am I missing something? How would inflation affect this pictureWhat about increasing health costs and other costs?.What about the the time factor and years of living?Would you be better off still investing in stocks with higher risks?Just trying to raise some questions and get a thread started on those trying to retire or at least break free on a whole lot less with the possibility of doing so a whole lot sooner.
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Author: dhewie Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4250 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 9:16 AM
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>>>but what about less than $500,00 for those who live below their means and don't need much?<<<

If you think you can do it, then more power to you, but I don't see how it's possible not matter how frugal you are. If you had $500K, and took out 5%, that money would only last you around 20 years, maybe 25 taking account for interest. When do you plan on retiring? Even if you retire at 65, that money will not last if you live to be 90 or more. And I don't see how you could live on $12,500 a year either. That's $1,000 per month, and my necessities (heat, electricity, food, etc.) are about half that. I'm sure you won't be able to make you car(s) last that long, so there goes $10,000+ for one or more cars during that time. And you also need to take inflation into account. According to my calculations, with an average rate of 3% inflation, your $12,500 will be worth about $9,300 in 10 years, and $6,000 in 25 years. I don't think you could live on that unless you want to live in your car, eating cold beans. It could work if you are invested in the stock market, or if Social Security is still around, but I wouldn't count on that.

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Author: luvmylife One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4252 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 9:43 AM
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I think this is an interesting question, especially since there are many LBYMers who read this board as well.

The $500K you mention was my original target BUT I wanted my house paid off as well. As I evaluated my net worth over the years I would include an asset (i.e. car, house) as long as there was a corresponding loan still outstanding. However, once those major liabilities were paid, I only considered my potential income-producing assets as the number I wanted to use as a benchmark.

I think we've discussed earlier that your home equity should only be counted as a potential income-producing asset if you sell and downsize or plan to rent it. So my question is, are you counting the value you have in your home to be part of this $500,000?

For myself, I would not consider $500,000 to be enough if I were still making a mortgage payment. My expenses last year, excluding income taxes, were just under $17,000. I'm hoping to live more frugally than I may need to in these early years of early retirement to give my portfolio some more years to grow. I'm comfortable with that now and certainly consider being able to avoid the alternative (WORK!!!) to be worth it.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4257 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:16 AM
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xhail asks,

We often here of retrirement goals of 1mil, 2mil, 5,even 10, but what about less than $500,00 for those who live below their means and don't need much?That is $12,500-$25,000 personal expenses per year.Anyone with lower goals 0f $250 - 500g? It certainly seems more attainble woth the possibility of attaining more.What if you didn't care about larger returns in the stock market and treated this amount as cash reserves in safer but lower returns like cd's at say a low average of 5% interest and you planned on withdrawing 2 1/2,3, 4 or even 5% each year?
Is this safer or am I missing something? How would inflation affect this pictureWhat about increasing health costs and other costs?.What about the the time factor and years of living?Would you be better off still investing in stocks with higher risks?Just trying to raise some questions and get a thread started on those trying to retire or at least break free on a whole lot less with the possibility of doing so a whole lot sooner.


There's certainly no problem with retiring on $500,000 if you can live on 4% or $20,000 per year.

I had about that amount when I retired in 1994. I kept records of my spending for the previous 3 years and found it ranged from $18,000 to $20,000 annually. Still, even though I was well within the "safe" withdrawal rate, I did about 250 hours per year of consulting work the first 2 years after I retired. I didn't stop until my retirement portfolio had grown to well over $1 million in 1996.

This illustrates an important point. The only reason my portfolio enjoyed substantial growth is that it contained mostly stock. I'd be doing a lot more consulting work today if my portfolio contained mostly Treasury notes and CDs. I still think it's sound advice to maintain 3 to 7 years worth in living expenses in Treasury notes or CDs, but I wouldn't let my allocation to fixed income securities get any higher or lower.

Health insurance costs will undoubtably continue to outpace the CPI. Some folks like Paul Terhorst (author of Cashing in on the American Dream: Retire at 35) self-insure for medical costs. That's more risk than I'm willing to assume. For elective surgery you might be able to go overseas and get the work done cheaply, but what about emergency care? If you have a heart attack, you want to seek treatment locally, no matter what the cost.

intercst



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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4259 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:22 AM
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Hmm. $500,000 works out (by my numbers) to be around $1500 per month, after taxes. Not a lavish lifestyle, but certainly very achievable. This assumes, however, that the money stays invested in the stock market. If you want the added (false?) security of CDs, you're looking at more like $900 per month after inflation.

Take into account something like health insurance (which I for one consider mandatory) at, lets say, $150 a month, and you're down to just $750. That's not too pleasant, to my way of thinking.

The initial target is low, but not unrealistic. I'm personally shooting for a combined total of around $950k to provide an inflation-adjusted salary of around $2250 per month, after taxes and good health insurance (~$300/mo). Many people can (and do) live on less than that.

Having said that, I'm not sure that I will retire when I hit my 'magic number' -- it'll sure be nice to have the option though. There are a few capital intensive things that I'd like to do to set up my non-rat-race lifestyle that I'd prefer to wait and pay cash for. Then again, I'm not sure that I won't have changed my mind by 2007!

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Author: 4gonefool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4261 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:31 AM
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We often here of retrirement goals of 1mil, 2mil, 5,even 10, but what about less than $500,00 for those who live below their means and don't need much?That is $12,500-$25,000 personal expenses per year.Anyone with lower goals 0f $250 - 500g? It certainly seems more attainble woth the possibility of attaining more.

If I were single and had $500K, I would retire in a heartbeat. I would live in much cheaper housing, I would barter my time for meals or other favors with friends (my standard fee for help with moving heavy furniture is beer and pizza). GFs would have separate financial responsibilities.

I think I would still go for higher returns on my investments for two reasons. Risk would be more tolerable for a single person and rewards could be applied directly to expensive habits without going through the spouse filter.

4goneFool


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Author: ariechert 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: 4264 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:49 AM
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This is the situation I am in. I am 46 almost 47 years old. I was more or less forced into early retirement. I had been putting $200/month (for 16 years) in a 403B while working as a lab technician at the University of Tennessee. My 403B had grown nicely to about $206,000. I had worked my way up from $13,800 per year to $28,0000 per year. My female boss (German immigrant) comes in and says I am making too much money and says she can't afford me and has to let me go. So, I try and finish a masters in Education to become a teacher; I finish all the classwork and then FLUNK THE INTERNSHIP because I can't get the kids to pay attention. So, I go back to work in the basement animal facility of the Vet School making $15,000 a year cleaning animal cages. I do that for 10 months and say to myself I can't do this any longer. So, my old boss tries to hire me back at $18,000 a year. I go upstairs and work for her for 1 & 1/2 days and just get up and walk out. I just couldn't do the same work I'd been doing for $28,000 a year for $18,000 a year. I am the king of cheap I actually probably live on around $800/month. I had gotten on the IPS Funds website, while working in the Lab Animal Facilities, and they have a really good annuity calculator, really simple to use and figured out that I could make as much as I was making off my 403B using the 72t distributions as I was making cleaning animal cages. I told my wife I was through. She didn't care as long as I could help with the bills. I was lucky because my wife is a college professor with good health insurance and so I could get on her policy (a biggie!). So now I am living on like $17,000 a year and loving it. I am not really suffering at all. I never did like going to the malls and spending tons of money anyway. I am never going back to work. NOT IN THIS LIFE!

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Author: AstridS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4265 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:52 AM
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I think that retiring with $500,000 or less is entirely possible. It is entirely dependent upon your standard of living. In fact, my mother has retired on less than this. I don't know exactly how much she has, but I know that it can't be even into six digits.

She owns her own home and vehicle, and works when she wants to. For the last 5 years she has worked for half of the year and travelled the rest of it. One year she spent six months in Australia. Retiring has given her the freedom to do what she wants to do, when she wants to do it.

That being said, she is very careful with her expenses. I doubt very much if she spends more than $15,000/year. She has a very large (more than one acre) garden, and barters with some of the neighbors for services and meat. Most of her winter heat is from a wood stove, which she fuels with wood cut on her property.

I agree that it is much easier for a single person to retire on less than $500,000. Only one person's goals and priorities need to be considered: yours.

AstridS

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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4271 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 11:19 AM
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ariechert posted:

My 403B had grown nicely to about $206,000 ...
So now I am living on like $17,000 a year and loving it.

This strikes me as a scarily high percentage withdrawl. Is this indexed at all for inflation? How will it hold up in a prolonged bear market? Not to rain on your parade, but there may be some things to think about here if you don't want to go back to cleaning animal cages.

Of course, you may well have already thought of them! Please don't take these questions as mindless poking, if you have good answers I'd love to hear them!

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Author: windhoven One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4274 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 11:25 AM
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If I were single and had $500K, I would retire in a 
heartbeat. I would live in much cheaper housing, I 
would barter my time for meals or  other favors with 
friends (my standard fee for help with moving heavy 
furniture is beer and pizza). GFs would have separate 
financial responsibilities.


4goneFool,

You have just described my situation! Except that I
own the 4 plex I live in, and the renters carry the
entire mortgage. Hard to live much cheaper when the
rental vacancies are under 2%. Fourty days ago when
I decided I had had enough, my stock portfolio was
around 500K, yesterday I broke the 700K barrier.

If you have the stomach for the risk, 500K is enough,
but you must be aware that there is a big risk with 
that small of an amount. I still need to wait a year
for LTCG to be locked in, in that time I may have 2mil 
or I may need to go back to work, but that is the risk
I am willing to take.

Cheers,
Windhoven on day 3 of RE life


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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4277 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 11:41 AM
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I still need to wait a year
for LTCG to be locked in, in that time I may have 2mil
or I may need to go back to work, but that is the risk
I am willing to take.


This makes it sound as if your entire portfolio is in one recent runaway stock purchase! If so, it is indeed risky -- hopefully you'll end up alright though.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4279 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 11:43 AM
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rjstanford:

ariechert posted: <<<<My 403B had grown nicely to about $206,000 ... So now I am living on like $17,000 a year and loving it.>>>>

"This strikes me as a scarily high percentage withdrawal. Is this indexed at all for inflation? How will it hold up in a prolonged bear market? Not to rain on your parade, but there may be some things to think about here if you don't want to go back to cleaning animal cages.

Of course, you may well have already thought of them! Please don't take these questions as mindless poking, if you have good answers I'd love to hear them!"


An annuity was mentioned in the original post. It is possible that the annuity company is shouldering all the investment risk, with areichert shouldering the inflation risk of a fixed payout and the credit risk that the annuity issuer will remain solvent, but it is difficult to tell from the original post.

In addition, I think that the first quote is also misleading, because areichert also posted "I was lucky because my wife is a college professor with good health insurance and so I could get on her policy (a biggie!)."

Unless his wife is contributing nothing to his support (which we suspect is not true because she definitely provides the health insurance), a reichert is living on more than 17k per year.

Just my $0.02. Regards, JAFO


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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4283 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 11:58 AM
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An annuity was mentioned in the original post. It is possible that the annuity company is shouldering all the investment risk, with areichert shouldering the inflation risk of a fixed payout and the credit risk that the annuity issuer will remain solvent, but it is difficult to tell from the original post.

You're right, I had forgotten about that.

Plugging away at the BHLN ( www.bhln.com ) SIPA calculator, I came up with a $14k annual non-inflation-adjusted annuity (SIPA) for $203k for a 45 year old. It also mentioned:


Your investment is $203,656 based upon our mortality assumptions and the U.S. Treasury yield curve as of February 14, 2000. This investment will provide you with $14,000 per year for as long as you live, beginning on April 1, 2000.

If your annuity is purchased with after-tax dollars, your annual after-tax cash payment, assuming a marginal tax rate of 40.0%, will be $10,533 for the first 38.2 years because the IRS will consider 38.1% of each payment to you a return of your principal . Any payments you may receive after 38.2 years will be fully taxable, reducing your annual after-tax cash return to $8,400 thereafter.

If your annuity is purchased with pre-tax dollars all payments you receive will be fully taxable, reducing your annual after-tax cash return to $8,400 per year.


While that marginal rate could be a little high if this was your only source of income, it might not be in a DINK situation like the one described. Hard to say. Still, between taxes and inflation, I wouldn't want to retire on it!

In addition, I think that the first quote is also misleading, because areichert also posted "I was lucky because my wife is a college professor with good health insurance and so I could get on her policy (a biggie!)."

Unless his wife is contributing nothing to his support (which we suspect is not true because she definitely provides the health insurance), a reichert is living on more than 17k per year.


Another very good point!

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Author: Chipsboss Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4296 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 2:00 PM
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Cheers,
Windhoven on day 3 of RE life


Cheers to you, Windhoven. I think that's REAL life -- retire early and live.

Chips, into his 7th REAL year

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Author: travster One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4298 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 2:12 PM
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We often here of retrirement goals of 1mil, 2mil, 5,even 10, but what about less than $500,00 for those who live below their means and don't need much?


I think a compromise approach might be best here. Have you considered working part-time? If one has a decent earning potential, retirement can happen much, much earlier if willing to work part-time. I think this is an option that folks often ignore (although intercst mentioned this). Also, this enables one to be a bit riskier with the portfolio, giving it a better chance to grow, since you still have a sure income stream coming in. Six or eight months off a year is a great way to transition to retirement, especially for younger folks. Another added benefit is that you are keeping a higher percentage of what you make since you are in a lower tax bracket -- I am still working full-time and am a 50/50 partner with the government. Having more time off will also give you a chance to learn more about investments and you can pursue something that you might not consider when you need your full income.

Probably the main reason that I personally favor the part-time approach, is because I fear (I think I am risk-averse to some extent) that ten years down the road after retirement I will be forced back into the workforce, but my skills will have attenuated to the point of somewhat crippling earning potential. Working part-time helps reduce this risk, as well.

/Travster


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Author: backslash Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4306 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 3:34 PM
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I realize that I might be chastised severely for even bringing up this subject on this board, but nobody has mentioned social security. On a $500K retirement investment fund, I would think you could withdraw a slightly higher percentage for a while, reducing it when SS kicks in. That would allow a somewhat more lavish lifestyle, while still insuring long term availability of retirement funds.

I personally am doing my investment planning as if SS doesn't exist, since I want to have been retired for at least 15 years before I reach the age, but it does make a difference and should be considered. Please don't hit me!

Harley

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Author: phantomdiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4307 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 3:41 PM
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I realize that I might be chastised severely for even bringing up this subject on this board, but nobody has mentioned social security.

Okay, I'll chastise you. Bad Harley! Bad bad bad!

There, do you feel better now? ;-)

On a $500K retirement investment fund, I would think you could withdraw a slightly higher percentage for a while, reducing it when SS kicks in.

It's more like "if SS kicks in," seems to me. But that's as nasty as I'm going to get on this issue.

I personally am doing my investment planning as if SS doesn't exist,

Very prudent. And if it does exist, whoopee! We'll have extra money!

Please don't hit me!

Nah. It's no fun hitting somebody who's already cringing.

phantomdiver
grinning, ducking, and running very fast

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Author: goinfishin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4308 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 3:42 PM
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I personally am doing my investment planning as if SS doesn't exist, since I want to have been retired for at least 15 years before I reach the age, but it does make a difference and should be considered. Please don't hit me!

I think most on this board do their planning as if social security will not exist and if it does, Great, as it will be gravy for some luxury or something.

I agree with you though, it all depends on your faith in government and from the debates that went on here the past few days that seems to vary greatly, but I for one do not believe social security will ever disappear or "collapse". The gov. always has the ability to issue debt for needed money.

Of course the younger you retire the less your benefit will be and the longer you have to wait to get to it. However, if you are willing to count on it, retiring could come much sooner.

As for part-time work, I want to escape the corporate BS and would not even want to be in it part time, but I would consider a few days working at a Hobby Shop or Hardware store to bring in a little spending cash.

Fishin



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Author: 4gonefool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4310 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 3:46 PM
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Harley wrote:

I realize that I might be chastised severely for even bringing up this subject on this board, but nobody has mentioned social security. On a $500K retirement investment fund, I would think you could withdraw a slightly higher percentage for a while, reducing it when SS kicks in. That would allow a somewhat more lavish lifestyle, while still insuring long term availability of retirement funds.

I personally am doing my investment planning as if SS doesn't exist, since I want to have been retired for at least 15 years before I reach the age, but it does make a difference and should be considered. Please don't hit me!


I agree that SS will still be around. So many voters are over 40, that it is difficult to believe it wouldn't. I will be 67 before I am eligible for full benefit and that will hopefully be more than 21 years of "no visible means of support".

I too am not including it (or even my defined benefit pesion) in my retirement plans. It makes sense to make your plan conservative.

4goneFool


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4313 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 4:22 PM
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travster wrote,

I think a compromise approach might be best here. Have you considered working part-time? If one has a decent earning potential, retirement can happen much, much earlier if willing to work part-time. I think this is an option that folks often ignore (although intercst mentioned this). Also, this enables one to be a bit riskier with the portfolio, giving it a better chance to grow, since you still have a sure income stream coming in. Six or eight months off a year is a great way to transition to retirement, especially for younger folks. Another added benefit is that you are keeping a higher percentage of what you make since you are in a lower tax bracket -- I am still working full-time and am a 50/50 partner with the government. Having more time off will also give you a chance to learn more about investments and you can pursue something that you might not consider when you need your full income.

This tax bracket thing is actually very interesting.

My younger brother who works as an actuary in New York told me he did a study of his "optimal tax bracket" and decided he should cut back to working only one day per week. Of course, New York has two or three different kinds of income taxes, so it's probably the "worst case."

intercst







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Author: malakito Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4314 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 4:24 PM
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Of course the younger you retire the less your benefit will be...

Pretty much true, since you'll have a lower "35 highest years of earnings" basis with the SSA.

...and the longer you have to wait to get to it.

I didn't think this was true. I thought you could decide to start getting SS benefits at somewheres between 62 at the earliest and 70 at the latest, with the caveat that the earlier you start, the smaller your monthly benefit. But I didn't think it had anything to do with when you stopped working. Please correct me if I'm wrong.

--malakito.

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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4316 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 4:51 PM
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...and the longer you have to wait to get to it.

I didn't think this was true. I thought you could decide to start getting SS benefits at somewheres between 62 at the earliest and 70 at the latest, with the caveat that the earlier you start, the smaller your monthly benefit. But I didn't think it had anything to do with when you stopped working. Please correct me if I'm wrong.


I think the quoted comment just meant -- if you retire at, say, 52, you'll have to wait 10 years to start receiving Social Security retirement benefits. If you retired at 59, you would only have to wait 3 years.

Phooley

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4321 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 5:26 PM
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If you would condider living in a foreign country, you could retire IN REAL STYLE with $500K. Here's an example of how you could retire in Costa Rica with $500K.

Cash portfolio:
$50K private monthly contract at 3%/month
$50K private compounded contract at 2.8%/month
***************************************************
$100K Total

Stock portfolio:
$400K in an index fund or individual stocks.

The $50K monthly contract will give you a net income of $1500/month to live on while your $50K in the compounding contract will generate you a 39.3% CAGR or $19,650 yearly interest. If you want more current income, you allocate more to the monthly and less to the compounding contract. With $100K in the monthly contract, you'd get a $3000 per month income.

Let's assume that you FREEZE the cash portfolio at $100K and never let it go beyond that. This is what would happen over 8 years assuming a reasonable 18% CAGR for your stocks and that you do invest the extra $19,650 per year into your stock portfolio.

Cash Portfolio:
$100K

Stock Portfolio:
$1,8M

Total Net Worth:
$1.9M

If you didn't add the $19,650 per year to your stock portfolio and decided instead to buy, say, a new car every 2 years, your stocks would grow to $1.5M and your total net worth would get to $1.6M.





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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4323 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 5:29 PM
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galeno posts:

If you would condider living in a foreign country, you could retire IN REAL STYLE with $500K. Here's an example of how you could retire in Costa Rica with $500K.

Cash portfolio:
$50K private monthly contract at 3%/month
$50K private compounded contract at 2.8%/month


This is the key, rather than anything to do with Costa Rica. In fact, if this was available, why put anything whatsoever into the stock market?

Last I remember in the discussions here about it, this was a semi-legal (at best) plan, with lots of "Don't ask questions, just send money" comments attached to it. Has anyone actually determined the legitimacy? IMO its just way to good to be true.

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4328 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 5:44 PM
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xhail writes:
What if you didn't care about larger returns in the stock market and treated this amount as cash reserves in safer but lower returns

An idea for your consideration. The numbers are drawn realistically based on conditions in my area (a rural suburb of D.C.)

Buy 5 single family starter homes outright at $100K each. Rental income including 5% vacancy allowance is ($725/month)(12 months/yr)(5 houses)(.95) = $41,325/year.

Expenses:
Taxes $2100/yr
Insurance $1000/yr
Maintenance, etc. $1000/yr
Total $4100/yr.

Net Cash Flow = $41325-$4100= $37,225/yr.

Depreciation allowed (based on improvements valued at 80% of purchase price) = .8($500K)/27.5 = $14,545/yr.

Taxable income = $41,325 less($4100+$14545) = $22680

Not bad:

$37,225 annual cash flow of which only 60% is declared as income.

You gain any future appreciation and rent increases which are obtained from the properties which have historically equaled or outpaced the overall inflation rate. You will not wake up one morning with your net worth cut in half.

Cash on cash return is 7.4% vice the 4% which can be safely drawn from a portfolio composed solely of equities.

If you don't need all of the money to live on, invest the balance in equities to provide future growth.

This example is over-simplified somewhat for the sake of brevity but amply demonstrates how income producing real estate has the potential to facilitate an early retirement using smaller amounts of starting capial.

Regards,
FoolMeOnce




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Author: goinfishin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4337 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 7:21 PM
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I think the quoted comment just meant -- if you retire at, say, 52, you'll have to wait 10 years to start receiving Social Security retirement benefits. If you retired at 59, you would only have to wait 3 years.


Yeap, that's what I meant.



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Author: galt67 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4338 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 7:52 PM
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Is retiring on $500k or less possible? Definitely. And here's how-and, BTW, a BIG THANK YOU for Paul Terhorst for inspiration!

You can go one of two routes-

First, live like a 'college student' in the US, which Terhorst discusses in his book 'Retire at 35' (a classic, IMO). I would move to a 'college town', in a state without an income tax, LBYM. You'd have great, cheap entertainment whether it be theatre, concerts, arts, at the college plus a diversity of peoples. Also relatively low cost of housing.

The second route, the one I'm exploring is living part or full time overseas. Now I'm not suggesting London, one of the most expensive places to live in the world, but how about Quito, Ecuador? A beautiful city with a year round mild climate. The Philippines-a mostly English speaking populace with many American and European expats. Or Portugal? You could live in the EU fairly cheap. And any of these places could be lived in, comfortably, for under $1k per month!

So for those sometimes feeling DISCOURAGED about achieving ER, because they don't have a 'million bucks', (do you think it's probably because you're losing 50% of your income in taxes??) don't be!

YOU CAN DO IT ON LESS!!!! PLAN YOUR WORK AND WORK YOUR PLAN!!!

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4344 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 9:49 PM
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rjstanford wrote:
Cash portfolio:
$50K private monthly contract at 3%/month
$50K private compounded contract at 2.8%/month

This is the key, rather than anything to do with Costa Rica. In fact, if this was available, why put anything whatsoever into the stock market?

Last I remember in the discussions here about it, this was a semi-legal (at best) plan, with lots of "Don't ask questions, just send money" comments attached to it. Has anyone actually determined the legitimacy? IMO its just way to good to be true.


It's real. It's legitimate. And it has EVERYTHING to do with Costa Rica. You must go to San Jose, Costa Rica IN PERSON every month to get your cash. I have exactly $100K with this outfit split 50/50 between monthly and compounding.

That's all I'm going to say about it on this board. I won't post about it again.





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Author: galt67 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4346 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 9:54 PM
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FoolMeOnce writes-
Buy 5 single family starter homes outright at $100K each. Rental income including 5% vacancy allowance is ($725/month)(12 months/yr)(5 houses)(.95) = $41,325/year.

Expenses:
Taxes $2100/yr
Insurance $1000/yr
Maintenance, etc. $1000/yr
Total $4100/yr.

Net Cash Flow = $41325-$4100= $37,225/yr.

WOW! Neat concept but a few questions? Although I'm not a home owner isn't $200/year/house low for insurance? And are taxes really that low? And, lastly, pardon my ignorance, I thought when maintenance costs on a home they typically run '3%' annually?

Am I way off? I could see where your expenses could be 'per house', not for all five, which would dramatically reduce the monthly/annual income.

Can you flesh this out some more?


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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4347 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 9:55 PM
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galt67 wrote:
Is retiring on $500k or less possible? Definitely. And here's how-and, BTW, a BIG THANK YOU for Paul Terhorst for inspiration!

I'll tell him for you when I see him next month.

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4352 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/18/2000 10:11 PM
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but what about less than
$500,00 for those who live below their means and don't need much?


I think a compromise approach might be best here. Have you considered working
part-time?


Geez, I don't read up for 24 hours and I almost miss a great topic.

My plan is to "retire" on less than $500k, with a 5% or less withdrawl rate. For the last year and a half I have lived on $18k/year (I add a few $k on RE planning for Health Insurance). Granted it is in AZ, but I'm in a good area, on one of the nicer gold courses and with a mountian nearly in my backyard. I'm in a roomy apt, and buying a house doesn't make sense to me because I would like be free to move around a bit. One possibility would be "migrating' back and forth between southern AZ and Flagstaff, which is filled with tall pines, friendly people, and tons of trails to ride and run on.

But right now I am working on 2 different business plans to do on the side. Both would be work that I really enjoy, and that I would do even if it wasn't paid. But with taking in money from it I should easily be able to make it so I don't have to withdraw from my port, just letting in (hopefully) grow.

All of this is a little more risky, but since I have a field that I am an expert in and that I enjoy, I have a backup plan. But while I am young and single I plan to enjoy life, travel a bit, and pretty much just have a good time.

A couple of months after moving here to start my fulltime job, a mountainbiking partneer told me what he had thought up while younger. "Wouldn't it be cool if your retired years could be when you are young and can get out and enjoy life, and then work in your older years"

That has built on me a lot, and while I think there is still plenty to enjoy further in life, there are a lot of things I can do now that I won't be able to later, due to family, physical condition, or whatnot. I'm willing to take a bit more of a risk now (though I do have a good backup plan just in case) and plan to take the leap later this year :)

4aapl

(of course now my job is going better, with better work and the IPO announcement....so there's a chance I could stay around a bit (I'll give it 5%). But the commute home today was the worst, and I ended up pulling into a lot and going on a hour and a half hike/destress/think in the hills as a breather)

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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4359 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 5:59 AM
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Hello Dehewie, I got lost in the math right away in your post. Could you re-do it showing your work for the first calculations.

I believe you are saying that $500K at a 5% annual drawdown would only last 20 to 25 years counting for interest [inflation, maybe?] A 30 year Treasury Bond (now at 6.2%) pays 24% more than the needed 5% drawdown, but even if it were 5% it should provide $25K a year--over twice the $12.5K you referred to.

But the real numbers are probably even better. According to the much-discussed Trinity study, for most (95% or so) retirees, a mixed portfolio of stocks and bonds should safely yield 5% indefinitely, no mater what happens to the market and will allow for a 4% annual inflation rise, and probably provide you with a substantial estate to boot.

The inflation numbers look okay, but I would counter that SS dollars will be there as expected for people retiring in the next 10 years or so. It is for people who are less than 55 now that SS looks pretty shakey without more taxes on the remaining workforce. Thanks, -- John

Dehewie wrote:

>>>but what about less than $500,00 for those who live below their means and don't need much?<<<

If you think you can do it, then more power to you, but I don't see how it's possible not matter how frugal you are. If you had
$500K, and took out 5%, that money would only last you around 20 years, maybe 25 taking account for interest. When do
you plan on retiring? Even if you retire at 65, that money will not last if you live to be 90 or more. And I don't see how you
could live on $12,500 a year either. That's $1,000 per month, and my necessities (heat, electricity, food, etc.) are about half
that. I'm sure you won't be able to make you car(s) last that long, so there goes $10,000+ for one or more cars during that
time. And you also need to take inflation into account. According to my calculations, with an average rate of 3% inflation, your
$12,500 will be worth about $9,300 in 10 years, and $6,000 in 25 years. I don't think you could live on that unless you want
to live in your car, eating cold beans. It could work if you are invested in the stock market, or if Social Security is still around,
but I wouldn't count on that.


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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4360 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 7:07 AM
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galt67 writes:
Am I way off? I could see where your expenses could be 'per house', not for all five, which would dramatically reduce the monthly/annual income

Yikes! You are correct. I am doing this now with three houses instead of five and I slipped into my personal calculations. The expenses are understated by a ratio of three to five. Actual total expenses are closer to $6830 vice $4100/yr. Adjusted results are:

Cash flow $34,495 which represents 6.9% of equity.

Can you flesh this out some more?

Local tax rate is $.75/$100 assessed value which is usually less than market value.
Fire insurance is about $333/house/yr
Maintenance costs are taken from my own experiences. The $100K acquisition cost per house is for new houses which will initially have low maintenance costs. These can be expected to increase over time.

The point however, remains valid. Even with the figures as adjusted, the income is 70% greater than what can safely be generated from a portfolio of equities only, based on a safe withdrawal rate of 4%. This is a significant difference which may help someone make ends meet when attempting to retire on a small nut.

Regards,
FoolMeOnce



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Author: kenkaya Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4363 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 9:24 AM
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i retired jan '99 at age 56 with 500k in IRAs, started SEPP at 5% withdrawal [25k] house and land paid off, and am 100% debt free [with 2 cars]..at credit union have 27k in 5 year laddered CDs plus 475k at Vanguard 
with one year expenses in Prime MM and 450k split 50/50 between 500 Index//Extended Market Index..
i move 25k into Prime MM at beginning of each year.
am a subscriber to Financial Engines Investment Advisors [FEIA] who as you know, cater PRIMARILY to worker-bees growing their 401Ks towards retirement..
I have vanguard IRA listed as "my 401k" with all the vanguard Index Funds as "my options".. have age 62 as "age @ retirement" aspiring to live on 50k annual.
FEIA accesses my investment risk at 1.25 [1.00=average] with 57 - 60% odds of meeting 50k goal.
based on my present position have these forecasts:
Up-Side forcast [95%ile]=1,210,000 @ $78,700 annual
Median    "     [50%ile]=  710,000 @  49,400   "
Down-side "     [05%ile]=  401,000 @  31,300   " 
i DON'T time the market.. but DO position myself
couple times a year to where the growth IS happening.
of course i will stay with the SEPP plan for 5 years PLUS 2 months [for statutory insurance] then step-up to the maximum withdrawal within my marginal tax rate.
with unspent funds going into after-tax investments 
[probably will consider Tax-Free's for this] this is 
the PLAN from age 61 [end of sepp] till age ~65.. 
[will start SS @ age 62].. after ~65 will Start and STAY ON the rules of R.M.D.s [rather do it starting earlier than 70.5] 
am able to life a comfy life-style of $25k [career salary was ~50k but always LBMM so am spending MORE 
NOW than i did while working the rat-race..
am taking monthly distributions for sepp;  and have 
budget covering ALL expenses PLUS $500 monthly [6k-annual] slush fund for Big Ticket Items [vacations, 
bad surprises, Good Surprises, repairs/replacements/
additions to whatever]  one thing about this home is that ALL normal WEAR ITEMS have already been replaced 
[roof, flooring, doors, all major appliances[high- efficiency Heat Pump, ovens, cooktops, water heaters]
new siding, eaves and overhangs where not bricked..
end of YEAR ONE this slush fund had $4,500 Left Over!
we eat out every week someplace or another and enjoy life.. i dont see any deprivation or suffering @ 25k.
we have monthly budget of $400 for food which we never hardly spend it all..  also am working part-time @ $7
/hour at local golf course just for the fun and xtra
pocket money.. also am volunteering  4 hours weekly stocking food donations on shelves at local food pantry.. i dont buy lottery tickets ANYMORE, but if i did win the lotto.. i would volunteer more hours at the food pantry [i dont deal with the clients just do the muscle work].. love this board, BUT i dont have the time most seem to have here.. so just selectively read topics that may be important/relevant.. 
welcome any positive/negative suggestions to my plan 
with the help of you all PLUS harry dent.. this'll 
all work out..  btw, like INTECST i also plan on moving ~50% into SAFE investments.. but the other half i want to explore the growth areas that the retiring boomers are gonna be driving [health care needs, retirement communities, recreational pursuits, etc]..  



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Author: baanista One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4364 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 9:26 AM
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One quick remark on social security. In my opinion, social security benefits are not likely to be eliminated, but instead "means tested" in order to make the money go further.

In that situation, the retiree with a modest income and assets will probably get the SS benefit they paid for, unlike harder working savers who make the mistake of retiring "rich".

Regards,
Baanista

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4372 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 10:40 AM
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FoolMeOnce wrote,

Local tax rate is $.75/$100 assessed value which is usually less than market value.
Fire insurance is about $333/house/yr
Maintenance costs are taken from my own experiences. The $100K acquisition cost per house is for new houses which will initially have low maintenance costs. These can be expected to increase over time.

The point however, remains valid. Even with the figures as adjusted, the income is 70% greater than what can safely be generated from a portfolio of equities only, based on a safe withdrawal rate of 4%. This is a significant difference which may help someone make ends meet when attempting to retire on a small nut.


I'd like to add one point.

Managing a string of 5 rental houses is a lot more time consuming than opening your brokerage account statement at the end of the month. You should include the value of your time in the calculation and adjust the returns accordingly.

intercst



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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4374 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 10:51 AM
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Intercst writes:
Managing a string of 5 rental houses is a lot more time consuming than opening your brokerage account statement at the end of the month. You should include the value of your time in the calculation and adjust the returns accordingly.

A good point. While single family homes are not as management intensive as apartment buildings, they do require some care and feeding and certainly require more effort than a portfolio of securities, but it is not excessive. I have 3 homes that I manage at this time. Unlike with apartment buildings, the tenants are responsible for most normal grounds and building maintenance. I get called on from time to time to effect repairs and I must refill vacancies as they occur. My average tenant stays for 2-3 years or more. I would estimate the demands on my time at less than 40hrs/yr.

Regards,
FoolMeOnce



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Author: Carpian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4390 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 12:00 PM
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Buy 5 single family starter homes outright at $100K each.

You bring up some excellent points with real estate, but isn't there also the matter that unless the person has the $500,000 stuffed in their mattress, they are also going to get slapped with substantial capital gains/income taxes when they withdraw the money to buy the houses?

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4391 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 12:07 PM
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Carpian said:
get slapped with substantial capital gains/income taxes when they withdraw the money to buy the houses?

Assuming the money is currently in appreciated equities. The post which originated this thread proposed investing $500K in CDs. Since you can't get the money into CDs without paying taxes, I assumed this was $500K net.

Regards,
FoolMeOnce

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Author: gettergo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4393 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 12:18 PM
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i think the posts on real estate as an investment, have been excellent.

While I wouldn't advise putting all of ones eggs in the same basket, similar or better returns can be had from commercial real estate.

Example: Commercial buildings can be purchased for $250,000, that rent for $2500 a month, a 12% return. Additionally you depreciation the building (but not the land) over 33 years. If the building is worth $204,000 of the $250,000, you get a yearly deduction of $6477. $30,000 income, minus $6477, leaves a taxable of $23,523.

On most commercial leases the tenents pay for real estate taxes, insurance, and repairs.

Food for thought, GO

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Author: SkyHigh Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4394 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 12:20 PM
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Of course managing five rental houses, or five rental duplexes, or other property my be construed as work! ;)

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Author: catlovr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4399 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 2:02 PM
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for 4aapl

Just out of curiosity, where do you live in AZ? I am a native but have lived in Dallas for the last 20 some years. My husband and I are planning on retiring to north Scottsdale or therabouts. We have considered Sedona and are going to check out Prescott later this year. I was back home about a year agp, looking at property in Carefree and was amazed at the high cost of housing. I thought we would save money over the cost of living in Dallas but it looks likeit will cost more..any thoughts?

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4400 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 2:26 PM
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Just out of curiosity, where do you live in AZ? I am a native but have lived in Dallas for the last 20 some years. My husband and I are
planning on retiring to north Scottsdale or therabouts. We have considered Sedona and are going to check out Prescott later this year. I
was back home about a year agp, looking at property in Carefree and was amazed at the high cost of housing. I thought we would save
money over the cost of living in Dallas but it looks likeit will cost more..any thoughts?


Right now I am in the Pheonix area right at the north end of Awatukee, with South Mountain trails 1/2 mile away and a golf course just outside. I'm not into golf....but it looks nice and I can get in a 6 mile run with 75% of it on grass (more cushioning, better for the knees) if I go out right at sunset when the golfers have finished up.

My 700 sf apt is $620/month, and then I pay about $140 for water/trash/electric/phone/cable modem. I love the location, aside from traffic getting out of the area at certain times...but I avoid that. I priced the other apts around and they cost quite a bit more, partly since they are newer....so I make out well, but don't have much leverage when the apt raises it's rent.

I like the area, but if I wasn't working I would probably pick a different area...something more rural. Scottsdale is nice, but has a bit of an attitude and a higher cost of living. But I'd probably pick something on the northern edge, so that there is more open space and so I'm (slightly) closer to Flagstaff.

Feel free to e-mail me if you have more questions. Since you're from here you probably know more than I do about the area, but things have been changing pretty quickly here.

4aapl

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4432 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 11:49 PM
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I agree with you though, it all depends on your faith in government and from the debates that went on here the past few days that seems to vary greatly, but I for one do not believe social security will ever disappear or "collapse". The gov. always has the ability to issue debt for needed money.

Social Security, in one form or another, will always exist. However, for those of us who responsibly save for retirement, it will be 'means-tested' to a lower amount. (Notwithstanding the changes proposed in the current tax bill in Congress)



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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4433 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 11:51 PM
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My younger brother who works as an actuary in New York told me he did a study of his "optimal tax bracket" and decided he should cut back to working only one day per week. Of course, New York has two or three different kinds of income taxes, so it's probably the "worst case."


As far as income taxes are concerned, New York City is the "worst. ........ uh ..... , case" :-)

I left New York about 10 years ago and don't plan on ever returning.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4434 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/19/2000 11:57 PM
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It's real. It's legitimate. And it has EVERYTHING to do with Costa Rica. You must go to San Jose, Costa Rica IN PERSON every month to get your cash. I have exactly $100K with this outfit split 50/50 between monthly and compounding.

That's all I'm going to say about it on this board. I won't post about it again.


I wonder where they (the institution in question) invest the money ? I hope it has nothing to do with drugs or other nasty stuff like that !!

What investment, anywhere in the world, can return a guaranteed 36%/year in US dollars ???




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Author: baanista One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4440 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/20/2000 2:37 AM
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Markr33 said: I wonder where they (the institution in question) invest the money ? I hope it has nothing to do with drugs or other nasty stuff like that !!

What investment, anywhere in the world, can return a guaranteed 36%/year in US dollars ???

It could actually be reasonably legitimate. In places like Costa Rica, local inflation becomes so high that no one is willing to lend at a reasonable rate in the local currency due to the inflation risk. As a result, borrowers have to shoulder the inflation risk themselves by borrowing strong currencies (dollars).

The lender still runs the risk that the government might force conversion of dollar assets at a below market rate in the event of a financial crises. This happened in Mexico in the eighties to the great distress of gringo retirees who had put their savings in local dollar accounts. They were making several hundred basis points over US dollar deposits but much less than local peso deposits.

The result is that legit small business operate mostly on internally generated cash because effective interest rates are so high.

My concerns with Galeno's plan are as follows:

1. Even though I can build an economic rational for the situation, it still smacks a little of too good to be true. My main concern here is the secrecy and only available to those in the know features of his scheme. These are standard scam trademarks.

2. Even if legit, the situation doesn't seem like it is sustainable. Either the high interest rates prove to be justified by defaults, government interference, etc. or the Costa Rican economy improves, people are more willing to lend and rates go down. One way you lose principle, the other your income drops to below the level you need. In other words, the current situation may be a short term anomally.

3. Galeno calls this a private firm. In other words, the "gaurantee" is only as good as the character and capacity of the firm. So if the economy goes down the toilet, you should assume your investment will go swirling down the drain like everyone else.

Regards,
Baanista

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4447 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/20/2000 10:36 AM
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baanista wrote:
My concerns with Galeno's plan are as follows:

1. Even though I can build an economic rational for the situation, it still smacks a little of too good to be true. My main concern here is the secrecy and only available to those in the know features of his scheme. These are standard scam trademarks.


It's not really a secret. The company requests that customers not talk about the program to others. The "financiera" has three legitimate businesses. A currency exchange, an immediate check cashing service and they purchase accounts receivables from local businesses at a very deep discount. They make about 5 to 6% per month and pay their customers 3%.

In this country there is simply not enough investment capital to go around. As in any credit market with high devaluation, inflation, and interest rates, adverse selection and moral hazard reign.

State owned and private banks are pressuring the government to change the tax laws on these "private deals" so they can capture this "leaky money". Every CD or "fidecomiso" investment in this country through a "non-private" financial intermediary pays a 10% withholding tax off the top to the CR government. Even the company admits that the political pressure is mounting and that their business will probably not exist in the same form five years from now.

2. Even if legit, the situation doesn't seem like it is sustainable. Either the high interest rates prove to be justified by defaults, government interference, etc. or the Costa Rican economy improves, people are more willing to lend and rates go down. One way you lose principle, the other your income drops to below the level you need. In other words, the current situation may be a short term anomally.

Excellent observation. However, this company has been in business for 22 years. They survived the 1983 devaluation crush intact. They've always paid the same rate for US dollars or CR Colones--3% per month. You lend them the money for six months. If over $100K, they want it for a year. However, I ALWAYS look at the program as a short-term anomally. There is no other way to look at it.

3. Galeno calls this a private firm. In other words, the "gaurantee" is only as good as the character and capacity of the firm. So if the economy goes down the toilet, you should assume your investment will go swirling down the drain like everyone else.

Absolutely. The customer is betting on the CHARACTER and CAPACITY of the firm. This is not a FDIC insured investment. However, I would say that this private "financiera" is more stable than MOST of the private banks here in Costa Rica. Of course, that's not saying much.

Prudence and risk evaluation are key. I have about 5% of my net-worth tied up in this program. That's my comfort level. It really juices my cash portfolio's returns. But I know Gringos who have 100% of their wealth invested with this company. That's WAY too risky for me.

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Author: galt67 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4486 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/20/2000 1:38 PM
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I don't know about most of you but this is by FAR the most important, and relevant, 'thread' to me. I don't have to be a mathematician to know it's ALOT easier to hit 500k than some of the higher dollar amounts mentioned on this board as being 'requirements'.

I think one of the MAJOR reasons most people don't consider ER, is they perceive it as being 'unreachable','It would require simply millions', so on. By teaching, discussing, and encouraging others about how relatively small nest eggs will allow ER, I think we'd see more interest in it. And a happier, more interesting, society.

Thanks to all of YOU for keeping me focused daily on my goal!

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Author: baanista One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4496 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/20/2000 3:27 PM
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Thanks for the extra detail Galeno. Good to hear they have a track record that includes surviving your big devaluation. I am also glad to see I was reasonably on track with this.

I hope the Gringo's you know who are 100% invested in Costa Rican paper are old enough to collect social security.

It must be really tough for "Main Street" merchants in CR when they have to pay such high rates for capital. I was wondering if the situation was any better next door in Panama where the US dollar is essentially the national currency?

Regards,
Baanista - Who wonders if he should move to CR and become a loan shark?

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Author: Anes One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4499 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/20/2000 3:41 PM
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I don't have to be a mathematician to know it's ALOT easier to hit 500k than some of the higher dollar amounts mentioned on this board as being 'requirements'

Not to be disagreeable but, I found the 1st $500,000
came alot slower and harder than the next one(s).

Look at any chart of compounding and you will see that at certain point (around 18years) the real fun begins.

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Author: xhail One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4526 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 4:38 AM
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Thanks Galt67, it was my intention to spark interest for those discouraged that they will never attain $1mil+ which seems out of reach .$500g or less is more realistic to many.This is not to say we can't reach for more later, to live even more comfortably.

I am glad to see all the posts, but I think we have gone off on tangent subjects and should focus more on the original questions.I agree the first 500g is harder.Once you get to a certain level, the compounding work get easy to make greater sums of money.Many people can't save 5000 and feel 50,000 is crazy and 100,000 is out of the question, at least in a fairly short time frame.But once you reach 25,000, 50 and 100g don't seem that hard and then, at 100g, 250 and 500g seem attainable.I just wish I had this knowledge of this board along with my LBYM philosophy at age 11, when I had my first regular job beyond paper routes,lemonade, lawn mowing and snow shoveling.I could have retired by 18! - well maybe 21 or at least by 25 like 4aapl.

Now, let's say you had 500g in cd's (or any other cash safe return investment) that you felt very confident would average say 7%, flexing between 5 and 9%.For simplicity, let's say inflation would average 3%.And you only need to withdraw 4% of the original base On Jan 1st of each year for $20,000.Furthermore, let's say you had $520,000 to start in the first year, starting on Jan 1st, so the 500g is not touched when you take the first 20g off the top.Would you be "safe" for the rest of your life assuming you lived these very modest means? Anything wrong with THIS picture?Would that money grow much over say the next 40-60 years while still covering you low living expenses and inflation?What if you took any growth $ beyond the 500g and moved that over to more riskier investments like stocks?





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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4532 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 10:32 AM
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xhail asks,

Now, let's say you had 500g in cd's (or any other cash safe return investment) that you felt very confident would average say 7%, flexing between 5 and 9%.For simplicity, let's say inflation would average 3%.And you only need to withdraw 4% of the original base On Jan 1st of each year for $20,000.Furthermore, let's say you had $520,000 to start in the first year, starting on Jan 1st, so the 500g is not touched when you take the first 20g off the top.Would you be "safe" for the rest of your life assuming you lived these very modest means? Anything wrong with THIS picture?Would that money grow much over say the next 40-60 years while still covering you low living expenses and inflation?What if you took any growth $ beyond the 500g and moved that over to more riskier investments like stocks?

The only problem with this picture is that inflation would likely "clean out" a portfolio of 100% CDs over a 30 or 40 year pay out period.

Here's the "100% safe" inflation adjusted withdrawal rates for a 40 year pay out period for three portfolios. See the "Retire Early Study on Safe Withdrawal Rates", at link:

http://www.geocities.com?WallStreet/8257/restud1.html


100% stock/ 0% fixed income Withdrawal Rate = 3.40%
77% stock/ 23% fixed income Withdrawal Rate = 3.54%
0% stock/ 100% fixed income Withdrawal Rate = 1.43%

A 1.43% withdrawal rate on a $500,000 portfolio is a little more than $7,000 per year. Even a millionaire would only be able to withdraw $14,300 year from a 100% CD portfolio if he wanted to remain "100% safe".

It's also unlikely he would have become a millionaire holding a portfolio of 100% CDs.

intercst





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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4540 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 11:26 AM
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intercst writes:

Inflation would likely "clean out" a portfolio of 100% CDs over a 30 or 40 year pay out period. Here's the "100% safe" inflation adjusted withdrawal rates for a 40 year pay out period for three portfolios

100% stock/ 0% fixed income Withdrawal Rate = 3.40%
77% stock/ 23% fixed income Withdrawal Rate = 3.54%
0% stock/ 100% fixed income Withdrawal Rate = 1.43%

A 1.43% withdrawal rate on a $500,000 portfolio is a little more than $7,000 per year. Even a millionaire would only be able to withdraw $14,300 year from a 100% CD portfolio if he wanted to remain "100% safe".

It's also unlikely he would have become a millionaire holding a portfolio of 100% CDs.


I don't take issue with intercst's numbers. And he is right that the upside potential with a CD portfolio is lower than with stocks. I feel obligated to offer the other side of the story, though.

Because stock investments carry risks, you must know yourself and how you will react to losses before you invest in stocks. This is true of all investors, but it is particularly true for those seeking early financial independence. Let's say you are planning to retire from the corporate world next January with $500,000, and you put a large portion of that in stocks. What happens if you lose 50 percent between now and the end of the year? Can you live with the result?

Because of my particular circumstances (and these differ in each individual case), I cannot. I believe that the stock market is the best place to put one's money as a general rule. But it is not the best place for me at this point in time. I've missed out on a lot (a lot!) of growth over the last five years by being 100 percent out of the stock market. But I don't regret my decision. Because I could not bear to lose my ticket to early financial independence, the risk of stocks (especially at current prices) was too high for me.

While I accept that the 1.43 percent safe withdrawal rate for fixed income investments is accurate as an historical matter, the number is not relevant to investments made today, in my opinion. I received a annual percentage yield of 7.3 percent on the last five-year certificate of deposit I purchased. Assuming that inflation comes in at 3 percent over that time-period, my real return will be 4.3 percent (and I won't owe tax because my income level after reaching financial independence is low enough to avoid the income tax). That 4.3 percent return is better than the safe return for stock investments, and it is backed by a 100 percent government guaranty.

The two problems I see with CD investments is that this 4.3 percent deal may not always be available, and there is no chance that my assets will grow to be millions in today's dollars. For those reasons, I may move funds into stocks as stock prices come more into line with their historical averages. So when stocks are priced high and the return on CDs are high, I invest in CDs; when stocks are priced low and CD returns are low, I expect to reverse course.

Please understand that I am not recommending this course of action for others. Intercst and others have had great results with a pro-stock course, and the capital gains offered to equity investors in recent years is responsible for bringing to the table a good number of those considering financial independence strategies. But one should always consider what is the worst that could happen with an investment approach.

Stocks work only if you stay with them for a long time, so don't jeopardize an early retirement now within striking distance because you didn't consider the short-term risk possibility. If you are willing to put your early retirement plans on hold in the event that stocks go down, then this advice may not apply to you.

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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4541 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 11:32 AM
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While I accept that the 1.43 percent safe withdrawal rate for fixed income investments is accurate as an historical matter, the number is not relevant to investments made today, in my opinion. I received a annual percentage yield of 7.3 percent on the last five-year certificate of deposit I purchased. Assuming that inflation comes in at 3 percent over that time-period, my real return will be 4.3 percent (and I won't owe tax because my income level after reaching financial independence is low enough to avoid the income tax). That 4.3 percent return is better than the safe return for stock investments, and it is backed by a 100 percent government guaranty.

The biggest problem with this logic, as I see it, is that it neglects the possibility of negativity. Say that one had a pure cash portfolio invested heavily into CDs at the start of an interest rate spike (hitting double digets). I don't know that one is coming, but I also have no knowledge that it isn't (and its very dangerous to have a plan that works only if certain positive events occur, IMO).

The two problems I see with CD investments is that this 4.3 percent deal may not always be available, and there is no chance that my assets will grow to be millions in today's dollars. For those reasons, I may move funds into stocks as stock prices come more into line with their historical averages. So when stocks are priced high and the return on CDs are high, I invest in CDs; when stocks are priced low and CD returns are low, I expect to reverse course.

The reason that the 4% draw from a stock portfolio works is that it acknoledges that there will be negative years (gain lower than inflation) and hedges against them with the overly postitive years. The hybrid timing portfolio might work -- I don't have a good comfort feeling for it, but that's why there's more than one investing style!

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4544 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 11:57 AM
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The biggest problem with this logic, as I see it, is that it neglects the possibility of negativity. Say that one had a pure cash portfolio invested heavily into CDs at the start of an interest rate spike (hitting double digets).

You are right about the bad effects of an interest rate spike. I see two ways to deal with the possibility. One is to purchase Treasury Inflation Protected Securities (TIPS). They are paying over 4 percent today. I think they are a better deal than CDs, but I've stuck with CDs so far only because I haven't wanted to deal with the confusion of having my investments in a variety of different places (probably not a great reason, I know, I just am a little bit more hyper than most about keeping track of where things are).

A second approach is to ladder your CDs. You can structure your purchases so that one comes due every two or three months for the rest of your life. That way, if interest rates spike, you lose on the CDs that have a long holding period remaining but you make up for the loss on your CDs about to terminate (because these are reinvested at the higher "spike" rates). This is the approach I follow.

Those interested in this subject might want to take as look at the Paul Terhorst book, "Cashing in on the American Dream" (sadly out of print, but try used book sellers on the Internet). Terhorst started his own early retirement on the laddered CD plan. He has changed investment styles in recent years, moving a good portion of his money into stocks.

It can be argued that the Terhorst change argues in favor of the stock approach. Personally, I see it as an indication that he lacked conviction in his original plan. Anyone can change their mind, so I'm not trying to be critical of one of the giants of the movement. My concern, though, is that Terhorst has allowed the high returns now being paid in the stock market to influence his judgment.

That is the worst possible rationale for going with stocks, in my view. If stocks are really better from a theoretical standpoint, that should have been apparent to Terhorst when he developed his plan, back in the mid-80s. At that point (when it can be argued that he was able to think more clearly about the subject because stocks were offering returns more in line with historical averages), Terhorst voted for CDs. I think he was right the first time (or at least partly right--note the acknowledgments of the arguments for the pro-stock view set forth in my original post).

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4561 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 3:16 PM
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CD's vs Stocks for safety.

What about the effect of taxes (for those in that income bracket)? CD income is taxed at your standard rate of 15/28/31/36/39.6% while long term capital gains on stocks are only taxed at 10/20% and soon to be taxed at 8/18% !

While I accept that the 1.43 percent safe withdrawal rate for fixed income investments is accurate as an historical matter, the number is not relevant to investments made today, in my opinion. I received a annual percentage yield of 7.3 percent on the last five-year certificate of deposit I purchased. Assuming that inflation comes in at 3 percent over that time-period, my real return will be 4.3 percent (and I won't owe tax because my income level after reaching financial independence is low enough to avoid the income tax). That 4.3 percent return is better than the safe return for stock investments, and it is backed by a 100 percent government guaranty.

If you use a 1.43% safe withdrawal rate, you will need lots more money before you retire. I see that you are using the argument "This time it's different" with regards to the high real rates on CDs. If that argument is valid for CDs, why wouldn't it be valid for stocks as well ?

Perhaps they are paying higher rates on CDs because they are anticipating inflation to be higher than 3% over the next 5 years.

How do you plan on avoiding income taxes altogether ? How much can one earn before paying any tax ? (I suppose std. deduction plus exemptions)




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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4568 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 5:00 PM
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hocus wrote,

That is the worst possible rationale for going with stocks, in my view. If stocks are really better from a theoretical standpoint, that should have been apparent to Terhorst when he developed his plan, back in the mid-80s. At that point (when it can be argued that he was able to think more clearly about the subject because stocks were offering returns more in line with historical averages), Terhorst voted for CDs. I think he was right the first time (or at least partly right--note the acknowledgments of the arguments for the pro-stock view set forth in my original post).

In 1984 when Terhorst retired, money market funds were yielding 11% to 12%. That may have been part of the reason Terhorst choose a 100% CD allocation.

intercst

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4572 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 5:32 PM
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markr33 asks a series of questions re my discussion of the alternative (not really a recommendation!) of investing in certificates of deposit rather than equities.

How do you plan on avoiding income taxes altogether ? How much can one earn before paying any tax ?

I went back and checked the numbers and you are right to question whether tax can be avoided altogether with the CD investments. Sorry about that (I tend to think in terms of concepts rather than numbers and the fact that the tax number I came up with under this plan was so low--rather than the number itself--impressed itself on my brain).

You can limit tax a great deal, though. First, I exclude the amount covered by three personal exemptions. Then I deduct the amount covered by the standard deduction. I believe that covers at least $11,000 of income. The remainder of income you need to live on would be taxed at the 15 percent rate. If you live on $24,000 (this assumes you have paid off your mortgage and thus pay nothing for housing, etc.) tax would be imposed on $13,000 (less than $2,000 in tax). That's not zero, to be sure. It's a bit less than what I pay presently, though. ;-)

Perhaps they are paying higher rates on CDs because they are anticipating inflation to be higher than 3% over the next 5 years.

Perhaps. If inflation is higher, I get hurt a little. If it is lower (which I think is just as possible), I do better than expected. I do wonder about why the real rate of return on CDs and TIPs is so high today. There was a little discussion of it on a thread from a while ago (see Post 2440 and others in the "Treasuries" thread from 1-22-2000). The best explanation the board could come up with is that higher rates are needed to attract money away from stocks given the current popularity of the latter.

If inflation goes higher, stocks will probably be hurt more than CDs. I will be able to purchase new CDs at the higher rates of interest as my CDs come due every two months or so (see my discussion of the laddering technique to avoid the risk of an interest spike, in response to an earlier question on this thread--at Post 4544). Higher interest rates could cause large drops in stock prices because the earnings assumptions which underlie the current prices would be undercut (the Berkshire Hathaway board discusses this concept frequently in great depth).

If you use a 1.43% safe withdrawal rate, you will need lots more money before you retire. I see that you are using the argument "This time it's different" with regards to the high real rates on CDs. If that argument is valid for CDs, why wouldn't it be valid for stocks as well ?

This question points to some risks in over-reliance on the withdrawal rates cited by intercst, in my view. I noted in my initial post that I don't question the accuracy of the numbers or that it is helpful to use such figures as planning tools. As with all tools, though, one needs to use them with care.

When one says that it is safe to take a 4 percent annual withdrawal from stocks, what you are saying is that this is the amount you are sure to get over time as the ups and downs of the stock market even out. The ups and downs of the CD market or the TIPs market are very different.

If stocks go down, I am locked in and cannot sell until they go up again (unless I want to suffer a permanent loss--in which case the figures cited by intercst don't apply at all). However, if the current-day return on CDs ever falls again to the historical return of 1.43, I can change investments without suffering any significant penalty.

There is less volatility in the fixed-income investment vehicle. That's not necessarily a good thing or a bad thing; it's just a characteristic of the investment choice. Essentially, I am giving up some capital appreciation potential in return for keeping my options open for a time. If the real rate of return on CDs falls, there is nothing to stop me from switching to stocks at that time (except that I can only switch as the CDs come due every two months or so). So the 1.43 figure doesn't concern me at all.

Please understand, though, that I am not trying to scare anyone out of their stock investments. I like stocks in general, just not now. And if I weren't in a hurry to reach my goal, I might view things with different eyes.

For their part, those in stocks need to be aware that the 4 percent safe withdrawal is an average, not a return figure that will be realized each year. If a 50 percent drop in the first year of financial independence would be enough to cause you to sell some stocks, the figures cited by intercst will not work for you; they presume sticking to it through thick and thin.

Here's a figure I would really like to see. Does anyone know the average rate of return for investors actually holding stocks for a number of years? The figures usually cited (such as those that were the basis for intercst's study) are based on hypothetical returns (such as how you would do if you invested in the S&P 500 for 30 years without taking money out during panics), not real returns of actual investors.

I've seen a few studies that indicated how actual investors (who are human, subject to fear, etc.) do in stocks, and the returns were much lower than in the returns based on hypotheticals. I've never seen research of this type covering a long time-period. If anyone hears of such a study, I'd be grateful if you would post the information to this board.


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Author: blgriffin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4593 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 8:25 PM
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You are right about the bad effects of an interest rate spike. I see two ways to deal with the possibility. One is to purchase Treasury Inflation Protected Securities (TIPS). They are paying over 4 percent today. I think they are a better deal than CDs, but I've stuck with CDs so far only because I haven't wanted to deal with the confusion of having my investments in a variety of different places (probably not a great reason, I know, I just am a little bit more hyper than most about keeping track of where things are).

I just opened a money market account with BankDirect.com for $500 (min) and will earn 6.0%. Plus I purchased a 12 month CD earning 6.85% (APY) for $2,000 (min). Since BankDirect is a sub of my regular bank I did not hesitate making these investments.

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4595 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 9:00 PM
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In 1984 when Terhorst retired, money market funds were yielding 11% to 12%. That may have been part of the reason Terhorst choose a 100% CD allocation.

That's so. Since my whole plan depends on the logic behind the original Terhorst advice, I thought I better check out the book and see if his comments could shed any light on our discussion today. The book includes a chart of real returns on CDs from 1980 though 1987. The rates are: 6.4 percent (1980); 9.1 percent (1981); 10.0 percent (1982); 8.9 percent (1983); 9.1 percent (1984); 5.8 percent (1985); 4.3 percent (1986); and 4.0 percent (1987).

The figures for the last two years are comparable to those available today. The figures for the earlier years make my mouth water. But some people at the time probably did not consider those rates "good enough." That's how an investment vehicle becomes particularly attractive, in my view. It is ignored and pressure builds to offer a better deal to investors until they are finally drawn in.

That's how it was with stocks for many years after the depression. Even stocks that paid dividends exceeding those paid on bonds were disdained by investors; the perception was that they weren't worth the risk. In the early 1980s, when those great rates on CDs cited by Terhorst were being paid, an even better deal was available in stocks, which were set to begin a 20-year upswing. But many investors stayed away because the 1970s had been rough going.

For my purposes, it's good enough to be sure of a real return in excess of 4 percent. If stock prices were to drop or CD rates were to fall, the calculus would change. Another possibility I've considered is to create a fund of savings in excess of the amount I need for bare-bones financial independence. This fund could be invested in stocks without worry about harm to my plan if stock prices were to fall. Yet I would open up the possibility for some participation in the large capital gains available in stocks.

The bottom line is that each individual should put independent thought into his own investing plan just as he puts independent thought into his own spending plan. So long as you know the risks and rewards of the investment you choose, you won't be taken by surprise. And each plan needs to be shaped by the individual's degree of willingness to delay the target date for financial independence if short-term return expectations are not met.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4596 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/21/2000 9:06 PM
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CDs and limited income tax

Using dependants and std. deduction is fine for now, but eventually they shrink. When your kid turns 25, that's one down, when a spouse dies, that's 2 down and a reduction in std. ded. It may be a wash due to reduced expenses.

This question points to some risks in over-reliance on the withdrawal rates cited by intercst, in my view. I noted in my initial post that I don't question the accuracy of the numbers or that it is helpful to use such figures as planning tools. As with all tools, though, one needs to use them with care.

The only thing we have to guide us is the past and that is what the safe withdrawal calc. uses. (all reliable info on equity and debt markets since we have records)

When one says that it is safe to take a 4 percent annual withdrawal from stocks, what you are saying is that this is the amount you are sure to get over time as the ups and downs of the stock market even out. The ups and downs of the CD market or the TIPs market are very different.

No, it says that if you withdraw 4% (inflation adj.) of assets each year then the probability of running out of money is close to 0.

If stocks go down, I am locked in and cannot sell until they go up again (unless I want to suffer a permanent loss--in which case the figures cited by intercst don't apply at all). However, if the current-day return on CDs ever falls again to the historical return of 1.43, I can change investments without suffering any significant penalty.

I think you may be misunderstanding what a "safe" withdrawal means in the sense that we are discussing it. It is not a measure of historical return, but rather a measure over long and variable periods of time of what the risk of running out of money is.

When this risk is calculated for a 100% fixed income portfolio, it only uses the ups and downs of that market to get to the result of 1.43% of assets.






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Author: NewHouse One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4609 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 7:46 AM
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I find this discussion very interesting. As I ponder the application of hocus's plan of using 4% of his 7% interest return for retirement money, leaving the other 3% to grow for inflation matching and allowing him to inflation adjust his actual withdrawal, I have to wonder if the "Safe Withdrawal" concept is really off base in a 100% fixed income portfolio.

Consider this concept. Safe withdrawal is based on useing one's assets in retirement without running out of money. It is based on a concept of investment that is tipically used to grow assets. In other words, x% added to portfolio each year (growth)- x% withdrawn each year (retirement expenses) = x$ after x years. If x$ is positive our ER is in good shape. However, if our ER has garenteed income from fixed investments, real estate or dividends and these incomes never go into the asset base in the first place, I would suggest we have an entirely different senario.

Let's use hocus's numbers. (7% interest, 3% inflation) If he keeps 4% as living expenses each year and reinvests the 3%, what is the actual withdrawal rate on a 500k portfolio. I would suggest it is neg 3%. Therefore, chance of portfolio surviving is 100%.

The only thing that can mess this up is if inflation increases faster than interest rates rise on the investment. Hocus mention the great rates available in the early 80s. He didn't mention iflation rates. If memory serves me (mine is a little longer than many on this board but its starting to foggy) 1980 served us over 10% inflation and that started dropping slowly thru the next 4 years. Maybe someone can quote the inflation rates relative to Terhorst's interst rate returns.

This thread is getting very long and maybe I should have started this on a new thread. Sorry, I just had to get my .02 into this discussion. I look forward to arguements against my position.

Regards,
Paul

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Author: jtmitch Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4616 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 9:57 AM
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A take on this subject which is close to a Foolish approach although it keeps a fewer number of years of cash/bonds:

http://cbs.marketwatch.com/archive/20000218/news/current/askmu.htx?source=htx/http2_mw

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4623 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 10:30 AM
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I have to wonder if the "Safe Withdrawal" concept is really off base in a 100% fixed income portfolio...
Maybe someone can quote the inflation rates relative to Terhorst's interst rate returns.


Thank you for your expression of interest in the subject. CD/TIPS investments are not for everyone, but there may be a few who find that the concept works in their particular circumstances. Please note that the Terhorst numbers I cited in Post #4595 are real rates of return, not nominal rates. Thus, the inflation factor is accounted for with those numbers.

I also question whether the safe withdrawal concept applies in the context of investments offering guaranteed returns. The safe withdrawal rates are a powerful tool in the context of equities because the return varies so much from year to year--you need some way to determine in advance how much you can take out with safety. When you know your exact return in advance, there's no need to refer to history to determine what average return you can count on (which ultimately determines the safe withdrawal rate) --the answer is printed on the certificate.

Terhorst believed when he wrote his book (perhaps not today) that the rate of return on fixed-income investments had increased forever because of regulatory changes. If that is so, then the 1.43 rate is only an historical curiosity that does not affect my plan. If the 1.43 rate reasserts itself, I can abandon certificates of deposit without paying the penalty paid by stock investors who switch horses in midstream.

I left out several aspects of the strategy for space reasons that I'll make note of here. The 7.3 percent return is not the return you will receive on all of your CDs if you use the ladder approach described in Post #4544. The ladder approach will provide a blended rate of return which will vary over time as the return offered on CDs goes up or down. For the CDs I've purchased over the past few years, my blended rate of return is a little over 6 percent (it's only the most recent CD that pays 7.3 percent). Of course, inflation was lower than today when the lower rates were being paid.

The objection you most often hear to purchasing CDs for your early retirement fund is that taxes reduce the return. I described in Post 4544 how you can keep your yearly income tax burden below $2,000. I'm not sure whether those using a stock approach can do that much better, even with the capital gains break and the option of avoiding tax by not selling the equities.

You need to convert something to cash to live on each year, and you need to pay tax on any gains applicable to the stock sold. I don't know how much this usually amounts to for those following the stock approach. Someone using this approach may be able to say whether they usually pay more or less than $2,000.

Also, you can lower the tax burden below $2,000 by holding some of the CDs in tax-protected accounts. The illustration I used in the earlier post presumed that all CDs were in taxable accounts. In reality, about one-third of my holdings are in tax-protected accounts (these are GICs because that is what is offered in my 401(k) plan). My personal tax burden is significantly below $2,000.

I've never done a full analysis comparing the tax and other burdens associated with holding equities vs. fixed-income investments. It strikes me, though, that one has to jump through some hoops to avoid taxes with equities (hold investments you might otherwise sell, devise strategies to avoid big tax burdens when stocks with large accumulated earnings must be removed from the tax-protected account, etc.) Holding CDs is a bit simpler, it seems to me (not forgetting that the price of simplicity is giving up the huge appreciation potential of stocks).

If you are exploring this alternative, I encourage you to devote some thought to the idea I noted in Post #4595--having a 100 percent safe account of the amount needed for bare bones financial independence, and a separate risk/appreciation account.

I like the idea because of my impression that the biggest risk in stocks is that people overreact to changes in the market. We all say in advance that we won't do this, but the historical record says that a large number of us will. If I had money needed to live on in stocks, a sharp drop in prices would worry me; the safe withdrawal rate study might steady my nerves for a time, but I'm not sure if I could stay rational if prices fell too far for too long. But I don't think these thoughts would enter my mind if I knew my basic living expenses were provided for in any event, and that the stock account was only to pay for extras like a newer car, vacations, or hobby expenses.


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Author: goinfishin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4630 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 11:06 AM
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But I don't think these thoughts would enter my mind if I knew my basic living expenses were provided for in any event, and that the stock account was only to pay for extras like a newer car, vacations, or hobby expenses.

This is similar to an idea I posted a few weeks back about purchasing an immediate annuity, which incidently are paying about 7% right now, to cover your basic living expenses and putting the rest of your portfolio in equities. You give up some growth potential in exchange for peace of mind.

Fishin


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4632 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 11:18 AM
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NewHouse asks,

Maybe someone can quote the inflation rates relative to Terhorst's interst rate returns.

Here it is. An investment in 4-6 month commercial paper should offer a slightly higher yield than a CD of similar maturity

intercst




Year	                1971	1972	1973	1974	1975	1976	1977	1978	1979	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997
4-6 mo. Comm. Paper	5.66	4.62	7.93	11.03	7.24	5.70	5.28	7.78	10.88	11.37	17.63	14.60	9.37	11.11	8.35	7.31	6.25	7.63	9.29	8.43	6.92	3.91	3.44	4.35	6.45	5.68	5.78
Percent Change - CPI	5.29%	3.27%	3.65%	9.39%	11.80%	6.72%	5.22%	6.84%	9.28%	13.91%	11.83%	8.39%	3.71%	4.19%	3.53%	3.89%	1.46%	4.05%	4.67%	5.20%	5.65%	2.60%	3.26%	2.52%	2.80%	2.73%	3.04%


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4638 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 11:48 AM
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I also question whether the safe withdrawal concept applies in the context of investments offering guaranteed returns.

One problem is that there aren't many opportunities for guaranteed returns over time. The only one that I know of is an annuity from an insurance company. Another one might be treasury bonds, but even they are limited to 30 years. (well, perhaps 40 years with specific types of bonds)

What would happen to a retiree with everything in fixed income investments if treasuries go back to yielding 1.5% like they used to. (in the 50's ???)

What if their yield goes down to 1/4% or 1/2% ? (see Japan recently)

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4641 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 11:59 AM
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This is similar to an idea I posted a few weeks back about purchasing an immediate annuity, which incidently are paying about 7% right now, to cover your basic living expenses and putting the rest of your portfolio in equities. You give up some growth potential in exchange for peace of mind.

Just out of curiosity, are these long-term type of annuities insured in any way ? What happens if the insurance company backing the payments goes bust ? (I probably should also post this on the Insurance Board)



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Author: goinfishin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4645 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 12:07 PM
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Just out of curiosity, are these long-term type of annuities insured in any way ? What happens if the insurance company backing the payments goes bust ? (I probably should also post this on the Insurance Board)

The simple answer is no. If they go bust you lose.

You have to research the financial strength of the company. There are rating agencies that make this relatively easy.


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4648 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 12:12 PM
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Just out of curiosity, are these long-term type of annuities insured in any way ? What happens if the insurance company backing the payments goes bust ? (I probably should also post this on the Insurance Board)

The simple answer is no. If they go bust you lose.

You have to research the financial strength of the company. There are rating agencies that make this relatively easy.


Wow !! I don't think I am willing to trust anyone, even an insurance company who has been in business for 100 years, with my retirement assets meant to last 50 years or more !!

Also, if we are willing to trust that the insurance company will be around forever, why not just invest in the shares, preferred shares, or bonds, of the insurance company directly and use the return (dividents and/or interest) for living expenses ?


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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4652 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 12:35 PM
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What would happen to a retiree with everything in fixed income investments if treasuries go back to yielding 1.5% like they used to. (in the 50's ???)

This is my biggest concern re the certificate-of-deposit approach. If you look at the chart of real returns provided by intercst (Post #4632), you'll see that the real returns provided in the early '90s were too low to live on. (I didn't mean to suggest that these returns were guaranteed into perpetuity, only for the term of the certificate--although, as a general matter, there is a conncetion between changes in inflation and changes in nominal rates, keeping real rates of return somewhat stable.)

The only response I can suggest to the scenario you describe is to move into equities at the point when real rates of return drop too low. Since the study on safe withdrawal rates covers a long time-period, there is no reason I can think of to believe that going into stocks three years from now, five years from now, or ten years from now would not work as well as going into them today.

(Actually, the Harry Dent book saying that stocks will drop later this decade does present a reason for thinking this, but I haven't read the book, so I can't comment. But if you believe in the Dent scenario, you may be joining me out of stocks at some point; I'm not sure that Dent is anymore pro-stock in a long-term sense that I am. We both like stocks in general but are uneasy about stocks at particular points in time.)

My hope is that any sharp drop in real interest rates will be matched by a fall in stock prices (which would mean that I would gain a net benefit from the change because I would get into stocks on the cheap). But there is certainly no guarantee that the two events would occur simultaneously.

The reason I like Treasury Inflation Protected Securities (TIPS) is that that they generally protect you from changes in interest rates. It is as if they were designed to do exactly what I am seeking in my financial independence investment vehicle--a combination of absolute protection of capital with enough interest to cover my expenses. I've just been stubborn about switching from CDs because of administrative hassles.

Intercst has noted in prior posts that a flaw with TIPS is that they protect you only from changes in inflation reflected in CPI, and that inflation in the cost of health care may exceed this amount. He protects himself from this risk by investing in companies that would profit from inflation in medical prices.

I think his point is a good one, since inflation in the price of health care is an expense that sneaks up on you late in life when it is hard to do much to enhance your income. I am not now protected from inflation that exceeds CPI changes. I have thus far chosen not to worry about this, but it's a back-burner issue that I may want to reexamine at some point.

Right now the best thing I can do for my health is to retire early! A statement we can all agree on, I hope!


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Author: Anes One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4658 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 1:28 PM
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Just out of curiosity, are these long-term type of annuities insured in any way ? What happens if the insurance company backing the payments goes bust ?

I beleive the industry is self insured, ie. should a company fail other stronger companies come to the rescue. I am not aware of anyone ever losing any money, however one could speculate about what might happen to them in 29' style market.

You can duplicate the same investments the insurance company will make with a mix of cash, bonds and stocks
and pocket the markup yourself.

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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4668 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 2:09 PM
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I beleive the industry is self insured, ie. should a company fail other stronger companies come to the rescue. I am not aware of anyone ever losing any money, however one could speculate about what might happen to them in 29' style market.

This is known as reinsurance, and cause of much interesting banter over on the Berkshire Hathaway board (BRK.A) -- BRK is now one of the largest reinsurers in the world, if not the largest.

You can also go right to the source by getting an annuity directly from someone like Berkshire ( www.bhln.com ). From the numbers that have been sent around, it seems to pay a little less than some of the others, but you get a nice high credit rating (as they like to brag, its better than the country of Japan's rating). Like most things, you pay for security.

One way of checking -- ask your insurance company about capitalization and reinsurance before giving them any of your money, especially if you're getting something expensive like an immediate annuity.

Also, I don't know of any inflation-indexed annuities, so be sure to include that fact in your calculations.

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Author: AstridS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4671 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 2:52 PM
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Just out of curiosity, are these long-term type of annuities insured in any way ? What happens if the insurance company backing the payments goes bust ? (I probably should also post this on the Insurance Board)

The simple answer is no. If they go bust you lose.

You have to research the financial strength of the company. There are rating agencies that make this relatively easy.


There isn't a simple answer to this question. You will need to find out if your insurer is part of a Guaranty Association in your state. The members of a guaranty association will cover part of your insurance payments should the company that carries your insurance fail. I do agree that you should also research the financial strength of the company. A.M. Best is one company that publishes ratings of insurance companies.

AstridS


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Author: xhail One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4717 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/22/2000 10:34 PM
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Thanks to everyone for all your great imput on this subject, especially Hocus, Newhouse and Jtmitch and the very interesting article reference in post #4616.You guys expressed the problem far better than I could.This is exactly to the heart of where I hoped my initial questions would go.I also expected the counterpoint by Intrcst and others and great info there as well.

I do want to weigh the pros and cons of the obvious potential high returns of stocks in the long-run vs the possible safer investments like commercial paper, bonds,tips, cds, etc..More importantly,what is the minimum we really need to retire on vs what we hope to retire on.I thought that maybe it was possible to never have to touch the $500,000 base (maybe just blow it all in your dying days!) and live off the returns, but the article via post #4616 was an interesting twist.

I,too, wanted a safe base investment to pay my minimal living expenses and have a seperate stock portfolio for added luxuries like a new car, better living, or maybe even some riskier small business investments to play with and not as much worry after you know you have your safer retirement portfolio to cover your ass, I mean, basics.I also considered the excess between 4% taken and say 7% earned, 3%, invested in stocks like Hocus.

But just to be able to live on the minimal 20-25g instead of 40-50g+ from 1mil+ is another question here. I have lived on $10,000 -$12,500 net in fairly expensive Chicago, well below my means.I recently been thinking I don't need 40-50g or more (but would be nice) and 20-25g would be double my current expenses, but I believe doesn't include taxes taken out.I do want to live better, but really don't need much except increased travel expenses in my budget and increased health care expenses in general.And most importantly, by being able to live on less gets me free sooner and seems more attainable in the short term.

I am especially concerned with health care.Currently I am considering a national plan that includes dental,vision and doctor visit discounts and many other great alliance benefits with a $1500-5000 deductible for any hospital I choose based on "usual and customary" regardless of the hospital for about $80-100/mo depending on the deductible.This is through Alliance Services in association with other insurance companies. If anyone has experience with them let me know because they seem like one of the better companies out there.Just trying to find out if I would be safe, assuming I have bought and stayed in an inexpensive property that will be lower than my already low rent and will probably be paid for in full when I break free.I have to take into account no state income taxes and a cheaper and better weather place than Chicago.Like Intrcst, I am cosidering some investments in health related businesses like Pfizer,etc..




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Author: DockRat Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4734 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/23/2000 10:36 AM
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I'm planning to bail out just before 60 in '01. I'll have about 450k in 401k's and after tax mutual funds.
I'll be putting most of my portfolio into balanced
funds which don't take a drastic hit when the market does. I'm using an anticipated 10% market return for growth. I'll have to bite the bullett for the first two years by drawing down about 8%, but when social security starts, the draw can be decreased to 7% and when the wife's ira is accessable and she reaches 62 we can even draw less and thats with a 3.5% COL increase built in. It looks good in a spreadsheet. I'm going to give it a shot. If it works I'll be all grins. If not, We'll just have to adjust. By the way, we're going to the west coast of FL where the coasts are way cheaper than where we are now.
xhail, the best to you and your dreams. Jim
PS: how about doing the "interview" so we know a little about you. You've got some good dreams & hopefully a good plan.

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4752 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/23/2000 12:58 PM
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xhail writes:

I do want to weigh the pros and cons of the obvious potential high returns of stocks in the long-run vs the possible safer investments like commercial paper, bonds,tips, cds, etc.

If you weigh the pros and cons, you can't possibly make the wrong decision, in my view. Let's say you come down on the side of CDs, and you miss out on huge stock returns. That's what happened to me. I don't live with regret over it, though. I knew when I made my decision a few years ago that the gains we've seen were a possibility, and I tried to examine how I would feel missing out. Now that this eventuality has come to pass, I'm OK with it (it would not be kind to taunt me, though, with graphic illustrations of where I would be today had I followed intercst's advice!)

Or say you choose stocks, and they crash. So long as you consider the possibility going in, I don't think this has to be a devastating blow. If you lose money in stocks in your early 40s, you might learn things from the experience that will make you millions later in life. My concern is for anyone who goes the stock route (or the CD route, for that matter) without contemplating the possibilities, and preparing themselves in advance against negative emotional reactions to unexpected developments.

I enjoyed intercst's list of 66 crisis events that might have influenced one against stocks at any time in recent U.S. history. My first reaction upon reading the list was to feel fear for the safety of even my humble government-insured CDs, but I'll get over that. (As an aside, I must observe that if "Eisenhower illness" was the worst event they could come up with for 1955, it must have really been the placid time it's often made out to be. Just my luck to have the world start to go haywire right about the time I join the party!)

Here's my first suggestion on how to make your decision. Think about the equivalent of the 66 events that could occur in the next 66 years, and about how hearing about those events would influence you emotionally in terms of the safety of your investments. If there is a news event that shakes your confidence and you pull some of your money out of the market at the wrong time, the returns cited as the reason to own stocks doesn't apply to you. The analysis will be proven 100 percent true, it just won't apply to you!

If you feel confident that such events would not influence you, I think stocks are probably the best place to be. I don't have that confidence today (partly for reasons that are particular to my personal circumstances), so I refrain for the time-being.

My second suggestion is that, even if you decide against stocks, continue to study them. I have not one dollar in stocks and yet I devote time to understanding them every day. This makes me the opposite of the individual who invests much and studies little. In fact, it might be fun at some point to try to develop some metrics that distinguish the retire early type from the non-retire early type. One might be that the ratio of time spent learning about investments to dollars invested is higher for the retire early type.

I'm coming to believe that those interested in retiring early have a lot of differences in terms of specifics, but a lot of similarities in terms of principles. Four key shared characteristics occur to me now: (1) an inclination to think for oneself (see the thread today called "early retirement" on our contrariness); (2) a willingness to devote effort to research before devoting dollars to investing or time to life-diminishing activities; (3) an ability to look into oneself and ask questions that can cause temporary discomfort; and (4) an honesty that applies even when no one's looking (so that one acts according to the answers one develops, and refrains by nature from shifting blame for bad results to others).

One last note. On the thread on "early retirment," backslash writes:

I used to argue politics and religion a lot, until I realized I was wasting my time. You can seldom convert someone, so why try?

I find there's some small satisfaction obtained by needling them a bit from time to time.


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Author: xhail One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4795 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/24/2000 5:17 AM
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Hocus, why didn't you opt for the usual 80% stocks and 20% cash reserves for 5 yrs living expenses?I know some will argue for 85/15 and 3 yrs, etc.Were you close to your retirement goal and felt by opting stocks, you would not get there if they fell drastically in the short -term?If so, why haven't you readjusted to the above mix or aren't you retired yet? I do think $500,000 or less is quite possible for those with modest means.Personally, I want to strive for more, but first plan on what I can attain and accept to live on at the lowest.For the most part,I have to side w/ Intercst on the optimal mixes and safe rates of returns.Why not do it on 500g or less instead of 1mil+ if you can?

But I have a slightly different situation, in which my business plans are important to me and I want to have a go on a couple of them first for personal goals, and secondly to see if I can actually get higher returns than I would on stocks.Please, let's not re-argue the pros and cons of owning your own biz!At the same time I want to allocate $ towards the minimal amount I can retire on.Sort of an insurance if the businesses don't do as well as expected.I guess I have a similar problem in that I will need a good portion of my money soon for the businesses so I don't invest the max in stocks, but at the same time have that other goal of reaching the minimal amount for retirement asap.It is a dilemma because if I forget about the businesses, I may get to the minimal retirement amount much sooner, but maybe not if stocks fall badly.At the same time, the businesses could also possibly get me there sooner and far beyond the 500g, and I have more control there, but that takes away from investing the max in stocks.But not everyone is as lucky as 4aapl or intrcst with stock picks or can handle the risk of a non-diversified portfolio with alot of $ allocated to the few.I have decided I don't want to be an old man wondering what if or bitter that I didn't at least give my dreams a try.Regret minimization framework theory.Yes, one could argue that the business is like investing in a single stock, but like I said, you have more control.Like you, if I would have maxed out in stocks say 5 years ago, I would be much farther towards both, but hindsight is 20/20.I would be interested on yours and Intercst's thoughts as well as others on the article referred to in jtmitch's post #4616.Thanks!

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4804 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/24/2000 9:49 AM
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xhail asks,

Like you, if I would have maxed out in stocks say 5 years ago, I would be much farther towards both, but hindsight is 20/20.I would be interested on yours and Intercst's thoughts as well as others on the article referred to in jtmitch's post #4616.Thanks!

I don't see much difference between the standard "3 to 5 years in cash" and this trademarked "BondWheel" concept. (I guess it shows that you can trademark anything, it's not like a patent.)

My preference is to hold CDs and Treasury notes for my near term living expenses rather than the corporate bonds proposed in the article. I do this because the cash portion of my portfolio is supposed to survive the "Crash of '29". Corporate bonds would not perform as well as Treasuries under that scenario.

intercst

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4811 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/24/2000 10:49 AM
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xhail writes:

Hocus, why didn't you opt for the usual 80% stocks and 20% cash reserves for 5 yrs living expenses? Were you close to your retirement goal and felt by opting stocks, you would not get there if they fell drastically in the short -term?

That's it.

If so, why haven't you readjusted to the above mix or aren't you retired yet?

Not quite yet.

I do think $500,000 or less is quite possible for those with modest means.

I do too. The downside is, losing 50 percent hurts a lot more at these levels. There's not much slack.

Personally, I want to strive for more, but first plan on what I can attain and accept to live on at the lowest....Why not do it on 500g or less instead of 1mil+ if you can?

It sounds like we are thinking along the same lines. I would love to be debating whether to retire on $500,000 or $1,000,000. Those are two nice alternatives to be facing. The $1,000,000 is just not in the cards in my case, though. If I had not made a decision to retire somewhere a little above $500,000, I would have quit my current job several years ago, taken a lower paying but more fulfilling job, and given up on the retire early concept altogether.

It's only the possibility that I can retire early that has kept me hanging on, and there ain't no give on the issue of staying until I reach $1,000,000. It's great for those who can see a way to pull it off, though. This is why I can't stomach the idea of losing a high percentage of the nest egg (See Post #4560 for a discussion of who among us should be permitted to use the words "nest" and "egg" together in the same sentence, and who should not). Because of my circumstances, I know I wouldn't have the guts to ride out a major downturn in the market; given that fact, I think it is prudent to limit my participation in it (as of today, to zero, but that may change).

For the most part,I have to side w/ Intercst on the optimal mixes and safe rates of returns.

Intercst has performed an important service by offering the safe withdrawal study. It's a valuable tool that lets people know the amount they can take out of a pool of stock investments each year while depending on the pool to still be there (and most likely grow). The only point on which I differ is whether this tool can be applied in cases where the investor has doubts about his ability to remain in stocks in the aftermath of a sharp drop in portfolio values.

I have a slightly different situation, in which my business plans are important to me and I want to have a go on a couple of them first for personal goals, and secondly to see if I can actually get higher returns than I would on stocks.

You and me both! I define the phrase "retire early" broadly. For me, it does not mean retire and then not work. For me it means get out of the shackles that come with needing a high paying job to get by. The usual advice to someone frustrated in their job is to look for another. I could do that, but what happens if that falls through someday as well?

My breakthrough was when I realized that the best way for me to find fulfilling work was not to need money to live on anymore. That's where I will be shortly. At that point, I can start businesses or accept jobs, and hopefully bring in money for life's little extras. But I can also shut down those businesses or walk away from those jobs without worrying whether my family has the money it needs to live on. Bottom line: I am in control of my life. That's what the phrase "retire early" (or financial independence, if you prefer) means to me.

Like you, if I would have maxed out in stocks say 5 years ago, I would be much farther towards both, but hindsight is 20/20.

You know what? People striving toward financial independence are going to run into the jealousy problem a lot more frequently than most others. Most just don't have the amounts of capital we talk about on this board. Having a lot of capital is generally perceived as a good thing. But it can cause emotional turmoil too; it's something to watch out for.

I have some measure of jealousy for the returns enjoyed by intercst. But it's not a problem because I am happy with where I am myself (especially compared to the millions who could lose their jobs anyday and have no capital whatsoever). How would I feel, though, if three months now, I had a little less than $300,000 rather than a little more than $500,000? I'm the one who has to live with my answer to that question, so I have to think hard about it before I decide on an investment strategy.

I will need a good portion of my money soon for the businesses so I don't invest the max in stocks, but at the same time have that other goal of reaching the minimal amount for retirement asap.It is a dilemma because if I forget about the businesses, I may get to the minimal retirement amount much sooner, but maybe not if stocks fall badly.

These are the issues I struggle with. The fact that I plan to work after "retiring" means that I can probably let go of the corporate job with a bit less than those who do not want to work after hitting the target. That's a plus for me. However, the fact the I have constructed a plan that provides for bare-bones living expenses only means that I can't take on as much risk. That's unfortunate. I lose out on returns this way. But these are the cards I was dealt, so I'm playing them the best I know how.

The businesses could also possibly get me there sooner and far beyond the 500g, and I have more control there, but that takes away from investing the max in stocks.

I know what you're talking about, because my goals are similar. One question I've asked myself is, do I need a business fund to cover $50,000 or so start-up expenses (I'm looking only at low-capital enterprises)? My answer is, it would be nice. If the frustration level gets too high (and there are days), I will let go the reins without the business fund.

In that case, I will go forward on the presumption that the start-up money will be paid back to my nest egg with profits from the business. Is it possible that this won't work? Yes. If bad things happen, I'll deal with them. I don't think what I'm doing is crazy, though.

And it's possible (just as possible? more likely?) that the business will actually provide additional funds for the nest egg rather than subtract from it. From the first moment that I considered the retire early concept, I was thinking of it as a "bridge" to a new type of work. If this wasn't a possibility, I just wouldn't be in the retire early game at all (which isn't to say that full retirement is not also a valid goal). See Post #3271 if you are interested in further discussion of the "bridge" concept.

I don't want to be an old man wondering what if or bitter that I didn't at least give my dreams a try.

Bless you. I hope you make a million in your business. If you lose a million, I hope you do it having an adventure that was worth a million to you to go through. If those are the only possibilities for you, you are surely doing the right thing.

Faithful viewers will note that I've exceeded my word allotment yet again! (and after starting out so well with my first ever two-word and three-word responses in reply to xhail's initial two questions!) Re this, I've been thinking about that Steely Dan song. How did they put it?

I cried when I wrote this song.
Sue me if I play too long.


Now that's deep.

Epilogue (!)

Many thanks to the kind soul who recommended my Friday knock-knock post (#4262 for those seeking an antidote to the Big Think above). The beautiful baby boy was excited to learn that "his" knock-knocks received the recognition they deserve.


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4850 of 748890
Subject: Re: Retire on $500,000 or less? Date: 2/24/2000 5:59 PM
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hocus wrote,

Intercst has performed an important service by offering the safe withdrawal study. It's a valuable tool that lets people know the amount they can take out of a pool of stock investments each year while depending on the pool to still be there (and most likely grow). The only point on which I differ is whether this tool can be applied in cases where the investor has doubts about his ability to remain in stocks in the aftermath of a sharp drop in portfolio values.


It's actually worse than that. <morbid grin>

If you rebalance your portfolio annually, not only would you be remaining in stocks -- you would be buying more to maintain the "efficient frontier" portfolio allocation in a down stock market.

intercst



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