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71, retired at 53, Living modestly but well
Old 11-21-2010, 12:42 AM   #1
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71, retired at 53, Living modestly but well

Hello, I'm Ted Shepherd, though you may know me from Motley Fool years ago as Chips Boss. (Chips was my German Shepherd Dog. The significance of the screen name is that, in retirement, I have no boss and I am boss only to my dog.) Retired at 53 from career as an aerospace engineer and operations research analyst. Went broke at 40 chasing performance in mutual funds and listening to stock brokers who drained my account into their own. (May their tribe decrease.) I learned that I cannot pick stocks to beat the market averages, and cannot pick managers and advisors to do that for me either. YMMV. Switched then to index fund investing, and retired 13 years later, 1993. Maximum contributions to a 401(k), living below my means and dollar cost averaging put me in a position to retire early. I own my house with no mortgage.

My experience might not be of much use to you because, unlike many people, I never supported a spouse or family, never got wrecked in a divorce settlement, and inherited about a third of my retirement stash.

My current retirement income is in three roughly equal streams: IRA withdrawals, pensions (corporate and social security), and dividends in a taxable account. My allocation of the income stream is about a tenth for income taxes, and the rest split about evenly between consumption and restoring the damage inflation does to the retirement stash. (That looks like "savings". Don't let anyone tell you that you won't need to do any further saving in your retirement years.) My income taxes are so low because almost half my income is tax-deferred, in a IRA. Because I inherited part of the retirement stash, and because of the challenge and my resentment of consumerism, I have managed the money for these 17 years of retirement to stabilize its purchasing power as well as I can given market volatility.

Currently, my annual withdrawal from the retirement funds is about 2.5% for living expenses and income taxes combined. I have known all along that my income taxes would jump sharply when I reached the age to make mandatory withdrawals from the IRA. It never made sense to me to make much in the way of early withdrawals from the IRA. I didn't need the money, for one thing, and paying income taxes sooner rather than later does not appeal to me. Further, detailed mathematical analysis showed that only minimal withdrawals in my sixties were necessary to support my goal of stabilizing the purchasing power of the retirement funds.

Of course, my planning depends on assumptions about future market returns, inflation, and income taxes. My spread sheet for personal financial planning allows me to vary these parameters easily to see the consequences for my spendable income. It runs to age 95. I'm currently using inflation at 3% a year, and investment return at 5.75% return (only 2.75% after inflation, combining dividends and capital gains), and continuation of current tax law. If that law lapses, my standard of living (after tax, spendable income) will drop about 5%. A nuisance, not a tragedy for me. If the market does better than my conservative assumptions, I will raise my standard of living while being prepared to drop it back again if necessary.
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Old 11-21-2010, 06:28 AM   #2
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Welcome. Did you ever convert some traditional IRA assets over to Roth IRA assets along the way? If not, why not? If so, up to what tax bracket? I'd be curious to know from someone who has actually lived through this possibility for 20 years, since I am at the beginning of that step. Thanks!
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Old 11-21-2010, 06:46 AM   #3
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You're very welcome here. I didn't know about Motley Fool (I just looked it up in the Wikipedia), because the year it began, 1994, was just the year I cashed in almost all my investments to buy a house. After that, mortgage payments kept me broke, so that I had nothing to invest. Sorry I missed you.
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Old 11-21-2010, 07:14 AM   #4
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I didn't know about Motley Fool (I just looked it up in the Wikipedia)...
You might also be interested to know that this discussion board was formed in 2002 by a Motley Fool board participant (Dory36). Many of us who initially signed up here were former MF members and moved here when MF began to charge a membership fee.
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Old 11-21-2010, 08:11 AM   #5
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For LOL! -- I converted only a very small part of my IRA to Roth. I have a strong preference to pay no income taxes before I have to. My calculations indicated that it was not to my advantage to pay early, confirming my preference. This represents a bet on my part that income tax law will be about the same in the future. That's not a good bet. If and when federal income taxes go up, my standard of living will decline. I can handle that. I have seen analyses that conclude that conversion of a standard IRA to a Roth IRA is advantageous. They seem to be spoiled by an implicit assumption that the cash to pay income taxes on the conversion materializes only if the investor does the conversion. So far as I know, those studies do not consider the alternative of keeping that money away from IRS and in a taxable investment account instead.
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Old 11-21-2010, 08:19 AM   #6
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Thank you for your post. I am always interested in the views of folks who have been retired for a long time...
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Old 11-21-2010, 08:20 AM   #7
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You might also be interested to know that this discussion board was formed in 2002 by a Motley Fool board participant (Dory36). Many of us who initially signed up here were former MF members and moved here when MF began to charge a membership fee.
I to am a MF refugee as I was in the first 100 posts. This site is much better IMO

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Old 11-21-2010, 10:35 AM   #8
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Welcome, Ted!

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Originally Posted by Ted_Shepherd_AKA_Chips View Post
I own my house with no mortgage.
Check!

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Originally Posted by Ted_Shepherd_AKA_Chips View Post
My experience might not be of much use to you because, unlike many people, I never supported a spouse or family, never got wrecked in a divorce settlement, and inherited about a third of my retirement stash.
That's my situation exactly....Check!

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Originally Posted by Ted_Shepherd_AKA_Chips View Post
Don't let anyone tell you that you won't need to do any further saving in your retirement years.

I have known all along that my income taxes would jump sharply when I reached the age to make mandatory withdrawals from the IRA. It never made sense to me to make much in the way of early withdrawals from the IRA. I didn't need the money, for one thing, and paying income taxes sooner rather than later does not appeal to me.
I agree 100%. While I am still w*rking, I have realized that money management in retirement is at least as complex as it is in the accumulation phase. I delight in using all available tax-deferred accounts to legally delay paying as much tax as possible. But when mandatory withdrawals kick in, I will have a hard time limiting my annual income to maintain low tax status. That's where my professional corporation will be extremely useful, because the corporation can decide when, and how much, to pay it's employee (me). If all goes according to plan, I expect to have income to spare (and invest) during retirement. I guess that's a good situation to be in.

This was the first forum I joined and it is very informative and a lot of fun!
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Old 11-21-2010, 10:55 AM   #9
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Retired at 53 from career as an aerospace engineer and operations research analyst.
Welcome. I ERd at 4 years ago at 51. In another thread I would like to know more about (non financial) what you have learned, experienced, thoughts and how you have changed over the past 18 years.
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Old 11-21-2010, 02:42 PM   #10
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You are entirely welcome, midpack. I have thought that my experiences could be of interest to people preparing for retirement or already in it. Still, I acknowledge that my early retirement was possible because I never supported a spouse or family (and put the resulting savings into the market), and an inheritance helped me stay retired. I thought I had enough in my retirement accounts to retire when I quit working in 1993. I was wrong about that, but the bull market of the 90's bailed me out, even before my inheritance in 2000. If nothing else, I can serve as a bad example -- going broke at age 40 from pursuing performance in mutual funds (performance that usually vanished as soon as I put my money in them), and then trusting a broker to manage my account which actually went to zero value due to expiring options. (Only strength of character keeps me from being too embarrassed to admit my blunders.)
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Old 11-21-2010, 05:18 PM   #11
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Hi Ted, when we get a few hours I'll tell you about all the stupid crap I did in my life.

"we grow old too fast and smart too late"
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Old 11-22-2010, 07:33 AM   #12
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Ted,

Welcome and thanks for sharing your real life lessons.

Free to canoe
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Old 11-22-2010, 02:35 PM   #13
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.... My allocation of the income stream is about a tenth for income taxes, and the rest split about evenly between consumption and restoring the damage inflation does to the retirement stash. (That looks like "savings". Don't let anyone tell you that you won't need to do any further saving in your retirement years.) .....
Welcome to the board.

Would you expand on the above? I didn't understand it.

We ER'd in 2008, went back to work for a while earlier this year, and as of last week, are work-free again!

I too, am interested in your non-financial ER experiences.
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Old 11-22-2010, 04:55 PM   #14
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Would you expand on the above? I didn't understand it.
I'm sure Ted_Shepard will speak for himself, but I'm going to test my understanding by attempting a paraphrase. Of course we all want our retirement payments to increase in dollar amount so as to compensate for inflation. You can try to arrange that by obtaining some financial instrument that does that for you -- e.g., TSPs or a pension with COLA -- but you can also try to synthesize the effect on your own by arranging that the dollar amount of your investment increases in an amount, year by year, so that as you withdraw for your living expenses a reasonable percent of the investment value, the amounts of your withdrawals will increase, so as to give you a constant buying power from your withdrawals (in spite of inflation). So, you have to reinvest dividends or capital gains periodically so as to increase the dollar amount of your total investments, in order to obtain this effect.
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Savings during Retirement
Old 11-22-2010, 05:53 PM   #15
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Savings during Retirement

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Welcome to the board.

Would you expand on the above? I didn't understand it.

We ER'd in 2008, went back to work for a while earlier this year, and as of last week, are work-free again!

I too, am interested in your non-financial ER experiences.
Thanks for the welcome. I'll post something on non-financial ER experience is some appropriate thread here. Do you have a suggestion?

Why I seem to be saving in retirement: I manage the retirement stash to preserve its purchasing power as level as possible over the years other than letting market volatility do what it does to the value of the stash. This means that I cannot spend all my income any year but must devote some of it to restoring the value in the retirement stash that inflation has taken away. That looks like savings.

Many people manage their retirement accounts with a goal of not going broke during life. My approach is different. It preserves the purchasing power of the retirement stash as if it were a family trust so that I can pass to the next generation intact. Since I inherited some money, and had the gift of college education from my family, I mean to bequeath some money.

I have a detailed spread sheet for financial planning in retirement. I started it before I retired to help me psychologically in managing the change to an era with no pay checks. The spread sheet has entries for all my income -- corporate pension, social security, dividends in a taxable account, and distributions from the IRA -- for each year of my age from 53 to 95. The spread sheet adjusts the social security payments for inflation. The corporate pension started when I was 55 and never receives a COLA. The distributions, starting at age 70, are the minimum the complies with IRS regulations. Earlier distributions were minimal; they were the result of running analyses to evaluate a trade-off between paying optional income taxes on distributions in my sixties and paying higher income taxes on mandatory distributions from a reduced IRA thereafter.

This spread sheet for my retirement planning treats income taxes and spendable income as separate items. I knew that mandatory IRA distribution would run my income taxes up after turning 70. I didn't want that to decrease my after-tax standard of living. That meant letting the retirement stash grow a little in my fifties and sixties so that higher income taxes afterward would reduce that stash rather than my after-tax standard of living.

Some software for retirement planning asks the user to select an income tax rate. That is something I want the software to compute, not to take as an input from me. My spread sheet estimates my income taxes for each future year of my retirement and records the actual value for past years.

There is a crucial value in the spreadsheet -- my current allocation of income to my living expenses for this year. For planning purposes, that allocation goes up by enough to cover inflation each year. In fact, though, my spendable income jumps around with market performance. That is no problem for me, since the income is large relative to my inclination to spend. Selecting a value for this year's spending then determines the performance of the retirement funds for the duration of the planning period. That is, my built-in assumptions about market performance, inflation, taxes, and distributions determine the plan completely except for that one crucial variable: this year's spending. (I can and do vary those assumptions in doing sensitivity analyses.) The spread sheet computes an inflation-corrected value for the total retirement stash at the end of each year, currently 71 to 95; originally 53 to 95. Here is my mathematical interpretation of the old-fashioned injunction PRESERVE YOUR CAPITAL. I take those year end values as a set of statistics and compute the standard deviation in that set. Then, I use mathematical optimization software (the "what if" capability in Excel) to find the value for present spending that minimizes that standard deviation.

Sorry if I lost you. Truth in posting: I have a BA in math and a MS in applied math. All this calculation seems easy and reasonable to me, but explaining it is not so easy. I will be happy to explain further.
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Old 11-22-2010, 06:06 PM   #16
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Thanks for the welcome. I'll post something on non-financial ER experience is some appropriate thread here. Do you have a suggestion?

-----
Sorry if I lost you. Truth in posting: I have a BA in math and a MS in applied math. All this calculation seems easy and reasonable to me, but explaining it is not so easy. I will be happy to explain further.
With that education you will fit in with many of the engineers on the board. As to your other experiences that would lean more towards the psychological.

I would be interested in you perspective on 18 years of retirement generally - likes, dislikes, what would you change or do differently. How have you changed or what phases have you gone through over that time - were you very active in the beginning and now settled into a routine?
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Old 11-28-2010, 08:24 PM   #17
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Hello, I'm Ted Shepherd, though you may know me from Motley Fool years ago as Chips Boss. (Chips was my German Shepherd Dog. The significance of the screen name is that, in retirement, I have no boss and I am boss only to my dog.)
Hey Chips,

I was jtmitch on the old MF REHP board. I followed Dory36's FIRECALC to this forum quite a while ago after I got sick of all the politics on what was originally a very good discussion group on REHP. Look forward to seeing more of your posts and hearing about your retirement experiences.
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Good to see an old friend
Old 11-28-2010, 10:08 PM   #18
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Good to see an old friend

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Hey Chips,

I was jtmitch on the old MF REHP board. I followed Dory36's FIRECALC to this forum quite a while ago after I got sick of all the politics on what was originally a very good discussion group on REHP. Look forward to seeing more of your posts and hearing about your retirement experiences.
For jtmitch: Good to see you again after all this time. I admit that my recall is fuzzy, but I remember you as one of the good guys, easy to get along with, and, IIRC, a retired military officer. I worked in the civilian defense industry for thirty years after three years active duty as a Naval officer. Same team, same goals as you.

I have persevered (for what it's worth) in my retirement plan as you heard it from me long ago. The fixed income part of my retirement stash consists solely of my (meager) corporate pension (with no COLA, ever) and my Social Security. I started SS as soon as I could get the full amount, 65 years and 4 months for those of us born in 1939. GNP includes the fair rental value of owner-occupied houses. I consider that as part of my fixed income stash too since my house has no mortgage.

While I worked and after I went broke chasing "market beating" performance, my investment strategy was LTBH. With no paycheck, the "buy" part is missing except as I reinvest some dividends. Rather, I just hold onto the assets I held when I retired. Sad to say, those assets grew by inheritance. Those who love you enough to make you their heirs are people you would rather have in your life in preference to getting their money. Further, I abstain from stock picking and market timing, simply holding my index funds for most of my investments for growth. (Vanguard Index 500 Admiral; Vanguard Total Stock Market; Schwab 1000) I also hold a small amount of the stash in some managed funds, originally from Forbes Magazine's Honor Roll that I bought about 20 years ago, and some individual stocks that, again, sad to say, I inherited about 10 years ago.

I have not invested outside the US although the companies in my American-based index funds earn a large part of their profits in their foreign subsidiaries. My purpose in staying domestic with my investments is to facility American employment, repaying as well as I can the people whose investments made my working years vastly more productive than they would have been. I always had the latest computers available, and the support of large manufacturing facilities.

I now take about 2.5% of the retirement stash each year to augment the fixed income. My spendable income has bounced around with the stock market, but that doesn't matter to me. I have more than enough income and, so far, nerves of steel. In a pinch, I could get by with just the pension and Social Security. My continuing goal with the retirement assets is to preserve their purchasing power as well as I can. Since I inherited money, I'd like to bequeath it to the next generation. (That presents a dilemma though; my relatives who know how to manage money don't need any from me, and my other relatives would just squander it. Maybe I'll leave it to the National Taxpayers Foundation.) Still, I might tap the stash for my own purposes, say to buy an expensive medical procedure that I get in Thailand some time when the local functionaries say I can't have it.

In retirement, I have moved to a age-restricted community near Las Vegas, NV. Driven from my native California by crime and crowding and a government that is hostile to middle class people, I now face a state income tax rate of ZERO on all my income, including in particular, withdrawals from my IRA. I have taken a number of ocean cruises and been a member of the local bridge clubs and a computer club. My main hobbies and pass-times now are weight and resistance training and following the political and economic news. Some reading. Some travel. Life is sweet, though wounded by deaths of people I loved.

What's your news, Friar?
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Old 11-29-2010, 11:07 AM   #19
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My experience might not be of much use to you because, unlike many people, I never supported a spouse or family, never got wrecked in a divorce settlement, and inherited about a third of my retirement stash.
Welcome Ted.

I definitely appreciate insight from those who have been there and done that even when the circumstances aren't exactly like my own.
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Old 11-29-2010, 12:54 PM   #20
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Thank you, CoolChange. No two of us have exactly the same life experience, of course, though we share an interest in early retirement. Let me ask you this: Assuming you manage your retirement assets to be reasonably confident that you won't outlive them, what to you plan for the remaining assets when you die? Some advocate "Die Broke" -- a policy they implement largely by buying life-time annuities. That seems to me to be a way of making the annuity seller your beneficiary -- that seller gets to keep any funds still left. Maybe that's fine, if the seller is some charity that you are happy to support (posthumously). Alternatively, you can plan to bequeath the remaining assets to one or more of your survivors. My problem with that is this: my relatives are either good at managing money (and don't need mine) or not good at money management and would just squander assets that my family has taken more than a century to put together.
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