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Nearly time to ER
Old 03-26-2004, 12:21 PM   #1
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Nearly time to ER

Hello all, I've been lurking here for a while now and have learned a great deal. Thanks you all very much for you knowledgeable posts.

First a little about me, then a question or two. Single, no dependents (unless 2 cats count) hit 59.5 last week and am still working full time but looking forward
to retirement in the near future. There's a rumor running around my company that an early retirement offer will be made soon. If that turns out to be true I could be gone in a few months. Otherwise I intend to milk a large amount of saved vacation hours and become semi-retired, working 25-30 hours a week for perhaps another year or so. I'd reach 25 years July 1 2005 and at that point will get a better break on health
insurance so it's tempting to hang around at least that long.

My nest egg is about $875k in savings, IRAs, company stock, 401k and retirement plan. Based on past early retirement offers I expect I'd clear somewhere around another $100K or if I work another 15 months would be able to save that amount. The house is paid off and after retirement I'll probably sell it (it's way bigger than I need) and get a less expensive home. This should get me into the $1.2-1.3 mil range. Everything I've been reading here says that should be plenty for my lifetime. I don't have an extravagant lifestyle - I could live comfortably on 3% and get by on 2% if I had to - so if I manage it right I should be fine. Right?

After paying off the house a few years ago I started accumulating a lot of cash so I think I need to do some rebalancing. The 401K is in an S&P500 index fund and so are the IRAs. Until I retire I can't do anything about the company retirement plan money but when the happy day comes I'll put it in the S&P500 too. That leaves mostly cash which is in savings accounts right now. I'd like to get most of that into bonds but know very little about how to judge that market. Normally I'd never try to time the stock market much less the bond market but with interests rates so low I wonder if
an investment at this time in say the Vanguard Total Bond Market Index Fund isn't asking for trouble once interest rates start to rise. My goal is to have about 75% in the S&P500, maybe 20% in a bond fund and 5% in cash. If any of you could help me understand the bond fund part I'd sure appreciate it.

Haven't seen this discussed but for those of you collecting or expecting to collect SS how do you manage it? I figure that it will about cover future taxes so I plan to set up a separate account for SS deposits and use that to pay Federal taxes and hopefully property tax and auto registration. (I Live in Nevada so no state income tax.)

Thanks for any ideas you have and hope I'll be able to contribute a thought now and then.

Peter
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Re: Nearly time to ER
Old 03-26-2004, 12:28 PM   #2
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Re: Nearly time to ER

You should be fine. My portfolio is slightly smaller than yours, and my withdrawal rate slightly higher, not to mention my withdrawal term might be longer, and I'm expecting no trouble at all.

You might look into my book report on "the four pillars of investing" or read the book yourself. Gillette Edmunds "How to retire early and live well" is also a good candidate and is a lighter read than the "four pillars".

In short, you might want to broaden from the s&p500, although thats a decent base. The total stock market index is a small improvement. Stay away from long bonds and eyeball the intermediates for the time being; stick with short terms...most folks here like the vanguard short term corporate fund.

To the basic stock and bond components, you might want to add another 1-3 asset classes like 5-10% in a REIT, 5-10% in foreign stocks, 5% in emerging markets, 5-15% in large cap value indexes, 5-15% in small cap value indexes, 3% in precious metals, etc.

The essential is to add return while concurrently reducing risk and volatility. By successfully combining 3-5 (sometimes) disconnected asset classes, you can accomplish that.
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Re: Nearly time to ER
Old 03-26-2004, 02:09 PM   #3
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Re: Nearly time to ER

TH's suggestion on the "4 Pillars ..." book is
excellent. I recommend you read it before
you make any major financial moves.

As far as the bond funds go, the Short Term
Corporate fund is a good cash substitute and
pays close to 3% last time I looked. The duration
is about 1.8 years, which means that if short
term rates rise 1%, the bond value will drop 1.8%.
The Total Bond Market Index fund is an intermediate
term fund with a duration in the 4-6 year range.
Most experts expect rates to rise gradually after
the election, but this is far from certain. In any case,
the rise in yield of the fund will overcome the drop
in value over a period of time. IMHO, you should
consider using the Total Bond Market Index or the
GNMA fund for the bulk of your bond allocation and
use the Short Term Corporate for your cash.

Personally, I like to keep things simple. If you are of
the same mind, you might consider Life Strategy
Moderate Growth or the Target Retirement 2025
fund. Both use a 60/40 mix of equity to bond. Other
60/40 funds are the Balanced Index, STAR and
Wellington funds. The beauty of all these funds is
that they take stress out of the re-balance decision
in a down market.

Best of luck to you,

Charlie (aka Chuck-Lyn)
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Re: Nearly time to ER
Old 03-26-2004, 02:42 PM   #4
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Re: Nearly time to ER

I second charlie's post. Our lead work horse is Lifestrategy moderate. During the recent unpleasantness it was down -16% or so during 2002 but the computers at Vanguard rebalanced their little 'hearts' out and so we're back. ? Would I have rebalanced asset classes ala Bernstein et al? I don't know but I'm happy to let an impersonal unemotional computer take the question out of my hands.
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Re: Nearly time to ER
Old 03-26-2004, 04:45 PM   #5
Confused about dryer sheets
 
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Re: Nearly time to ER

Thanks TH, Chuck-Lyn and Unclemick this is just the kind of info I was hoping for. I'm looking for a lazy mans
investment vehicle so while I have no doubt the several options TH suggests are good choices for me the simpler the better. I didn't know about Vanguard's
Target Retirement funds but looking over them just now I think the 2025 or 2035 might be a way to go, along with the Short Term Corp. fund for cash. (BTW, it's yielding 2.62% currently Charlie)

Since I'm going to have quite a lot (to me at least) of cash to spread around do you think there's any downside to putting it all in the two or three funds I finally settle on at one time or would spreading it out
over oh I don't know say 6 months to a year be wise?

And while I'm on the topic, why does anyone who expects the market over time to go up dollar cost average? It seems to me that's a sure way to on average pay more for your shares. The experts all recommend it so maybe I'm missing something but if so I'd sure like to know what.

Peter
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Re: Nearly time to ER
Old 03-26-2004, 05:24 PM   #6
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Re: Nearly time to ER

Quote:
And while I'm on the topic, why does anyone who expects the market over time to go up dollar cost average? It seems to me that's a sure way to on average pay more for your shares. The experts all recommend it so maybe I'm missing something but if so I'd sure like to know what.
The key phrase there is "over time". Between now and then the price will jump all over, and I think dollar cost averaging is meant to protect you from the short term extremes.

Others here can give you better advice than I, but I intuit that where your money is and why you want to rebalance needs to factor into the formula.
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Re: Nearly time to ER
Old 03-26-2004, 05:34 PM   #7
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Re: Nearly time to ER

Quote:
And while I'm on the topic, why does anyone who expects the market over time to go up dollar cost average? It seems to me that's a sure way to on average pay more for your shares. The experts all recommend it so maybe I'm missing something but if so I'd sure like to know what.

Peter
There is a study floating around on this that I recently read. If I remember correctly, it disagreed with the DCA approach on the basis that historical simulations showed you were worse off using DCA. I think it also admitted that the worse case of buying at the (temporary) high was also avoided. I would paraphrase it as being worse off on the average, but better off when looking at the 95% point. It reduces risk, and some loss of average return goes along with that.

Sorry, but I can not recall where I was reading that. There is lots of stuff floating around and I can't vouch for the accuracy or reliability of the above, but it made sense to me, or I wouldn't be quoting it. Maybe someone else can add more detail?

Wayne
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Re: Nearly time to ER
Old 03-26-2004, 07:10 PM   #8
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Re: Nearly time to ER

History does show that DCA is bad overall.

However, bear in mind thats history.

I think the market (all of them) are a little overvalued right now. But then, if I knew anything I'd be sitting on a 94 foot boat in the carribean and having a funny little drink in a coconut delivered to me by Miss 2002.

The lifestrategy and target retirements are good one shot deals. The expenses are a little higher than doing it yourself with index funds, but I think the difference over 10 years is about $100 per 10k. You can make that up with dryer sheets.

A combo approach could be picking a lifestrategy or target retirement fund, and then spicing it up with some small cap value index, REIT index, or emerging market index. No more than 5-10% of each.

Just so you're aware, the lifestrategies keep the same allocations in relative permanence; the target retirements self adjust...hence the target 2035 will look like the target 2025 ten years from now. They effectively become more bond weighted and therefore less "risky". Thats debateable to a point.

Anything with a hard stock allocation over 60% is probably buying you a lot more risk than return. Anything with a stock allocation less than 50% is probably buying you less return without any less risk. Remember to include any spiff funds you buy to dress up those bucket funds in your allocation calculations.

Heres my net allocation right now:
Emerging market 4.03%
Small Cap Val 2.62%
Large Cap Val 30.77%
Foreign Stock 6.85%
REIT 10.75%
Oil and Gas stocks 5.07%
Short and interm Corp 21.33%
Foreign bonds 1.98%
Intermed bond 16.60%

I will probably take a little away from the REITs, which are up, and from the intermediate bond mix and move it towards small cap value, perhaps at the end of the year.
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Re: Nearly time to ER
Old 03-26-2004, 07:27 PM   #9
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Re: Nearly time to ER

Peter,

BigMoneyJim hit the nail when he said dollar cost
averaging is used to protect against buying at
a market peak. Do a Google search on "gummy stuff"
to get a good feel for DCA. As I recall, plunging
in at once will win out over DCA about 60 to 70% of
the time because of the long term upward bias of
the market. However, the extra return advantage
is not large. It is the risk of the other 40% that I
worry about. If you have a wad of cash you want
to put in the market, I would DCA or Value Average
(even better than DCA and also explained on gummy's
website) over a 3 year period minimum. If you are
already invested 75/25 as your first post suggested,
then converting to Target Retirement 2025 or 2035
in one move would not add any risk. By the way,
I am 70 and all my IRA is in 2025 which has a 60/40
allocation. Some would say that that is too aggressive
for my age since the conventional wisdom would
recommend a 40/60 stock to bond. The reason I
am more aggressive is that I need the extra growth
and can stand the volatility. At age 60 conventional
wisdom would suggest a 50/50 mix is appropriate.

The asset allocation is a very personal choice but it
is the most important decision you will make. In any
case, the experts recommend that you treat ALL of
your financial assets as one portfolio. Bernstein's
"4 Pillars ..." explains all this.

Cheers,

Charlie (aka Chuck-Lyn)
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Re: Nearly time to ER
Old 03-26-2004, 07:40 PM   #10
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Re: Nearly time to ER

I dont think age has a lot to do with it. As long as you are working with a reasonably sized portfolio, anything between 50 and 60% equities should produce solid results with a lot less volatility.

Of course, if anything over 20mph scares ya, or you're working with a very thin portfolio, a 40/60 stock/bond portfolio gives you a little less volatility for a little less return.

More than 60% or less than 40 doesnt make a lot of sense though.

Thats with historical data in mind; Bernstein says stocks and bonds will return about the same going forward the next 30 years, so that same 50/50ish bias still smells right.
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Re: Nearly time to ER
Old 03-27-2004, 02:48 AM   #11
 
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Re: Nearly time to ER

Hey TH, how about a -0-/100 stock-bond portfolio?

John Galt (no equity upside but still cashin' his interest checks)
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Re: Nearly time to ER
Old 03-27-2004, 03:56 AM   #12
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Re: Nearly time to ER

John

You forgot real estate - 0 stock plus bonds and real estate(the inflation fighter?).

In my working days in Littleton,CO, I remember an older fella telling me he 'thought' he had been a wheat farmer since 1946 but since selling many farms and moving further and further from Denver as the taxes went up - decided he was really a land developer with wheat as a hobby. That was back in the 70's when stocks were 'bad' and land/real estate was 'good'.


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Re: Nearly time to ER
Old 03-27-2004, 12:11 PM   #13
 
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Re: Nearly time to ER

Hey unclemick! I did not forget real estate, nor could
I since I am still heavily invested there. I have made a substantial amount of money in real estate over the years. In fact, it is not too much to say that my
very early ER was due (in large part) to real estate.

John Galt
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