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A Different Slant on Retirement
Old 02-23-2007, 11:24 AM   #1
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A Different Slant on Retirement

If your objective was to leave an inheritance greater than your current net worth to a child in need, what approach would you take to minimize the possibillity of loss of principal and still grow the portfolio.

In working with a $1,700,000 in assets, I have entertained the idea of dividing the money in two buckets as they say, thus trying to live with fixed income from bonds and CD's for the next 20 years off $700,000, and leaving the $1,000,000 untouched for growth for my son to live on for his remaining 40 years after I die. Taking 4% of that amount would only give me $28,000 a year, and with paying taxes on the whole non tax sheltered estate, that would not be enough income. 6% from $700,000 would generate $42,000 which is the minimum I feel I would need. ($24,000 a year for me, and $18,000 a year for Uncle Sam) I would still want to have at least 40% of the $1,000,000 for my son in fixed income and 60% in stocks, so that means I must pay taxes on $66,000 (assuming 6% interest) plus another $20,000 from social security, plus any dividend income coming from stocks. Thus my $90,000 total fixed income and $18,000 tax bite.

So if I am 65 now, I will have 20 years to grow that $1,000,000 for him. .
However, in 20 years the present $42,000 income generated from the $700,000 for me to live on will be worth less than 1/2 because of inflation, and I would have a difficult time as years pass trying to live on it. So that plan seems flawed. I know part of the difficulty lies in my fear of the stock market and fear of loss on account of my son, thus my desire for a more conservative approach.

I know looking at it as a whole (undivided) $1,700,000, taking a little less than 3% would give me the needed current and supposed future income I need. However, most charts such as FireC are geared to looking at will your money last YOUR lifetime, as opposed to will your money last yours and someone elses lifetime.

As $1,700,000 would be sufficient net worth for someone to retire today, that amount may very well not be adequate for someone 20 years from now, especially if it had to last another 40 years, thus my desire to make it grow.

I guess the real question here is, what strategy should I take here to best
protect and grow my assets to last a long time. There don't appear to be charts geared to this scenerio, and of course I am very aware that "safety" and inflation protected type investment don't go hand and hand.

So, I guess my questgion here is what would be the safest strategy to achieve my goals (besides continuing to work till I drop) Do you think that my fear of the stock market and possible loss is just something I need to get over in order to make best use of this money?

I don't want an annuity, and I don't want to be a landlord any longer. So, stocks and bonds seem to be all that is left.
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Re: A Different Slant on Retirement
Old 02-23-2007, 12:47 PM   #2
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Re: A Different Slant on Retirement

Quote:
Originally Posted by modhatter

So if I am 65 now, I will have 20 years to grow that $1,000,000 for him.  .
However, in 20 years the present $42,000 income  generated from the $700,000 for me to live on will be worth less than 1/2 because of inflation, and I would have a difficult time as years pass trying to live on it.  So that plan seems flawed.  I know part of the difficulty lies in my fear of the stock market and fear of loss on account of my son, thus my desire for a more conservative approach. 
Often what people do when they have a financial fear is they buy insurance.  You could get an annuity that starts paying $42K/yr with CPI adjustments yearly for ~$730K.  But even though you are afraid of the stock market you said
Quote:
Originally Posted by modhatter
I don't want an annuity, and I don't want to be a landlord any longer.  So, stocks and bonds seem to be all that is left.
So when you looked at the $1.7M

Quote:
Originally Posted by modhatter
I know looking at it as a whole (undivided) $1,700,000, taking a little less than 3% would give me the needed current and supposed future income I need.  However, most charts such as FireC are geared to looking at will your money last YOUR lifetime, as opposed to will your money last yours and someone elses lifetime.

As $1,700,000 would be sufficient net worth for someone to retire today, that amount may very well not be adequate for someone 20 years from now, especially if it had to last another 40 years,  thus my desire to make it grow.
did you notice that FIRECalc gave a 100% success rate with the value of your remaining portfolio in the range of $1,022,563 to $9,171,813, with an average of $3,777,726? (and when I ran it I didn't even include SS since I didn't know your numbers)

You seem to have a number of options (at least the two here) so pick the one you are most comfortable with.
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Re: A Different Slant on Retirement
Old 02-23-2007, 01:16 PM   #3
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Re: A Different Slant on Retirement

Assuming you are healthy, I would look into buying a life insurance policy that pays an apprpriate amount of money into a trust that would benefit your son.
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Re: A Different Slant on Retirement
Old 02-23-2007, 01:26 PM   #4
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Re: A Different Slant on Retirement

I like the "buckets" approach in your case, as I do for most people with very large retirement portfolios. The conventional wisdom says you should have a certain percentage (often 40-50%) in "safer" stuff, but 40-50% of a very large portfolio is likely more "safe" money than you'll need for at least 10 years. So in that case, stick with 5-10 years worth of withdrawals in the "safer" stuff and invest the rest for growth.

Some people prefer a three-bucket approach where a second "intermediate" bucket between the safe stuff and the riskier stuff can fit. In such a bucket you might have longer term bonds, high dividend stocks and REITs, for example -- stuff that throws off a lot of income but has some price volatility. You could put (say) 5 years in the first bucket and perhaps 5-10 in the second bucket as well.
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Re: A Different Slant on Retirement
Old 02-23-2007, 01:41 PM   #5
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Re: A Different Slant on Retirement

Quote:
Originally Posted by brewer12345
Assuming you are healthy, I would look into buying a life insurance policy that pays an apprpriate amount of money into a trust that would benefit your son.
That's a sound plan, and you could probably use dividend income to do it........
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Re: A Different Slant on Retirement
Old 02-23-2007, 02:03 PM   #6
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Re: A Different Slant on Retirement

Why not switch things around. Use the $1million for you to create a few dividend bearing funds while you invest the other $700k in a combination of laddered bonds, balanced funds, and one or two more aggressive fund areas to keep the kitty growing over the next several years.

You don't need to split to happen until after you are gone I take it. It would appear you are taking care of you child now and anticipate caretaking of some type for his lifetime. There are any number of ways to set this up including life insuance as Brewer said or in a variety of trusts where many different instruments could be used and to shield it from estate taxes.
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