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Feeling better, but still not sure...
Old 10-15-2012, 01:54 AM   #1
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Feeling better, but still not sure...

Ok, after reading & learning a LOT here, and playing around with several online retirement planning tools over the past few weeks, I'm beginning to feel a little better about the possibility of our making it through (to Age 100). DW is accusing me of obsessing, but keeps reminding me she doesn't want to go back to the grind.

Trying to be fairly conservative, I used parameters of:
Combined (future) average annual return (60S/40B) - 5%
Average Inflation - 4% (6% for medical expenses where possible)
Success rate >95%

With the 4 tools I used (FireCalc, ORP, Flexible, & SmartMoney) I got pretty consistent results on annual spending/withdrawal amounts (which came out to ~3.5% and within $3K of each other) that were 40% higher than our actual expenses , and about $5K higher than estimated by the CFP we hired. Two of the planning tools recommended taking withdrawals from a mix of taxable, tax deferred, and tax free, whereas the CFP went with the conventional draining of taxable assets first. Playing around with this variable, we actually got larger withdrawals and our nest egg lasted longer by taking the mix.

I realize this is an ongoing process which will require lots of futzing into the future, especially during the first few "critical" years, but these numbers are looking satisfactory, which also makes me wonder what I missed, forgot, or did wrong in all 4 planners...

Thoughts, comments, ideas?

Tyro
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Old 10-15-2012, 05:37 AM   #2
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Originally Posted by Tyro View Post
Two of the planning tools recommended taking withdrawals from a mix of taxable, tax deferred, and tax free, whereas the CFP went with the conventional draining of taxable assets first. Playing around with this variable, we actually got larger withdrawals and our nest egg lasted longer by taking the mix.
Your CFP needs to be avoided in the future. The concept of tax managed withdrawals is not exactly new. He's living in the 1980s.

Here's my standard comment on when to retire. We only have one life. You need to decide how to spend it.

It's natural to become obsessive about planning for retirement and especially so just before pulling the trigger. There is absolutely no certainty about anything. Past performance is no guarantee of future performance. You will never be able to weather in infinite number of financial disasters, run away inflation, extended poor market returns, etc.

I recommend you make a generous (but not crazy) budget that has fat in it to cut if things get tight. Be ready to cut back to a bare bones budget if things really go bad. Most people here comment that they are doing well in retirement despite all of the recent financial issues.

Of course, there was probably some careful planner that retired in 1935 in Germany. He was sure that with the new, stable government that his finances would carry him and his dear wife for the next 30 years. The financial disaster over the next few years really didn't matter since they were Jewish. You can never truly predict the future.
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Old 10-15-2012, 05:57 AM   #3
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Originally Posted by Tyro View Post
Ok, after reading & learning a LOT here, and playing around with several online retirement planning tools over the past few weeks, I'm beginning to feel a little better about the possibility of our making it through (to Age 100). DW is accusing me of obsessing, but keeps reminding me she doesn't want to go back to the grind.

Trying to be fairly conservative, I used parameters of:
Combined (future) average annual return (60S/40B) - 5%
Average Inflation - 4% (6% for medical expenses where possible)
Success rate >95%

With the 4 tools I used (FireCalc, ORP, Flexible, & SmartMoney) I got pretty consistent results on annual spending/withdrawal amounts (which came out to ~3.5% and within $3K of each other) that were 40% higher than our actual expenses , and about $5K higher than estimated by the CFP we hired. Two of the planning tools recommended taking withdrawals from a mix of taxable, tax deferred, and tax free, whereas the CFP went with the conventional draining of taxable assets first. Playing around with this variable, we actually got larger withdrawals and our nest egg lasted longer by taking the mix.

I realize this is an ongoing process which will require lots of futzing into the future, especially during the first few "critical" years, but these numbers are looking satisfactory, which also makes me wonder what I missed, forgot, or did wrong in all 4 planners...

Thoughts, comments, ideas?

Tyro
Needs more cowbell.

Tyro, everything else looks pretty solid to me. You can spend more time and effort on your financial plan, but I don't think it will get much better. Congratulations.
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Old 10-15-2012, 08:09 AM   #4
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Needs more cowbell.

Tyro, everything else looks pretty solid to me. You can spend more time and effort on your financial plan, but I don't think it will get much better. Congratulations.
+1 Looks like you have all the bases covered and are conservative (perhaps too conservative). A 1% real rate of return is a lot lower than the 2.5% that I use (5.5% investment return - 3% inflation). After a couple year you may conclude that you need to splurge more.
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Old 10-15-2012, 09:00 AM   #5
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Originally Posted by Tyro View Post

Trying to be fairly conservative, I used parameters of:
Combined (future) average annual return (60S/40B) - 5%
Average Inflation - 4% (6% for medical expenses where possible)
Success rate >95%

Thoughts, comments, ideas?

Tyro
I'm not a big fan of 'selecting' average returns and average inflation. What does FIRCALC tell you about the historical success rate? That method tells us how those factors interacted with your withdrawals, the volatility and interaction can play a big part..

-ERD50
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Old 10-15-2012, 01:12 PM   #6
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Your 1% real return going forward doesn't sound that conservative to me.....



Try this thought experiment (not my analysis-- I lifted it from a respected source):

Broad US real earnings based on E15* rose at a rate of 3.02%/year 1945-1970,
by a rate of only 0.51%/year 1971 through 1995 (!), and 3.25%/year 1996 to date.
The overall rate of real growth of E15 in since 1945 has been 2.17%/year,
a pinch above the very long run rate of just under 2%.
Let's assume that the recent period growth of 3.25% since 1996 is sustained indefinitely, a most optimistic assumption.
Since the long run average E15 earnings yield is 6.18% and the S&P is at 1435,
Thus E15 would have to be at $87.87 in today's dollars for the S&P to be
fairly valued (long run average historical multiple) at today's prices.
That reasoning is very solid with only an extremely small error range.
But E15 is only $61.77 right now, and at 3.25%/year it won't reach
$87.87 (in today's money) till April 2024 extending the 1995-to-date trend.
So, either the market has to fall 30%, or has to be flat for 12 years
while trend earnings catch up with today's prices, or some mix of the two.
That conclusion uses what I believe is an unustainably high estimate of real trend earnings growth.
Also I believe E15 (an imperfect metric) is itself a pinch high right now.

*average eps for last 15 years
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Old 10-15-2012, 01:48 PM   #7
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Your CFP needs to be avoided in the future.
....
It's natural to become obsessive about planning for retirement and especially so just before pulling the trigger.
....
I recommend you make a generous (but not crazy) budget that has fat in it to cut if things get tight. Be ready to cut back to a bare bones budget if things really go bad.
1. Came to that conclusion on our own after truly dissecting CFP's report & assumptions.

2. We had things planned well in advance; unfortunately, retirement was thrust upon us 2 years earlier than scheduled with mixed goods/bads. In retrospect, considering what the company (in Chap 11) is doing to employees & retirees, it was the right decision at the right time (literally by a matter of days).

3. Done & done. We could easily cut that 40% surplus to the actuals, which would amount to a ~30% reduction.

Thanks.
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Old 10-15-2012, 01:58 PM   #8
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Needs more cowbell.
Hoopla? Reason to celebrate? When DW retired, we had a modest retirement party during which she (with great ceremony) went out on the roof of the house (despite paralyzing acrophobia) and flung our alarm clock into the air to come crashing down and shattering to smithereens on the pavement.

Personally, I'm satisfied with a sense of relief (if I've done this correctly).

Thanks.
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Old 10-15-2012, 02:00 PM   #9
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(Pessimistic) Point:

Quote:
Originally Posted by cardude View Post
Broad US real earnings based on E15* rose at a rate of 3.02%/year 1945-1970,
by a rate of only 0.51%/year 1971 through 1995 (!), and 3.25%/year 1996 to date.
The overall rate of real growth of E15 in since 1945 has been 2.17%/year,
a pinch above the very long run rate of just under 2%.
Let's assume that the recent period growth of 3.25% since 1996 is sustained indefinitely, a most optimistic assumption.
Since the long run average E15 earnings yield is 6.18% and the S&P is at 1435,
Thus E15 would have to be at $87.87 in today's dollars for the S&P to be
fairly valued (long run average historical multiple) at today's prices.
That reasoning is very solid with only an extremely small error range.
But E15 is only $61.77 right now, and at 3.25%/year it won't reach
$87.87 (in today's money) till April 2024 extending the 1995-to-date trend.
So, either the market has to fall 30%, or has to be flat for 12 years
while trend earnings catch up with today's prices, or some mix of the two.
That conclusion uses what I believe is an unustainably high estimate of real trend earnings growth.
Also I believe E15 (an imperfect metric) is itself a pinch high right now.

*average eps for last 15 years
(Optimistic) Counterpoint:

Quote:
While there may be doom and gloom all around, investors would do well to learn the lesson of history — that stocks are rising and will do so for years to come.

That was the message of James O’Shaughnessy, chief executive of O’Shaughnessy Asset Management, at The Big Picture Conference in New York on Wednesday, bucking the pervading sentiment that bear markets and economic disaster are looming.

O’Shaughnessy argued that while the next few months may well be choppy, the stock market’s history points only in one direction. Whatever people think about fiscal cliffs, European crises and Chinese crashes, the bigger picture speaks of rising markets.

For example, he said, from the start of 2000 to April 2012 the Standard & Poor’s 500 index is down 11% in real terms. Even the market’s worst 20-year cycle, from 1929 to 1949, saw stocks cumulative real returns of 6% — that means, said O’Shaughnessy, that to even match the worst 20-year period in U.S. history stocks will have to rise a cumulative 19% in relative terms by 2020 — a nominal rise of 30% to 50%. And that, he says, is the worst-case scenario.
Trust history, not fear, when judging markets - MarketWatch

My expectation is for actual results to be somewhere between these two "forecasts"...
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Old 10-15-2012, 02:07 PM   #10
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+1 Looks like you have all the bases covered and are conservative (perhaps too conservative). A 1% real rate of return is a lot lower than the 2.5% that I use (5.5% investment return - 3% inflation). After a couple year you may conclude that you need to splurge more.
We're very much hoping to be able to splurge more, and have set aside enough (not included in the planning data) to move to a better situation free & clear (though wouldn't rule out a mtg., depending on the situation & numbers when it occurs).

I would note that your inflation rate may be a tad low. Historically, it's 3.25% (1913 - present) and I've noticed that every period it's been below average (like now) has been immediately followed by a period of extremely high inflation. Especially with all the money being printed worldwide, many are predicting a following period of higher inflation (I expect even higher than my 4%, but I'm guessing out 40+ years).

Thanks.
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Old 10-15-2012, 02:09 PM   #11
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Hoopla? Reason to celebrate? When DW retired, we had a modest retirement party during which she (with great ceremony) went out on the roof of the house (despite paralyzing acrophobia) and flung our alarm clock into the air to come crashing down and shattering to smithereens on the pavement.

Personally, I'm satisfied with a sense of relief (if I've done this correctly).
Sorry. The cowbell reference is just some SNL humor. An excerpt here Saturday Night Live - Recording Studio (More Cowbell) Excerpt - Video - NBC.com

The rest of my post was my message. You assume 1% real return and FIRECalc gives you >95% probability. That's a solid plan.
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Old 10-15-2012, 02:12 PM   #12
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What does FIRCALC tell you about the historical success rate?
If I'm understanding the question, FC told us that we could spend quite a bit more than the projections we are going with (like 4.5% of nest egg in the first year).

Thanks.
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Old 10-15-2012, 02:34 PM   #13
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Your 1% real return going forward doesn't sound that conservative to me.....
The CFP seems to be a 'gloom & doomer' (a disciple of the P/E 10 Ratio, which we didn't know before hiring), wanting us to sit on the sidelines (cash or short-term bond funds) for the next 3-8 years.
Is the Stock Market Cheap?

I'm trying to keep an open mind, so while we've reduced our risk exposure (from 100% equity funds), I'm still reading & learning. Many opinions on CNBC (and Brinker) have hinted that a significant correction is imminent. While not necessarily trying to time the market (though it may appear otherwise to some), I do believe we're in a sideways range of uncertainty that will continue somewhere between now and inauguration day. During this critical early phase of retirement, I'd rather lose <3% from inflation loss (on the amount sitting in cash for a couple months) than 50% from another '09 (which we've recovered from, but haven't had to reduce with yearly withdrawals. I'm ready to adjust either way. YMMV.

Thanks.
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Old 10-15-2012, 02:40 PM   #14
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Sorry. The cowbell reference is just some SNL humor. An excerpt here Saturday Night Live - Recording Studio (More Cowbell) Excerpt - Video - NBC.com
Ah... It came back to me in the first seconds of the clip!

Thanks.
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Old 10-18-2012, 08:19 PM   #15
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I would add that PE10 could actually much higher than the chart shows if you believe we are at a cyclically high mark for corporate earnings.

I would definitely keep a pretty good size cash cushion right now that could be quickly invested back into equities if we have a big market event. I'm currently at about 30% cash and could get that to over 40% if I got out of the car biz.

The only thing wrong with my analysis is I'm often wrong about everything.........
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