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Old 09-24-2007, 06:38 AM   #21
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Congrats to those with COLA pensions that are sufficient to support their living without having to worry about the economy or the stock market. Let's suppose in the unlikely event that the pension providers (even the government) announce that they would default their obligations because of a severe recession, would you change your perspective about the economy or the stock market. You probably would say that such an event will never, never, never happen. However, this is only a hypothetical question.
Short of having an emergency stack of gold bars in the basement everyone has to worry about the economy and stock market, pension or not.

If my non cola'ed pension fails, the fallback position is two SS checks and about 14 years living expenses in the bank plus the house.
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Old 09-24-2007, 09:27 AM   #22
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I'm not retiring for quite a while, but in your situation, I would retire as planned. I am so conservative that my dad thinks I'll be able to FIRE 5 years before I plan too, so by the time I do FIRE, I'll have enough "extra" to withstand a poor economic climate.
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Old 09-24-2007, 09:35 AM   #23
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My asset allocation is already in place for FIRE, though I'll move some bonds to cash at that time. The only thing that will change between now and FIRE-day is the total size of the nest egg.

If you've done that, waiting for a "good time" to retire is just market timing.
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Old 09-24-2007, 10:31 AM   #24
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I retired in August of 1999!

And believe you me, it was OBVIOUS that the markets were way overvalued. Today they are not nearly so!

But even if the markets were overvalued in 1999, you couldn't assume that the madness wouldn't continue a few years. The problem with bubbles is that they can last longer than anyone expects. I knew that, so I couldn't just wait it out. Remember I had no crystal ball. I had no idea that things would crash and burn starting in 2000. I had no idea I was facing a 3 year bear market - virtually unheard of at the time.

I knew I had to have an investment strategy that could weather storms, and I knew that I couldn't time things. I'd already learned that lesson well from the past. I also knew it was important to have an investment strategy that required minimum maintenance (keep it simple) so I didn't have to be tweaking all the time. Managing one's investments can become a full time J-O-B if you let it. I wanted to enjoy my retirement, not spend lots of time/energy tracking investments and making decisions.

Was I nervous? Yes! So I deliberately set up a strategy to manage that nervousness.

1. As part of planning for retirement we set aside a "travel budget" - a two year "splurge" on travel so that we could enjoy the first two years doing some dream travel we'd put off for a very long time (due to demanding careers) without concern about market situation right after retirement. This turned out to be a very good idea. We sold some assets - some land, some high-flying tech stocks, and the proceeds went into this pot. As extravagant as it seemed at the time, we were so glad we did, because we were able to go out and enjoy ourselves as not worry about the bear market. Our travel budget ended up lasting us through 2002.

2. I had 2 years of living expenses (sans travel) set aside in a money market fund. This meant I didn't have to worry about drawing down from the retirement portfolio over the next two years. This ended up helping us so much mentally - truly shielding us from market vagaries - that it has now become a standard part of our strategy. I usually have 2 to 3 years of expenses set aside in a cash account separate from the retirement portfolio. It really helps with the short term "feel good".

3. I knew that the most prudent investment strategy was to have an asset allocation that should survive many decades and to rebalance as market conditions changed. I developed one that met my needs. From studies, etc. I concluded that for long term survival, 55% to 60% equities was necessary. This was daunting in 1999, but I knew that inflation would eat away our nest egg otherwise.

4. Since ER was for us possible because we sold a large chunk of company stock, I had a large lump sum to invest into the broader market. Due to the extreme nature of market valuations, I decided to average this into the market over a 2 year period rather than the 1 year usually recommended. This turned out to be the life and sanity saver. In fact as things continued to get progressively worse in late 2001 I extended the averaging in period another 6 months. Oct of 2002 was the last of my averaging in investments - scary yes, but my strategy required that I do it! So I did. I was amply rewarded for the many scary investment times by the huge turnaround in 2003! By the end of 2003 I was probably about 20% ahead of my original investment. According to my records by the end of 2004 I was 31% ahead pre-tax.

Note that if I hadn't had the lump sum to invest but had already had a diversified portfolio, I would have just shifted the asset allocation to what was appropriate to my new retired situation and kept that, rebalancing as needed. Presumably the several year run up before the 2000-2002 disaster would have allowed me to take plenty of profits and move them to bonds, conservative investments, etc. But if I had received a lump sum pension, I would have probably done the same approach as what I did.

So there you have it. A few strategies to manage the potential pitfalls in early retirement plus an asset allocation that should survive many decades. The nice thing about the AA approach is that even when many asset classes are getting clobbered, some other asset class is usually doing well, so you almost always have at least one winner! LOL! For me that helps.

FWIW - if I had it to do all over again I probably would have averaged my retirement fund into a balanced, high-quality, low-cost fund like DODBX. The mindless simplicity of that approach is well worth it. IMO it's probably not worth what little optimization you might achieve by being a little more diversified. I had selected DODBX as a benchmark for my asset allocation and bought chunks of it at the same time I was averaging into my allocated set of mutual funds. DODBX has matched or beaten my asset allocation performance every year since 2000. Of course that's because mid-cap and value stocks dominated over those years plus intermediate bonds did best. This year 2007 is the first time my asset allocation portfolio is trouncing DODBX. Finally! So you can see why I feel that the effort of maintaining one's own allocation may not be worth it not matter how much "better" it might seem on paper.

Hope this helps.

Audrey
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Old 09-24-2007, 10:51 AM   #25
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Congrats to those with COLA pensions that are sufficient to support their living without having to worry about the economy or the stock market. Let's suppose in the unlikely event that the pension providers (even the government) announce that they would default their obligations because of a severe recession, would you change your perspective about the economy or the stock market. You probably would say that such an event will never, never, never happen. However, this is only a hypothetical question.
If one's ER plans are entirely dependent upon a COLA then it's probably a bad idea to retire. "Single point of failure" is just another phrase for "back to work".

So the answer to your question is "Yes, a loss of federal COLA would cause me to conclude that the govt has finally run out of money. But I'd run the FIRECalc numbers and make a decision." However I'd probably find plenty of bargain-basement domestic stocks to invest in, and our international asset allocation would probably be gangbusters. In other words, diversification.

We had a similar situation when the market opened after 9/11. (I was due to retire the following June.) By the end of the day our ER portfolio had shrunk 40% from its 2000 high. I ran the numbers on FinancialEngines (I didn't know of FIRECalc back then) and included our pensions with a zero COLA as a safety margin. It wasn't pretty and we might have had to use Cut-Throat's bare-bones budget tactics for the worst spots, but it still worked. I didn't pull my retirement request, although I decided that it wouldn't be hard to find a part-time job if necessary. The freedom of not working was more compelling than the risk of having to adopt a semi-retired lifestyle, although admittedly that's a lot easier to do when you're healthy in your 40s than decrepit and/or in your 70s.

For the rest of the board... anyone who wants a COLA pension can buy an annuity with the same features, and it's probably just as survivable as Spanky's scenario. You can get it without volunteering to be shot at, too.
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Old 09-24-2007, 12:17 PM   #26
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For the rest of the board... anyone who wants a COLA pension can buy an annuity with the same features, and it's probably just as survivable as Spanky's scenario. You can get it without volunteering to be shot at, too.
Funny post, Nords.............
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Old 09-24-2007, 12:34 PM   #27
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Congrats to those with COLA pensions that are sufficient to support their living without having to worry about the economy or the stock market. Let's suppose in the unlikely event that the pension providers (even the government) announce that they would default their obligations because of a severe recession, would you change your perspective about the economy or the stock market. You probably would say that such an event will never, never, never happen. However, this is only a hypothetical question.
I think that the most rational approach for all of us (even those of us who expect federal COLA pensions, like me) is to diversify - - not just in asset allocation, but diversify the sources of our income streams.

Pension, social security, retirement accounts, taxable accounts, CD's, fixed lifetime annuity - - I know that I will have seven such sources of income, so if my federal pension disappeared it would not be a show-stopper. To me, anyone who relies only upon a pension is quite the optimist.

Notice that all of the above except the retirement accounts and taxable accounts are independent of the stock market to at least some extent, and sometimes completely. So is my (paid off) house, the vegetable garden that I plan to keep at my retirement location, and so on.

I am constantly on the lookout for other sources of income (besides w*rk!) that might appeal to me.
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Old 09-24-2007, 01:13 PM   #28
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I ER'd July 6, 2007. Since them, the Canadian dollar has spiked which directly lowers my disposable income. I had planned for a US dollar drop, but not quite so quickly.

Bottom line: no regrets. I'd far rather have a little less money and a LOT more freedom. Who cares what the economy is going to do? We know it will go up, it will go down. What's the point of ER if you are going to sit around and worry about the economy? That's too much like a j*b....
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Old 09-24-2007, 01:56 PM   #29
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The state of the economy doesn't change my FIRE plans in 29 months. I am balanced and diversified in my portfolio and income streams. I have a pension due in the US March 2010, 2 pensions in the UK (drawing one now, 2nd one starts 2020), plus SS both here and in the UK. None of the pensions are COLA and the sum of the pensions doesn't cover my needs, so I need the savings to meet all my goals.

If my pensions were actually lump sum equivalents I don't believe I would annuitize anything - I believe I am disciplined enough to manage the investments myself.
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