How much is enough to retire early on?

[Rich_by_the_Bay]

If one's only concern is conservation of buying power for life, why go cash instead of TIPS?

[digimix]

I am only 33 years old and have a clear plan to retire early. Currently my portfolio is 50/50 cash / real estate. My cash investment I have receive 10% monthly for the last 2 years. I am only sorry I did not start this like 5 years earlier. But I am extremely happy with how things have been going. I plan to retire in Panama where the cost of living is dirt cheapo as I already have a condo there. I travel a lot and these investments generate enough to live on and to afford me the lifestyle I want and at the same time still save 75% of my income(all passive) after these expense. My take is, calculate your current income, multiply it 5 five times and if you can invest your way to generate that amount then step off the boat and take the dive in retirement enjoy life while you have the strength to. Why save up your money only to spend it on an old unhealthy you when you can enjoy your youth while still saving to protect your old age.

[FIREd]

Wow I am very surprised by the number of early retirees on this board with massive cash positions. It goes against everything I have ever read on the subject, yet it seems to work! Just out of curiosity, for those of you with at least half their portfolio in cash, what is your SWR (or planned SWR)?

Quote:

Mysto: Over the last 27 years Total Inflation has been 103.9% (annual average of 3.82%) while my CD invested savings has INCREASED 145.9% (annual average of 5.40%) with a current annual return of 5.7%.

R Wood, It sounds like over the past 7 years the real return on cash has been about 5.40%-3.82% = 1.58% on average. Has this been your average withdrawal rate for the past 27 years and has your nest egg kept up with inflation, meaning did it grow on average 3.82% a year over the past 27 years?

[rmark]

The withdrawal research centers on 60/40 market portfolios, 25 year withdrawal periods, and U.S. historic returns and volatility – arriving at 4% of initial portfolio value + annual inflation withdrawals. Lower & higher starting withdrawals for longer & shorter periods.

Some authors overweight past higher return assets or devise complicated withdrawal rules in attempts to raise withdrawal rates. However, these rules are typically based on short segments of market history, making their future value questionable. And even the generally accepted 4% + inflation is weak when tested against other capital markets.

In essence, the research has you dividing your initial portfolio over your initial life expectancy while maintaining a market weight portfolio, using higher equity returns to offset stocks higher volatility, thus providing for an inflation adjusted withdrawal.

As a single 51 year old male you probably have a life expectancy of about 35 years.
(my guess, see IRS publication 590 for a more accurate number). Your 1.2 million divided by 35 years gives a 34,000 starting withdrawal from which investing costs and taxes would be deducted, leaving actual spending. If you keep the high cash/fixed income allocation, I’d suggest just re-dividing your portfolio each year using a new life expectancy estimate, resetting your withdrawal annually. This by itself will lead to increasing withdrawals, (as you are expected to live a longer shorter timeJ) though without the supposed inflation adjustment. Eventually it leads to a late life spend down of your portfolio.

You may find that your fixed income generates more cash flow than this withdrawal calls for, which may be re-invested into your portfolio or you may wish to increase your equity allocation.

As an aside – I know of no withdrawal research based on retiree sleep patterns.

[OAG]

Firedreamer: Our current SWR rate is 0% as we have been able just let it grow. My Army Retired Pay was all we used to live on until Social Security came along in 2000 (DS started) and 2002 (I started). In 2008 we will start RMD from Traditional IRA (DS) and in 2011 (myself) both of which are earning 6.25% APY until 2014 when they will be rolled over. These three sources will provide all of our expenses and then some. We also have small ROTHs earning the same 6.25% through 2014 which we do not plan to use and let them be available as a last resort. Sometimes we actually do withdraw from the savings but only to purchase big ticket items like a new car or when we purchased our personal residence, both of which were bought in 2005 utilizing maturing CD's. Since that time we have replaced the dollar draw downs that occurred with those two purchases. These purchases are not too large as we have been able to roll over a previous residence to a new one and the previous vehicles trade in value gets rolled to the new vehicle.

Just to be clear I have invested in Mutual Funds in the past but only for about 5% or less of our "nest egg" at the time, but I got really tired of watching the up and down of the market so we got out (luckily just before the 2000 (I think it was 2000)) drop -- always made money at it but we just felt more comfortable being 100% in insured savings. Also back in the late 70's and early 80's I did do some second trust mortgage lending at 21.25% interest rates. Fortunately, all of my second trusts did either go to maturity or get paid off early with no defaults. Also did a couple of good callable Bonds in the same time frame with attractive rates but they all got called early when the interest rates started to fall.

[Mysto]

Hey R Wood - I was replying to the original poster who it appears does not have a cola'd pension (lucky you have one - I wish I did)

If you are happy with your return - good for you.

I stand corrected. Fixed income only keeps ahead if:

1. CPI really measures inflation (It doesn't - Ask CFB)
2. You make no withdrawals
3. You don't pay taxes
(and you are lucky enough to get the best rates)

hard to be retired under those conditions unless the income isn't needed - of course then why the discussion or worry?

[OAG]

Sorry Mysto, my error. The Inflation numbers I have used are the ones from all of the Army Retired Pay CPI's and more recently the SS rates. Tried to attach a Excel file of the rates but seems you cannot do that with this system.

Found a link that may give better data at Historical Inflation data from 1914 t the present which is still close. I guess the discrepancy comes from the Military Retirement System using different method back in the late 70's and very early 80's.

[maddythebeagle]

Quote:

Originally Posted by FIREdreamer Wow I am very surprised by the number of early retirees on this board with massive cash positions. It goes against everything I have ever read on the subject, yet it seems to work! Just out of curiosity, for those of you with at least half their portfolio in cash, what is your SWR (or planned SWR)? R Wood, It sounds like over the past 7 years the real return on cash has been about 5.40%-3.82% = 1.58% on average. Has this been your average withdrawal rate for the past 27 years and has your nest egg kept up with inflation, meaning did it grow on average 3.82% a year over the past 27 years?

Not to mention the lowest current tax rate being 15% for interest income and many people on these boards consider their personal inflation rate to be much higher than 3-4%....esp. for somebody in their 50s paying for insurance on their own=huge wildcard...

[kjpliny]

Assuming neverending growth in the economy is like believing you will never die. All good things must come to an end, and peak oil will reverse the trends we've seen in past markets. Don't assume investing in stocks will always be what it has been.

The Great Depression was temporary, Peak Oil is forever. Google it.

<== self acknowledged doomer =)

[twaddle]

Large cash or bond positions are coming into vogue as viable alternative allocation strategies.

I'm familiar with a few "interesting" approaches:

1) Ha's famous Morlock strategy in which you maintain a large cash position waiting for market crashes, and then switch to a large equity position once deep value is available.

2) Taleb's Black Swan strategy in which you maintain approx 90% in cash or treasury bonds, and use the remaining 10% to swing for the bleachers with potentially high-return speculative investments. Your downside is always capped to 10%, while your upside is unbounded.

3) Larry Swedroe's approach to Fama and French data in which he allocates about 70% to bonds (mix of TIPS and nominals) to reduce volatility and allocates the remaining 30% to ScV (50% US, 50% international), EM, and a smidge of commodities. His expected returns are similar to 100% stock portfolios, but with much reduced beta.

[DangerMouse]

The cash portion of our portfolio is approx. 45% of our total holdings. We are happy with this and can not see any need to move the money to bonds or tips. We plan on a SWR of 4% and are currently earning 7%. I don't even know what the average return on TIPS or bonds would be, but as with equities I can't see the point of taking on additional risk for what may be a smaller return.

[twaddle]

Quote:

Originally Posted by DangerMouse The cash portion of our portfolio is approx. 45% of our total holdings. We are happy with this and can not see any need to move the money to bonds or tips.

Cash does look pretty good right now with a 3% real return, however you're obviously exposed to declining interest rates now that the fed has telegraphed a rate cut.

CD's would let you lock current yield, but bonds could be even better: lock in current yield and get capital appreciation if rates fall.

[clifp]

Getting back to the OP.

Plugging a few numbers into Firecalc as well as common sense 1.2 million/40 years = $30K suggest that you are fine. Once you factor in social security, I think you can reasonable expect to be able to withdraw $40K

I am more of risk-takergambler than you so I have a higher equity allocation. Your two biggest risk are unforseen medical expenses and inflation. Not sure how to deal with medical, but for inflation I'd suggest looking at TIPs.

Assuming that you have moderate amount of money in a IRA, you can purchases TIPs with ~2.5% real return. 1.2 million * 2.5%=30K real return.

[Lyle]

Dallasguy

The cost of living in Dallas area is reasonable and not likely to sky rocket up so I think you are fine(we live there also). I have calculated our expenses at closer to 40K here,but there are two of us.

I say go for it. You will likely find you have plenty.

Lyle

[Texas2step]

Dude! you have 1.2 million and no debt. At 51 I would retire. I live in dallas also, all my life. If I were able to retire I would move to a slower paced rural town, but that's just me. I think you are good to go, give notice and start living.

[jIMOh]

Quote:

Originally Posted by DallasGuy My question is: Do I have enough savings/investments to retire on? I know it's very specific to each individual, but I'd just like a few opinions on my situation. I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now. What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

1.2 M, 66% in cash.

At 4% SWR, this should generate 32k per year.

You are OK.

What I would do is start shifting money to tax favored investments- what is in IRA form? Roth form? taxable?

for example, take out 32k per year, then put 2k into a dividend paying vehicle... and maybe cap out tax bracket if this is a 72T and convert the balance of tax bracket to a Roth.

over time you will be withdrawing money at a lower tax basis.

Over time the 2k per year added to a dividend based investment should also help accumulate some assets where you can live off dividends, which tend to keep pace with inflation.

The 400k equity investment can generate close to 12k per year in dividends (3% yield). Adding 2k per year to this over next 17 years suggests $600k might be in dividend paying stocks by time SS kicks in at age 68.

[124C41+]

A good resource for answering your question is the Department of Labor Web site for the Employee Benefits Security Administration. Search for their publication, "Taking the Mystery Out of Retirement." If you work through the worksheets you will have your answer.

[RetireeRobert]

Quote:

Originally Posted by DallasGuy My question is: Do I have enough savings/investments to retire on? I know it's very specific to each individual, but I'd just like a few opinions on my situation. I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now. What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

If you take $1 million and a conservative SWR of 3.2%, that gives you $32000/year. The other $200,000 consider an emergency fund, but it could also throw off plain income (no touch principal of this fund) of $8000 at a conservative 4% earnings rate.

Total income $40,000, and you are considering the $200,000 an emergency fund where you do not touch the principal except for emergencies.

Only question is if you can sleep at night knowing inflation can eat you alive--remember the 80's? With 33% in equities you do have modest inflation protection. Perhaps part of the 66% cash could go to TIPS to further moderate inflation risk, yet maintain most of the allure of cash.

Then you safety valve is Social Security in 11 to 15 years.

YES---You can retire early!!

Do it!!

[Maurice]

Quote:

Originally Posted by R Wood Telly: Why be selective? Average Inflation as measured by CPI for last 27 years is 3.82% (which includes the 2 years you mentioned). For the last 20 years it has averaged 2.975% (Call it 3%).

Re the inflation question - I just finished Alan Greenspan's new book. His opinion is that the low inflation we saw globally in the last 20 years is an historic anomaly largely attributable to the fall of communism in the eastern block and the (relative) liberation of the Chinese economy. He sounded less optimistic about what the next 20 years would bring.

Out of curiosity I chose your timeframes (27 and 20 years ) and looked at the period up to 1990, roughly the start of what Greenspan considers the historically anomalous period.

For what its worth, the 27 years up to 1990 inflation averaged 5.57%. The 20 years up to 1990 it averaged 6.3%.




Now, back to your original question, I say go for it! 8)

[OAG]

Quote:

Originally Posted by Maurice Re the inflation question - I just finished Alan Greenspan's new book. His opinion is that the low inflation we saw globally in the last 20 years is an historic anomaly largely attributable to the fall of communism in the eastern block and the (relative) liberation of the Chinese economy. He sounded less optimistic about what the next 20 years would bring. Out of curiosity I chose your timeframes (27 and 20 years ) and looked at the period up to 1990, roughly the start of what Greenspan considers the historically anomalous period. For what its worth, the 27 years up to 1990 inflation averaged 5.57%. The 20 years up to 1990 it averaged 6.3%. Now, back to your original question, I say go for it! 8)

What is the source of those inflation numbers you use? BTW see my previous response #11.