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Old 02-29-2012, 04:24 PM   #21
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Misty it looks like you guys are in good shape. The only redflag is the combination of a pension without COLA and a 15% equity allocation. My question is what is your plan for dealing with inflation?

Now pundits and wannabe pundit like myself , have been predicting higher inflation due to the massive government borrowing for several years. We have been more wrong than right and so ignoring maybe smart. Still it seems to me while deflation remains a concern IMO a period of highish inflation 5-10% is a pretty likely scenario.

It sounds like it is your DH who is most uncomfortable about equities so I maybe preaching to the choir but I don't see how a very conservatively allocated portfolio of 1.6 Million generates $30K while keeping up with inflation with today's interest rates.

A personal anecdote my dad retired at 55 back in 1980. At the time his pension was the largest component of their retirement roughly $29K in today's dollars and larger than either SS (which he took at 62) or investment earnings, and mom's part time job . It got cut in half when he died but the real killer was inflation, my Mom is only collecting $432/month (5.1K/year) from his pension. Fortunately I move most of their money to Vanguard early in their retirement and kept up a healthy equity before gradually dialing it back this last decade.
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Old 02-29-2012, 04:55 PM   #22
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Originally Posted by clifp View Post
Misty it looks like you guys are in good shape. The only redflag is the combination of a pension without COLA and a 15% equity allocation. My question is what is your plan for dealing with inflation?

Now pundits and wannabe pundit like myself , have been predicting higher inflation due to the massive government borrowing for several years. We have been more wrong than right and so ignoring maybe smart. Still it seems to me while deflation remains a concern IMO a period of highish inflation 5-10% is a pretty likely scenario.

It sounds like it is your DH who is most uncomfortable about equities so I maybe preaching to the choir but I don't see how a very conservatively allocated portfolio of 1.6 Million generates $30K while keeping up with inflation with today's interest rates.

A personal anecdote my dad retired at 55 back in 1980. At the time his pension was the largest component of their retirement roughly $29K in today's dollars and larger than either SS (which he took at 62) or investment earnings, and mom's part time job . It got cut in half when he died but the real killer was inflation, my Mom is only collecting $432/month (5.1K/year) from his pension. Fortunately I move most of their money to Vanguard early in their retirement and kept up a healthy equity before gradually dialing it back this last decade.
Thank you so much for taking the time to post.

I have the exact same concerns that you do and I am having a hell of a time trying to figure out the fixed income situation. They do have a TIPs fund available in his 401k, so I had planned to put a huge chunk in there; but right now, fixed income is awful. My heart really goes out to people who were relying on their fixed income accounts to earn enough to supplement their pensions and/or SS. I will also do some CD ladders within the taxable account. Beyond that, I am stumped. I'm going to keep crunching the numbers. Perhaps DH will have to give into the fact that we will HAVE TO HAVE more in equities. I think he'd rather do that than continue working for another year or so.
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Old 02-29-2012, 06:16 PM   #23
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To illustrate the good point clifp makes regarding asset allocation, see below for order of magnitude difference if your asset allocation is very conservative WRT equities.

Where a 40:60 AA still allows a 4% SWR for this particular example, a 15:85 AA only allows a 3% SWR. IOW, compared to retiring with $1M and a 40:60 AA, at 15:85 you would need $1.33M. So you have to work longer or spend 25% less each year at a 15:85 AA.

Hopefully the chart will reassure you somewhat in that going 100% equity doesn't help guard against failure, you can see the chart flattens out at a fairly low equity allocation. Average residual assets changes a lot with more equities, but guarding against failure is usually job #1 for retirees.

Figuring out what your risk tolerance really is would be helpful. FWIW, most people tend to overestimate their ability to handle risk, ie. equity fluctuations. You don't "have to have" more equities, some people come unhinged when equity markets take a downward dive, and they definitely will several times over the course of a retirement. Understanding market history can be helpful. You can do this, you have time...
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Old 02-29-2012, 08:06 PM   #24
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so if 3% is a SWR for a 40+yr retirement than this

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... So you have to work longer or spend 25% less each year at a 15:85 AA.

...
should mean that with that AA a 2.25% WR is safe. and with a $1.6M portfolio they should be ok with a $36k starting WD, right?
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Old 02-29-2012, 11:10 PM   #25
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I hear you on the company match/ROI. That's exactly how I got in the "fix" I'm in. But, what a great problem to have, I say. It used to be worse until I started taking money from my 401(k) to live on AND taking 401(k) money to convert to Roth IRAs.



This is the bible I use for Roth stuff.

Guide to Roth IRA, 401k and 403b Retirement Accounts

from Fairmark.com

YMMV
Okay, I was thinking this was going to be an article and it is a series of articles. Did you buy the book "Go Roth"? I can definitely work my way through the articles, but am more than willing to get the book if need be.
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Old 03-01-2012, 03:41 AM   #26
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Have you run your plan through FIRECalc: A different kind of retirement calculator? Good place to start.

As rule of thumb, 3% is widely considered a SWR for age 55 or less (one example of many below, 3.3% looks like the 95% success rate for a 40 year retirement based on past history at least). As you probably know, the 4% rate most often talked about was based on a 65 yo retiree living for 30 years. But both are without factoring in Soc Sec, which most if not all US citizens can factor in.

If you do FIRECALC, I'd take Koolau's suggestion to scale up your projected expenses by 15-20% to allow for taxes unless you know more exactly what your tax bite will be.

Your certainly in the ballpark financially, congrats!
Okay, I've been "playing" with FIRECalc, but I need more clarity on the tax issue. When I laid out our budget for the first year in retirement, I had already taken taxes into consideration which led me to the $30K draw down figure required in our first full year of retirement. Are you suggesting that I add an additional 15-20% on top of what I already estimated to pay in taxes in 2013 to account for a higher than inflation adjusted tax liability in the future? I don't have a problem with doing that, but I just want to be clear that that is what you're suggesting that I do. So if total expenses for the first year are, say, $100K and that $100K already includes our 2013 estimated tax liability, you're suggesting that I should add an ADDITIONAL 15-20% to our expenses making them $115-$120K instead of $100K? Is that correct?
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Old 03-01-2012, 08:52 AM   #27
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If you do FIRECALC, I'd take Koolau's suggestion to scale up your projected expenses by 15-20% to allow for taxes unless you know more exactly what your tax bite will be.
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Okay, I've been "playing" with FIRECalc, but I need more clarity on the tax issue. When I laid out our budget for the first year in retirement, I had already taken taxes into consideration which led me to the $30K draw down figure required in our first full year of retirement. Are you suggesting that I add an additional 15-20% on top of what I already estimated to pay in taxes in 2013 to account for a higher than inflation adjusted tax liability in the future?
The point was simply that you account for paying taxes in figuring what your expenses will be (some people don't allow for taxes). In that you've already done that, the underlined applies, don't add another 15-20%.
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Old 03-01-2012, 10:04 AM   #28
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The point was simply that you account for paying taxes in figuring what your expenses will be (some people don't allow for taxes). In that you've already done that, the underlined applies, don't add another 15-20%.
Got it. No one knows exactly what they're tax bite will be in the future, so I thought perhaps you were suggesting that I should include an addition "chunk" to account for the fact that taxes are likely to increase in the future.

As much as I'd like to "forget" about taxes, I knew that I'd have to plan for them.

Gonna go "play FIRECalc" now.
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Old 03-01-2012, 11:55 AM   #29
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Hi Misty,

It looks like you are really doing well, and there has been lots of good advice here which I won't add to except I didn't see any mention of survivor benefits on the pensions.

You may have it covered but, for example, we were aged 55 and 54 when we ER'ed and 70% of our first year money was due to my non-COLA pension, of which DW will get 50% survivor benefits should I die before her. Therefore we have life insurance on me, and also currently plan on me taking SS at 70 to maximize her "insurance".

I just wondered if you had this covered in your expenses while the pension is a big % of your withdrawals.
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Old 03-01-2012, 12:05 PM   #30
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Hi Misty,

It looks like you are really doing well, and there has been lots of good advice here which I won't add to except I didn't see any mention of survivor benefits on the pensions.

You may have it covered but, for example, we were aged 55 and 54 when we ER'ed and 70% of our first year money was due to my non-COLA pension, of which DW will get 50% survivor benefits should I die before her. Therefore we have life insurance on me, and also currently plan on me taking SS at 70 to maximize her "insurance".

I just wondered if you had this covered in your expenses while the pension is a big % of your withdrawals.
Thanks for your input Alan. You make a great point. When DH retires he will take a decrease in pension so that I will get a 100% survivor benefit. So, yes, that base is covered. But I REALLY appreciate your mentioning it.

I would appreciate any input from anyone in terms of anything that I might be overlooking cuz there will be no going back.
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Old 03-01-2012, 01:15 PM   #31
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I've been "playing" with FIRECalc and now am getting a little bit more familiar with how to enter data.

When selecting various options, I want to use those that will give the most conservative outcome (i.e. worst case scenario for success).

o Under the Spending Models tab, I am assuming that Constant Spending Power would depleat your nest-egg faster than the other two options (Bernicke Reality Retirement or Percentage of Remaining Portfolio). Would someone please verify for me?

o I am also assuming that using PPI to measure inflation would result in a more conservative outcome than using CPI.

o Is anyone using a starting point other than 1871? Is there a different starting point that should be considered that would be more conservative?

o Inflation: I know that the default for most retirement calculators is 3% and most people probably use that; but I'm not sure that I feel comfortable with that going forward due to quantitative easing. At the same time, I am not sure what is realistic. Since this is used as an average, I wondered what people who anticipate high inflation are using. 5% ?

I really appreciate all the input and welcome any opinions/suggestions.
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Old 03-01-2012, 02:14 PM   #32
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I've been "playing" with FIRECalc and now am getting a little bit more familiar with how to enter data.

When selecting various options, I want to use those that will give the most conservative outcome (i.e. worst case scenario for success).

o Under the Spending Models tab, I am assuming that Constant Spending Power would depleat your nest-egg faster than the other two options (Bernicke Reality Retirement or Percentage of Remaining Portfolio). Would someone please verify for me?

o I am also assuming that using PPI to measure inflation would result in a more conservative outcome than using CPI.

o Is anyone using a starting point other than 1871? Is there a different starting point that should be considered that would be more conservative?

o Inflation: I know that the default for most retirement calculators is 3% and most people probably use that; but I'm not sure that I feel comfortable with that going forward due to quantitative easing. At the same time, I am not sure what is realistic. Since this is used as an average, I wondered what people who anticipate high inflation are using. 5% ?

I really appreciate all the input and welcome any opinions/suggestions.
hi and welcome misty

in answer to your questions,
o well that depends on future returns but i think you made the appropriate choice of spending plans. if things go bad you could always do something else.
o i would use CPI
o i dont use a different starting point
o i use actually inflation, i dont put in an estimate

good luck in your retirement, your numbers look great. however, if you are really concerned (conservative) you can always look into SPIAs
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Old 03-01-2012, 03:11 PM   #33
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FWIW...
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When selecting various options, I want to use those that will give the most conservative outcome (i.e. worst case scenario for success). FIRECALC results show you the historical worst outcome since 1871. How unlucky would you have to be to pick the worst possible year to retire in the past 110 years (30 yr periods)? You have a very good chance of a better outcome, how much more conservative do you want to be?

o Is anyone using a starting point other than 1871? Is there a different starting point that should be considered that would be more conservative? Why? If you look at the Excel data the worst 30 yr period began in 1969, the worst 40 yr period began in 1966. Omitting earlier years wouldn't change worst case, why wouldn't you want to see them all?

o Inflation: I know that the default for most retirement calculators is 3% and most people probably use that; but I'm not sure that I feel comfortable with that going forward due to quantitative easing. At the same time, I am not sure what is realistic. Since this is used as an average, I wondered what people who anticipate high inflation are using. 5% ? What matters most is real return, looking at inflation or returns alone might be a mistake. An average of 5% inflation for 40 years is not impossible but it's unprecedented. But if you want to be really conservative, using default returns and 5% inflation would model that. It will mean you'll need to save more, spend less and/or work longer. Run FIRECALC with 3% and 5% inflation without changing anything else, and look at the change in results. We're all going to have to make adjustments during retirement if inflation averages 5% for the next 4 years.

You can be too conservative modeling your plan IMO, but you're the one who has to be comfortable with it
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Old 03-01-2012, 03:32 PM   #34
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hi and welcome misty

in answer to your questions,
o well that depends on future returns but i think you made the appropriate choice of spending plans. if things go bad you could always do something else.
o i would use CPI
o i dont use a different starting point
o i use actually inflation, i dont put in an estimate

good luck in your retirement, your numbers look great. however, if you are really concerned (conservative) you can always look into SPIAs
I appreciate your response and your recommendation, but everything that I've been reading indicates that we should be able to make a go of it without annuities.

If things really go bad, we could convert to an austerity budget fairly easily and shave another $5-$10K/yr. without too much pain. I planned for some expenses annually that may or may not be spent each and every year and could roll over into the next year. I also budgeted pretty liberally for dining out and entertainment (well, we will be retired after all ). We could easily cut way back on both. DH loves to cook (can't wait) and we can always watch hockey on TV instead of going to see our favorite team in person. There are many ways that we could cut back and not really feel the pain.
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Old 03-01-2012, 03:55 PM   #35
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Midpack

I just wanted "to play" with the tool using the most conservative options offered to see if we would still make it for 40 years. Having DH work even another full year is not an option, so either we would have to reduce our ISWR (which is entirely possible since I was very liberal in estimating our costs) or we could invest more in equities (which DH would probably prefer to working longer). In any case, I want to be able to walk him through the model and be able to tell him that the results are based on being as conservative as possible, because I know that is what he will want to see.
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Old 03-01-2012, 04:19 PM   #36
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o Inflation: I know that the default for most retirement calculators is 3% and most people probably use that; but I'm not sure that I feel comfortable with that going forward due to quantitative easing. At the same time, I am not sure what is realistic. Since this is used as an average, I wondered what people who anticipate high inflation are using. 5% ?
Do not use 3%, 5% or any other fixed rate of inflation. Use CPI or, if you prefer and have a reason, PPI. When you use a fixed rate of inflation, you eliminate testing for the risk of a high inflationary period such as the early 70's.
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Old 03-01-2012, 04:39 PM   #37
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I appreciate your response and your recommendation, but everything that I've been reading indicates that we should be able to make a go of it without annuities.

If things really go bad, we could convert to an austerity budget fairly easily and shave another $5-$10K/yr. without too much pain. I planned for some expenses annually that may or may not be spent each and every year and could roll over into the next year. I also budgeted pretty liberally for dining out and entertainment (well, we will be retired after all ). We could easily cut way back on both. DH loves to cook (can't wait) and we can always watch hockey on TV instead of going to see our favorite team in person. There are many ways that we could cut back and not really feel the pain.
looking at your assets and spending i think you are good to go w/o an annuity also, but i do think that a very safe way for an ERe to plan for his/her spending is to separate wants from needs and then use an annuity (or pension) to cover the needs and then use a WR for the rest of the portfolio to cover the wants. that has actually been offered up as a way to be able to increase spending on the wants (a higher WR than may be considered "safe" is then used on the portfolio piece that is supporting the wants).
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Old 03-01-2012, 06:07 PM   #38
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Do not use 3%, 5% or any other fixed rate of inflation. Use CPI or, if you prefer and have a reason, PPI. When you use a fixed rate of inflation, you eliminate testing for the risk of a high inflationary period such as the early 70's.
Thanks. I decided to use CPI.
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Old 03-06-2012, 03:20 PM   #39
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We want to do some travel, but I don't know how often it will be or how expensive. We also will need or want a new car in the next (5) years. Should I take a "chunk of money" and "pretend" it's not there, earmarking it for those things before I determine our initial SWR?
Could you "assume" x trips per year at a cost of y? For example, I know we like to take one "expensive" trip a year at $6k, and one inexpensive one at about $2k. So I plan on $8k/year. I know you say you don't know how much they will cost...but "model" a trip to find out. For example, if you like cruises, log on to www.i've_saved_a_lot_so_now_I_can_afford_a_nice_cr uise.com and pick the options as if you were going...and see what it costs.


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TAXES
Even though we only need a $30K draw down (indexed to inflation), I am thinking that we should be drawing down his 401k as much as possible between 2013 and the time we decide to take SS. We will evaluate when to actually take it every year after we reach age 62. My SS will be minimal (<$400/mo) so we may opt to take it ASAP. I am concerned about the tax ramifications of not drawing down the tax deferred accounts and dealing with taxes after age 70 1/2.
Could you withdraw just enough from the 401k each year to reach a given tax bracket that's acceptable to you, then get any other needed funds from taxable accounts? Just look at the breakpoints and w/d up to one that's acceptable.
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