Milestone Reached?

[akck]

Just thought I’d post this before my portfolio value drops below again.

I’ve been refining my numbers and I now think I’ve reached a milestone in our financial plans. I believe my IRA has grown to a size it will meet our needs based on all the assumptions I’ve made (actually, it was there last year). This is spend the entire IRA by the time I die scenario. Of course everything has to work perfectly in order for this scenario to work. The main assumptions are dying 35 years after retirement, the portfolio averaging an annual return of 7%, inflation averaging 3%, all pensions & S.S. income pays as expected and we’re at or below my retirement expense target.

Since I’m pessimistic that everything will work perfectly in retirement, I’ll continue working at building a cushion over the next several years. My next goal is to be able to retire assuming a 6% return, with the final goal that the IRA will grow enough to last forever (<4% SWR). In theory, a 50% fixed income, 35% domestic equity, and 15% foreign equity asset allocation should produce an average 7% return. Our plan is to have 30-40% FI and the rest equities, so a return of 6% or larger is not out of line.

Some may think that a 3% inflation rate is low, especially under today’s conditions. One thing I’ve realized is that 25-30% of our expenses have an inflation rate of 0%. The mortgage portion of our retirement expense is set with a FRM. After the first few years in retirement, this expense will go to $0 (another budget item covers maintenance and taxes). Healthcare inflation won’t be a problem since we have paid medical insurance in retirement limiting our out-of-pocket expense. These two items should allow us to survive a higher rate on other items than the past average inflation.

Reaching this milestone has changed our investment plan. I’ve lowered the risk level I’m willing to accept. Early in my plan, when I had no idea what we needed, I figured a 12-15% average annual return was needed to reach our retirement goals. This of course means we had to take on more risk. With this milestone reached, I’m now scaling back the risk level on our investments, figuring a 7-9% return will meet our retirement goals. This transition will likely take up to three years as most were long-term investments within the first year or two of their 3-5 year span. This knowledge also made 2007, a down year for us, not as big a problem as it would have been under our prior risk level (i.e., I might have had to take on even more risk to make up for it).

What was most comforting from the expense thread was that those of you who’ve retired have been able to be at or below your retirement expense projections. It makes me think that we’ll be able to do the same since I’ve fudged my expenses to the high side.

So, what did you do when you thought you were near your goal? Did you scale back your risk level or did you go on as is? Also, do you think I might be overconfident having reached this milestone? Please shoot me down if you think I’ve made a bad assumption or missed something. I don’t want to have an “Oops!!” in retirement if it could have been avoided. Thanks.

[Want2retire]

Congratulations! That is indeed a nice milestone to contemplate.

Yes, I scaled down my risk level by putting a much more conservative asset allocation in place upon receiving part of my recent windfall.

I think you are doing just fine. You seem cautious, and that is a good thing since we live in the real world. Just keep plugging along and chucking your extra cash into your accounts as much as you can. Have you tried Firecalc? It's a free retirement calculator (though donations are welcome), and the link is at the bottom of the page.

I am not yet retired (my accounts are large enough, but I am waiting until 2009 for lifetime medical), so I can't comment on ER expenses.

And since I see that you only have 7 posts so far, welcome to the forum!

[RunningBum]

Well, the first time I hit my milestone and actually went by it by quite aways, I was stupid and stayed nearly 100% equities, mostly tech stocks.

A few years later, I got back up to my milestone and have been much better about diversifying into ~25-30% bonds and fixed income, and spreading out the equities among sectors and foreign/domestic. My milestone includes a cushion.

I don't see anything wrong with what you are doing. You didn't mention your age. I'm 46, that's why I feel like I should be well over 50% equities myself, though that's a risk/return statement and when I do actually retire I may throttle back some.

[Moemg]

When I reached my milestone life went on as normal . I did not change my asset allocation from 80% stocks and I did not quit my job . I was not sick of working and I was not mentally ready to retire . Now I am retired so I might go to 70% stocks . I can sleep at night with the risk so I figure I'll stay the course.

[akck]

Originally Posted by Want2retire

Congratulations! That is indeed a nice milestone to contemplate.

Yes, I scaled down my risk level by putting a much more conservative asset allocation in place upon receiving part of my recent windfall.

I think you are doing just fine. You seem cautious, and that is a good thing since we live in the real world. Just keep plugging along and chucking your extra cash into your accounts as much as you can. Have you tried Firecalc? It's a free retirement calculator (though donations are welcome), and the link is at the bottom of the page.

I am not yet retired (my accounts are large enough, but I am waiting until 2009 for lifetime medical), so I can't comment on ER expenses.

And since I see that you only have 7 posts so far, welcome to the forum!

Thanks for the encouragement. Yes, I've tried Firecalc and so far it says I'll have a 100% success rate for retirement. I do want to play with it some more, trying some of the other options and seeing what difference they make.

Like you, my retirement age is 60 (six years from now), mainly because of the free medical coverage. The pension will be a little bigger too, but by the time I saved enough to cover medical and pension reductions, I'd probably be 59 1/2 anyway.

Thanks for the welcome. I've been working on RE over the last 5 years and have visited other retirement sites. It's only been in the last year that I've refined the numbers and realized I was closer than I thought.

[akck]

Originally Posted by RunningBum

Well, the first time I hit my milestone and actually went by it by quite aways, I was stupid and stayed nearly 100% equities, mostly tech stocks.

A few years later, I got back up to my milestone and have been much better about diversifying into ~25-30% bonds and fixed income, and spreading out the equities among sectors and foreign/domestic. My milestone includes a cushion.

I don't see anything wrong with what you are doing. You didn't mention your age. I'm 46, that's why I feel like I should be well over 50% equities myself, though that's a risk/return statement and when I do actually retire I may throttle back some.

I know how that goes. If I had worked the numbers out a year ago, I could have been much better off assuming I started making the changes I'm currently working on. Still, I'm 54, and six years should be plenty of time to get me to my final goal. Thanks for the encouragement.