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modeling options for early retirement
Old 06-30-2012, 03:32 AM   #1
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modeling options for early retirement

I'm 34 and desirous of a life free from the tyranny of work. I'm willing, even excited, to live abroad to make that happen. I've done a fair bit of travelling and could adapt.

In any event, my real questions are about finances and investing. I don't really know what I should be doing but I'm pretty sure what I've been doing isn't quite right.

I need to do two things.

1) Rebalance my assets to not be so cash heavy
2) Model my retirement options and determine how much I need to retire

I'm an investment newb but I knew enough to live below my means and save as much as I could. After ten years working for a globalcorp, I amassed about $420k:

  • $103k in cash (mostly in ingdirect savings & CDs at pitiful interest rates)
  • $34k in individual stock in the company I worked for
  • $72k in Vanguard 500 Index Fund (VFIAX)
  • $9600 in Vanguard Balanced Index Fund (VBINX)
  • $168k 401k in Vanguard Target 2040
  • $34k 401k in Vanguard Total Bond Mkt Index
  • $2,700 Roth IRA in Vanguard Total Stock Market Index Fund (VTSMX)


I set up automatic investments but I still ended up cash heavy. I should have done something about this but ... I didn't know what I wanted to do with that money.

Now I do. I want to retire. As soon as humanly possible. I plugged in some numbers to FireCalc and it gave me an 82% shot of making it for 60 years with $500k to start while withdrawing $20k a year to live on. That's enough for Mexico.



I could probably go back to work for two years and put another $100k in the bank. If that's what it would take I could suck it up and put my tie back on for a little while, but I need a plan.



At this point I'm not even sure what questions to ask so I'm just posting these notes as I struggle to figure out what to do.
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Old 06-30-2012, 09:34 AM   #2
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Do you have any marketable skills? I know several people retired in PV MX who write articles for pay. Others create web sites. These serve to supplement your income in case you end up with major expenses (like health).

Also your money is good until age 60 without major investment returns. You can also improve those returns by moving your money to pesos at Lloyds Bank in Mexico.
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Old 06-30-2012, 09:43 AM   #3
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Quote:
Originally Posted by RetireAbroadAt35 View Post
... I plugged in some numbers to FireCalc and it gave me an 82% shot of making it for 60 years with $500k to start while withdrawing $20k a year to live on. ...

I'll just say be careful with 60 year projections in FIRECALC. It is somewhat counter-intuitive, but longer runs like that start to give better results. FIRECALC looks at actual historical series, so with a 60 year run, it has to ignore the last 59 years of data, as it can't get a complete data set for 60 years. So you don't get tested against any sequences from 1951 on, and the 70's were a particularly bad time for retirees.

Many of us feel that you need to get down near a 3% WR for time horizons that long. And you probably want a back up plan to get by even cheaper if needed. If your plan A is based on minimal spending, what is your plan B? ER involves the unknown, and the longer the time period the greater the unknowns. But saving and LBYM is a great first step.

-ERD50
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Old 06-30-2012, 10:37 AM   #4
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One comment, you need to think of your entire portfolio in terms of your stock & bond balance. I could not make out what percent you had in equities but it looks pretty light for a 34 year old.

What is your AA?
Do you have enough equities to achieve your goals?
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Old 06-30-2012, 11:16 AM   #5
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From the numbers supplied, it looks like the AA is around 63/13/24 (stock/bond/cash).
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Old 06-30-2012, 01:50 PM   #6
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Do you have any marketable skills?
I worked in IT. While I've never done small jobs as an independent contractor I think I could get some.

Quote:
I know several people retired in PV MX who write articles for pay. Others create web sites. These serve to supplement your income in case you end up with major expenses (like health).
I didn't bring this up in the OP but when I said I wanted to build a model it is so that I can play with some of these ideas.

  • Do I try to earn $10-15k a year so avoid drawing down my nest egg?
  • Do I plan on picking up occasional contracts for years when I want to spend more than $20k?
  • Do I give up on my mini-retirement and go back to work for a year or two? I'd probably earn ~$120k/year but I don't have the stomach for it right now.

When I say I don't want to work, I mean that I just want off the hamster wheel. I don't want to have to work.

Quote:
Also your money is good until age 60 without major investment returns.
How do you mean? Social Security?

Quote:
You can also improve those returns by moving your money to pesos at Lloyds Bank in Mexico.
I'd like to be able to factor that into my model (I picture a big spreadsheet). This would mean more to me if I could see the numbers and how they might cascade.


Quote:
Originally Posted by ERD50
If your plan A is based on minimal spending, what is your plan B?
To work a bit. Either up front so I can have a bigger nestegg, or as I go to. I just don't know how much I need to work.

Quote:
Originally Posted by lsbcal
Do you have enough equities to achieve your goals?
I lived below my means and saved because I just knew I didn't want to commit myself to a cycle of debt and consumption. However, until a few days ago, I didn't have a specific goal of early retirement.

From eyeballing things and looking various calculators, I think I'm close but not yet there.

At this point, I don't know how much I really need because my allocation is (probably) a mess and I don't quite know enough to fix it and make the right future predictions.
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Old 06-30-2012, 02:39 PM   #7
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Traveling and living abroad are not the same.
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Old 06-30-2012, 02:46 PM   #8
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I don't know if you're being snarky or genuinely concerned. Either way you're the second person to state the obvious to me on this board. I know that living abroad is a major change. I am sure that some people follow the siren's call of cheap retirement to Mexico even when they really shouldn't.

I am also 100% certain that there's nothing that anyone can say in this forum that will take the place of me finding out for myself just what exactly that means.

That said, the area where I do hope to learn from this board, is managing and predicting the finances. You can at least take solace in the idea that I'll be able to use those skills regardless of where I decide to live.
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Old 06-30-2012, 03:00 PM   #9
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Not suggesting it isn't a good idea. Just think you should definitely have a re-entry plan if it turns out not to be what you wanted.

One thing that surprised me a little was that we lost a some close friends while we were gone. We thought many of them would visit but very few did. Over time, it became difficult to keep up because we chose not to return to the US often. As a result, even some close friends just drifted off and it was not easy to reconnect with them when we finally repatriated.
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Old 06-30-2012, 03:02 PM   #10
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I think you are asking good questions and developing your strategy. To really do this right will take time and perhaps some trial/error. I'd do the FIRECalc thing as suggested, get to know what you like (as opposed to what you don't like), read this board and Bogleheads.

You may want to consider whether you will have sufficient work time to qualify for SS or not. It seems a long way off when your in your 30's and there is plenty of bad press about the future. But SS is a helpful thing for us. For instance, if you are drawing maybe 20k from SS, you'd need at least 500k (I'm thinking 4% withdrawals) minimum to replace this.
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Old 06-30-2012, 03:18 PM   #11
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I'm in kind of an odd spot. My job required me to travel and as a consequence I haven't set down roots anywhere.

My friends and family are scattered all around the country (and a few around the world). It kinda sucks, for sure, but I'm used to it.

In retirement, I don't see myself settling down in any one particular spot for too long either.

For SS, I've received several letters over the years saying that if I were to be disabled I'd qualify for so many $$ per month. I don't recall the numbers but I assume this is the letter that tells me I have enough work time to qualify, yes?
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Old 06-30-2012, 03:42 PM   #12
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Originally Posted by RetireAbroadAt35 View Post
I'm in kind of an odd spot. My job required me to travel and as a consequence I haven't set down roots anywhere.

My friends and family are scattered all around the country (and a few around the world). It kinda sucks, for sure, but I'm used to it.
I would not say at all it sucks. We have friends all over the US and the world. We travel a bit, too. Since December, I've been to Australia, England, France, Germany, New York, Colorado, North Carolina, and a few others places.

However, all those air fares can add up, so I usually get someone else to pay for them.
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Old 06-30-2012, 04:57 PM   #13
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Indeed. Any suggestions on how I go about determining asset allocation for early retirement? That seems to be my immediate issue.
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Old 06-30-2012, 05:02 PM   #14
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A visit and a few weeks reading at the following site will probably help you: Bogleheads Investing Advice and Info

Hint: Don't tell them you want to retire in your mid-30s. Save that for yourself.
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Old 06-30-2012, 05:03 PM   #15
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I saw the front page and my head exploded. I'll keep surfing.
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Old 06-30-2012, 05:15 PM   #16
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Indeed. Any suggestions on how I go about determining asset allocation for early retirement? That seems to be my immediate issue.
Try reading Bernstein's latest ebook just out:
http://www.amazon.com/The-Ages-Inves...liam+bernstein
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Old 06-30-2012, 05:47 PM   #17
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Hint: Don't tell them you want to retire in your mid-30s. Save that for yourself.
Out of curiosity - why? Are they not an early-retirement friendly bunch? I do admit my plan does seem to throw people off topic a bit.

But ... isn't this an essential element of my planning? I'm trying to determine how big the nest egg needs to be, how to allocate the investments, how to withdraw a minimum for living expenses, etc all around a long and early retirement.

Aren't my conclusions going to be different from those of people who are planning to retire in their 50s and 60s?
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Old 06-30-2012, 06:41 PM   #18
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Out of curiosity - why? Are they not an early-retirement friendly bunch? I do admit my plan does seem to throw people off topic a bit.

But ... isn't this an essential element of my planning? I'm trying to determine how big the nest egg needs to be, how to allocate the investments, how to withdraw a minimum for living expenses, etc all around a long and early retirement.

Aren't my conclusions going to be different from those of people who are planning to retire in their 50s and 60s?
Your conclusions may be different, but that doesn't make them valid. I think you will find that your sustainable withdrawal rate will end up being lower than you expect, but will be about the same as someone in their 50s. I think you will find that a job will have to factor into your life. I think you will find that you need lots more money for the degree of certainty that a 50-year-old or 60-year-old would demand. Since you are younger, maybe you don't think the same way as an older person does, so you don't need that level of certainty.

As for trying to determine how much your nest egg needs to be, I would say 33 times your annual expenses including taxes, investment expenses, inflation, and health care. Then add a 25% contingency.

As for asset allocation, if you read Jim C. Otar's "Unveiling the Retirement Myth" and other books, you will find that it doesn't really matter whether you are 35:65 to 65:35 in a equities:bonds ratio. What matters is what the overall economy and stock market does. And if you haven't noticed, you have absolutely no control over the economy and stock market.

So I would advise that you find a gig that you love to do that brings in some cash. I just met someone who paints home interiors. He lives in a very nice area of the country, works by himself, and does one or two jobs a month. He doesn't have to accept every job, so one month he might not work at all; another month he might have 3 or 4 contracts. Anyways, you get the idea.
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Old 06-30-2012, 06:59 PM   #19
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How do you mean? Social Security?
Unless you have 40 quarters of contributions to Social Security, you will have no benefit coming to you at age 62+ Likewise, since the SS benefit amounts are based on 35 years of earnings, if you retire so early but do qualify, the benefit amount from so few years working will be very small compared to your salary when working. You'll have to build your model assuming that you live on your own investments even through social security ages.
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Old 06-30-2012, 07:25 PM   #20
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Welcome to the board, RA35. I think.

Quote:
Originally Posted by RetireAbroadAt35 View Post
I don't know if you're being snarky or genuinely concerned. Either way you're the second person to state the obvious to me on this board. I know that living abroad is a major change. I am sure that some people follow the siren's call of cheap retirement to Mexico even when they really shouldn't.
I am also 100% certain that there's nothing that anyone can say in this forum that will take the place of me finding out for myself just what exactly that means.
That said, the area where I do hope to learn from this board, is managing and predicting the finances. You can at least take solace in the idea that I'll be able to use those skills regardless of where I decide to live.
You might want to chill a bit and take a deep breath.

This board gets a ton of new posters who discover the ER concept, race into planning, ask a bezillion questions, and then have their cheery illusions destroyed by reality. One of those illusions is living abroad. After the first 10 or 20 of those posters who leave this board in dismay and disarray, we tend to take a more conservative & cautionary tone with those who blithely state a plan to live overseas.

If you're used to that lifestyle then you'll be fine. If you're not used to it then it's going to take some adaptation. You might already know plenty about Mexico life but if you're looking to learn more then you could try Billy & Akaisha's website at RetireEarlyLifestyle.com. They've accumulated quite a treasure trove of info there, so it's going to take you a week or two to work through it.

Quote:
Originally Posted by RetireAbroadAt35 View Post
Indeed. Any suggestions on how I go about determining asset allocation for early retirement? That seems to be my immediate issue.
Quote:
Originally Posted by LOL! View Post
A visit and a few weeks reading at the following site will probably help you: Bogleheads Investing Advice and Info
Hint: Don't tell them you want to retire in your mid-30s. Save that for yourself.
Quote:
Originally Posted by RetireAbroadAt35 View Post
I saw the front page and my head exploded. I'll keep surfing.
You got a very good suggestion there, from a very smart poster who's a lot further down this particular road than you are, and you're giving the appearance of blowing it off. You're gonna surf a long time before you realize that there's no better starting point than the Bogleheads resources. The specific starting point you might want to try is, well, the "getting started" part of the wiki:
Category:Getting started - Bogleheads
after that you might want to jump to the asset allocation section:
Category:Asset Allocation - Bogleheads
and begin with "Investment Policy Statement".

A few of the more vocal Bogleheads feel that early retirement is the equivalent of rusting on the front porch. Some of them tend to be a bit zealous and pedantic about low-cost index investing, one or two perhaps even to the point of strident fanaticism. They're entitled to their opinions. However the Bogleheads investing process will help you figure out what assets are important to you and will help you design your own portfolio that you're comfortable with. Maybe it'll use Vanguard and Vanguard index funds, maybe it'll use another brokerage and other types of funds.

However it's a very frequent mistake among new posters to want to jump right in and pick funds before they've thought through the process of asset allocation. The problem is that if you take the recommendations of faceless Internet strangers, you won't have a personal commitment to the resulting portfolio. At the first sign of a bear market, you'll lose confidence in your choices and cash out. If you take the time to keep your head from exploding, work through the wiki topics, figure out your volatility tolerance, and decide what funds you want-- that process gives you a DIY portfolio that you can feel comfortable with. You won't lose sleep at night worrying about the markets.

Quote:
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Aren't my conclusions going to be different from those of people who are planning to retire in their 50s and 60s?.
Probably not. The challenges of retiring abroad are about the same at both sets of ages, even to the point of chasing hot chicks and starting families. But I'll let this board's overseas retirees chip in on those topics.

From an investment perspective, you and they are both looking at investment horizons of greater than 30 years. Most of the 4% safe withdrawal rate research (including FIRECalc) is based on a 30-year retirement. You'll probably be more interested in creating a perpetual portfolio of dividends or else augmenting your portfolio with part-time worth to reduce the SWR to a more perpetually-sustainable 3% for the first couple decades.

I doubt that you'll find quick answers here. It's worth taking your time.
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