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My Plan...what am I missing?
Old 11-12-2006, 07:22 PM   #1
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My Plan...what am I missing?

Many thanks to all the great posts. Your insights and suggestions have led me to this point. I'm curious to lay out my plan and see if I am missing anything or if anyone may offer improvements.

The basics:

44 years old
1.0 million in liquid, investable $
200k in a 401(k)

Goal: $50k per year indefinitely (lets say 35 years - I have too many bad habits to live to 100...)

Heres the plan I want to implement:

6 years living expenses in safe investments...(300k)

1-year MMA (50k)
1-year CD (50k)
2-year CD (50k)
3-year CD (50k)
4-year CD (50k)
5-year CD (50k) (My small, Denver credit union is still out of whack with national rates - the 5 -year CD is still yielding 6.0%)

Then set up a Paul Merriman ETF Banaced Buy-and-hold portfolio (http://www.fundadvice.com/portfolio.html) - split 50/50 between FI and stocks (700k)

6.25% S&P Depositary Receipts (SPDR) S&P 500 (SPY)
6.25% Vanguard Value VIPERs (VTV)
6.25% I-Shares Russell Microcap Index (IWC)
6.25% Vanguard Small Cap Value VIPERs (VBR)
5% I-Shares MSCI EAFE (EFA)
5% I-Shares MSCI EAFE Value Index (EFV)
10% WisdomTree Int'l Small Cap Div Fund (DLS)
5% Vanguard Emerging Market VIPERs (VWO)
25% I-Shares Lehman 1-3 yr (SHY)
25% I-Shares Lehman Aggregate Bond (AGG)

(I may add some foreign bonds to the US mix...)

So at this stage I have 300k in CDs/MMA, 350k in bond funds, and 350k in stock ETFs...

Add to that the 200k in the 401(k) (stock funds), and the totals come out:

CDs/MMAs - 300k
Bond funds - 350k
Non-401(k) stock ETFS - 350k
401(k) stock funds - 200k

Total FI - 650k
Total stock - 550k

I am a little paranoid, and am concerned about the future of the stock market. Thus the stock/bond-CD mix.

I figure to rebalance yearly. If the non-retirement stock funds do well, I'll take the profits and throw it into the MMA. If they don't, and the bond funds do well, I'll throw those profits into the MMA. If neither do well, I'll live off the maturing CDs in the meantime.

Do you think I should send the dividend/cap gains from the stock/bond funds into the MMA?

Have I missed anything?

Thanks!
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Re: My Plan...what am I missing?
Old 11-12-2006, 07:37 PM   #2
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Re: My Plan...what am I missing?

Quote:
I am a little paranoid
guess i'm less paranoid than you ... it seems overly conservative to me ... but if it lets you sleep!
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Re: My Plan...what am I missing?
Old 11-12-2006, 07:53 PM   #3
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Re: My Plan...what am I missing?

You're missing something very big. Inflation. The assumed steady rate of 50K in the fist year and then in the 5th year is wrong. Assume 3.5% inflation per year. After just five years you will need almost 60K.
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Re: My Plan...what am I missing?
Old 11-12-2006, 08:04 PM   #4
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Re: My Plan...what am I missing?

I figured the 5.5-6 % return on the CDs would virtually sustain spending power, and the 45% allocation to stocks would do the same long-term...
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Re: My Plan...what am I missing?
Old 11-12-2006, 08:09 PM   #5
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Re: My Plan...what am I missing?

Congrats on amassing such a nice nest age at your young age!

did you run your numbers through firecalc yet? I just did and it appears it only has a ~72% success rate.
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Re: My Plan...what am I missing?
Old 11-12-2006, 08:23 PM   #6
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Re: My Plan...what am I missing?

Are you using inflation-adjusted dollars?

You have a nice plan and it is very well funded for your age, but don't forget about inflation and taxes.

FIRECALC will adjust your withdrawals annually to account for inflation. It's a big, big deal at your age.
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Re: My Plan...what am I missing?
Old 11-12-2006, 08:26 PM   #7
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Re: My Plan...what am I missing?

Quote:
Originally Posted by cyclone6

44 years old

... indefinitely (lets say 35 years - I have too many bad habits to live to 100...)
Bad habits or so, I think you stand an unacceptably large risk of exhausting
your assets if you only plan to live 'til 79yo.

Also, have you factored in Social Security, de-rated by 25% as many here
suggest ?

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Re: My Plan...what am I missing?
Old 11-12-2006, 08:32 PM   #8
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Re: My Plan...what am I missing?

First off - thanks! But I am not entriely responsible for the acheivment - I managed to save the first half, the second half came from a great aunt. Thanks again Aunt Alma! And to those of you who may remember some of the Alma posts earlier this year, and recommended toasts in her memory, well, those toasts have taken place and a few parties as well...

I have run Firecalc. Using the advanced version, and the mixed portfolio (not the total market). I also assumed SS would kick in at 62 (at a reduced 80% level from todays levels), and I get a 97.7% success rate. Now there is no CD calculator, so I just used 1-month T-bills.

When I run the total market - without the SS option, I get something like 67%. This difference must be what Merriman and the other modern portfolio proponents are talking about...a broadly diverse portfolio will, over time, significantly outperform the s&p 500...
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Re: My Plan...what am I missing?
Old 11-12-2006, 08:36 PM   #9
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Re: My Plan...what am I missing?

As others have pointed out, the killer is inflation. Remember its exponential.

Here's the equation:

future dollars = today dollars * (1 + inflation rate) ^ years

So in 20 years at 3.5% inflation, which is about the average over the last 20 years, you'll need about 100K per year. Your net worth is impressive but I don't see how a portfolio of CD's will keep your purchasing power in future dollars. Think about it.



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Re: My Plan...what am I missing?
Old 11-13-2006, 10:30 AM   #10
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Re: My Plan...what am I missing?

Instead of CDs, you might consider a ladder of individual 5-year TIPS (or I-Bonds if their fixed portion ever gets up to 2% again) to stay ahead of inflation and reduce your taxable income.
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Re: My Plan...what am I missing?
Old 11-13-2006, 10:35 AM   #11
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Re: My Plan...what am I missing?

I think your 6 years living expenses is overly cautious. Otherwise, I would say you have a solid plan.
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Re: My Plan...what am I missing?
Old 11-13-2006, 10:46 AM   #12
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Re: My Plan...what am I missing?

Quote:
Originally Posted by kcowan
I think your 6 years living expenses is overly cautious. Otherwise, I would say you have a solid plan.
Well, it's intended to survive both the Depression and the 1966-82 disasters, as well as every other recession, without having to sell stocks into a down market.

Two years' expenses would have survived everything but those two. Most people choose a comfort level in between...
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Re: My Plan...what am I missing?
Old 11-13-2006, 10:51 AM   #13
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Re: My Plan...what am I missing?

I have admired Galeno's CD ladder.

From his post of Nov 20, 2002:

Quote:
Yes I am following the same mechanical withdrawal plan. In short, it goes like this:

FI = 25%
2y living expenses in MMF
2y living expenses in 2y CD (maturing in 1y)
2y living expenses in 2y CD (maturing in 2y)

Stocks = 75%

At the end of the year I sell 4% of the value of my stock portfolio and buy a 2y CD. I let half of the maturing 2y CDs go to MMF and I buy another 2y CD with the other half. I then divide the entire FI balance by 72 and that's my monthly draw for the year. At year end, I repeat the process.

Even with this three year bear market, my monthly FIRE income fluctuates very little thanks to my FI buffer. It's a similar approach to intercst's inflation adjusted withdrawals but slightly different in that I let the long term growth of my stock portfolio indirectly take care of any inflation or deflation in the economy.
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Re: My Plan...what am I missing?
Old 11-13-2006, 11:13 AM   #14
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Re: My Plan...what am I missing?

Quote:
Originally Posted by cyclone6
The basics:

44 years old
1.0 million in liquid, investable $
200k in a 401(k)

Goal: $50k per year indefinitely (lets say 35 years - I have too many bad habits to live to 100...)
Solid plan, just a little on the conservative side, but great! Congratulations. Have fun and don't forget to write from Thailand
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Re: My Plan...what am I missing?
Old 11-13-2006, 12:26 PM   #15
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Re: My Plan...what am I missing?

Quote:
Originally Posted by Sam
Solid plan, just a little on the conservative side, but great! Congratulations. Have fun and don't forget to write from Thailand
I agree. The only thing I would do is to trim your allocation to cd's and put a chunk in TIPS, as others have suggested. Otherwise, nice plan.
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Re: My Plan...what am I missing?
Old 11-13-2006, 09:21 PM   #16
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Re: My Plan...what am I missing?

Don't forget the killer health insurance part of the equation.

-helen

PS - Nice nest egg at 44 !!!
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