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Retiring for the Second Time - Financial Concerns in this Economy.
Old 07-03-2012, 08:46 AM   #1
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Retiring for the Second Time - Financial Concerns in this Economy.

Hi All:

Not been on for a while but used to be a regular poster. Been too busy working yes, I was called back to the same company that I retired from in the first place and gave in. Probably not to my better judgement, but it is done.

Some History (some of you may know this already):

My DW and I retired in 2003 at the age of 45/49 Resp. We are both US an Canadian Citizens. We had a great time and went sailing for 3 years in the Eastern Caribbean in winter and spent summer in Canada. We posted our antics on our website.

What we did was sell all in SoCAL where we had lived for over 15 years when RE prices were pretty good, set up residency in an Income Tax Free State for Tax purposes in the US (Florida). Not that we had a Huge nestegg to worry about, ut it was substantial for us, although every bit helps. We went to Canada to visit relatives for 3 months. Well low an behold after being there for 3 months we were entitled to Healthcare. so we had all our checkups and with a clean bill of health and a very reasonable travel inurance policy for 6 months healthcare, off we went sailing. So effectively we resided in the US for 6 months and Canada for 6 months. we did this for about 3 years, summers were spent in Canada. Our income was low from Fixed income investments as we pulled everything out of the stock market and invested in 10 year CDs at between 6 and 10%. We rolled the income into the principles. 50% was Tax deferred so we did not need to worry about that. The rest we paid taxes on as needed but not much at all. We lived on a cash account.

OK, so we came back and went back to the rellies in Canada. Now boatless and homeless we decided to go back to where we officially lived in the USA and check it out a bit. So off we went to Florida. We rented a place on the water for 3 months and spent most of the time looking for housing, healthcare was again on Travel insurance from Canada. Well you can only do this for so long. Home prices were ridiculous in 2006/2007 so we rented for about 3 years before we purchased a home with cash so we had no mortgage. during this time DW went to work in the US so we could get affordable US healthcare. Good job too as I had to have a pacemaker fitted only 6 months after we got back.

Once my old company got wind I was back i was offered a part time job working from home, this turned into full time as it was fun then and we were both a little bored with Florida retired life. Work was not hard and we had lots of free time, it worked for us. I covered south America, Asia and europe so I got to travel about a bit to break the monotony, which was not really that bad at all.

OK fast forward to 2012, my company (The one I was working quite happily for) was purchased by a competitive company, one that I did not respect at all, as they had a reputation of having business practices that I personally did not subscribe to. My DW is very happy working where she is and says she would be volunteering if she did not work there.

Me, I am at the point where I am fed up of them and bored as my job as changed dramatically. However, I am very concerned about the state of the economy in the US, low fixed income rates and the healthcare situation.

I am definately a fixed income invester and cannot risk a penny at my age. If I divided up our nestegg (assuming No Interest) it would last me and my wife 34 years at our current quality of life burn rate. Including all the things we like to do. ASSUMIING we do not get seriously ill. We are considering going back to Canada when my DW decides to call it a day,(Vancouver Island, or the Niagara Peninsula) but are spoilt by the US weather. And Home prices are an issue, for what we have now would require double the current investment. We are not ready to down size yet.

Current financial Status:

60% Post Tax Cash Vehicles, 40% Pre-Tax IRA/401k Vehicles. Could stay below tax radar by withdrawing minimal from Pre-Tax. No pensions other than SS not due yet but will take at 62. No kids to worry about, do not want to leave anyone anything (If we can help it).

I would be as happy as a sand boy if interest rates on fixed income were ~4-5%+ as now all our high interest investments have expired and are in MM waiting for indecisive me to figure things out.

Soul searching for some advice and support.

Thanks for reading so far....

SWR
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Old 07-03-2012, 09:14 AM   #2
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Originally Posted by ShokWaveRider View Post
Soul searching for some advice and support.
My advice would be to search both your soul and the 'financial facts of life' to reassess the validity of this quote:
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I am definately a fixed income invester and cannot risk a penny at my age.
The financial facts of life are fixed income returns stink and inflation is eating away at your nest egg and will likely only get worse. You may not be risking a penny with your funds in a money market account but you are risking your future financial well being.

Two words: Psst...Wellesley
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Old 07-03-2012, 09:19 AM   #3
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Welcome back - great story, and REWahoo said what I was going to. Fixed income doesn't reduce risk, it reduces volatility.

If you do some FIRECALC runs for a long retirement, you'll see that fixed income increases risk of running out of funds.

-ERD50
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Old 07-03-2012, 09:36 AM   #4
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Shok, my sympathies on the fixed rate predicament. I also long for those 6-8% interest from CDs from days gone by. You face two issues, that I understand. The decline of fixed interest rate and a psychological aversion to increased risk exposure in the market. That will be a tough one to overcome. I still plod along in accumulating CDs and IBonds, but I have the luxury to do so with a pension and automatic 2% cola each year. Many successful people on this forum advocate purchasing stocks with good paying dividends that yearly increase their payouts. Might be something to research. I understand how you feel, as there are certain guarantees in the stock market either, and if you worry nonstop with the rise on fall of the market, it certainly doesn't increase ones enjoyment of a retired lifestyle.
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Old 07-03-2012, 09:50 AM   #5
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What a great story. Sounds like you have been enjoying life, and really, isn't that the point?

My situation is different, as I have a pension and paid for retirement healthcare. However, I struggle with the same concerns you have regarding risk, but I have still chosen to take more risk than you.

My 401k and deferred comp plans offer like a slush fund for me: not needed for everyday living. A serious illness is the only thing I can see that would throw me for a loop, but I do have very good insurance. My main goal has been protection of these funds. However, my current AA is 75%/25% stock funds to bond funds. I tend to have funds that favor large, dividend paying companies. The rates for investment if you have cash are simply not there, and as has been said, one is actually losing money with inflation of 2-3% (or higher) and earning 1% (or lower).

Keep living the good life.
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Old 07-03-2012, 10:18 AM   #6
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My advice would be to search both your soul and the 'financial facts of life' to reassess the validity of this quote:
The financial facts of life are fixed income returns stink and inflation is eating away at your nest egg and will likely only get worse. You may not be risking a penny with your funds in a money market account but you are risking your future financial well being.

Two words: Psst...Wellesley
Thanks to all:

I am assuming you mean Vanguard Wellesley fund here...? I just have trouble sinking $1m+ into it when the DOW is 12k+

Yeah I know. Problem is I have been treating my current income as the return I am missing. (That is how I justify still working, part time, sad I know).

My math is as follows: Again I know I am just avoiding the main issue. This is all after tax calcs. If I take what I earn after tax, and compare it as a percentage of the nest-egg, it comes to 7.5%. This is why life is currently good Plus I get healthcare also so we have a back up policy for catastrophic funding (I get it for free with my company, one good part). Assuming 7.5% is equivalent to 10% before taxes. I am working for my interest return. But I also take home twice as much as what I need meaning i could live comfortable on 3% return after tax (Plus we bank most of it with the exception of expenses etc.) So If I cut my salary in half it would make 0 difference to Quality of life.

So If I could get 4% with no risk I would be very happy from a piece of mind perspective. (25% Tax Rate) and that would include inflation.

I have just so many friends that lost so much of their nest eggs in the market crash and ups and downs have NOT returned them back to status quo. It is VERY hard to accumulate at our age, but very easy to loose.

SWR
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Old 07-03-2012, 10:28 AM   #7
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I am assuming you mean Vanguard Wellesley fund here...? I just have trouble sinking $1m+ into it when the DOW is 12k+
Yes, and yes, so would I.

I'd never recommend you place a majority of your nest egg in any one asset, especially in a lump sum. But what about investing smaller amounts in this or another dividend paying balanced fund over time, dollar cost averaging until you reach whatever level you are comfortable with? (Yes, I realize that level is zero... )

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So If I could get 4% with no risk I would be very happy from a piece of mind perspective. (25% Tax Rate) and that would include inflation.
Unfortunately this is only wishful thinking in the current financial world.
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Old 07-03-2012, 10:33 AM   #8
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Yes, I am an ultra-conservative investor and have 30% Vanguard Wellesley too. Originally I dollar cost averaged into it, as REWahoo suggests, and I am very happy with it. I just take the dividends, which are pretty hefty and reasonably reliable. If my portfolio was all in cash, I wouldn't think twice about buying Wellesley right now.

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I have just so many friends that lost so much of their nest eggs in the market crash and ups and downs have NOT returned them back to status quo.
Wow! From what I gather, most of our members have long ago regained any temporary losses form 2008-2009. Maybe your friends would benefit from reading some of the better investment books such as those listed here: Investment Books
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Old 07-03-2012, 10:36 AM   #9
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Thanks to all:

So If I could get 4% with no risk I would be very happy from a piece of mind perspective. (25% Tax Rate) and that would include inflation. SWR
Two things: I don't think you can get 4% 'risk free'. And I don't understand your 'that would include inflation' statement. It sounds like you figure you need 3% plus taxes in retirement (or is that in your semi-retirement mode'?), but that would need an inflation adjustment - so +3%, adjusted for inflation each year.


Quote:
I have just so many friends that lost so much of their nest eggs in the market crash and ups and downs have NOT returned them back to status quo. It is VERY hard to accumulate at our age, but very easy to loose.
It seems common for the 'fixed investment' group to look at it this way. But it is usually looking at it from the peak - and if they didn't have stocks, they wouldn't have had that peak to drop down from. You have to look at it from the long run - I put money in the market over decades, it didn't all go in at the peak. But the 'fixed investment' group never mention they missed the peak too, they just look at the fall from the peak.

Quote:
I am assuming you mean Vanguard Wellesley fund here...? I just have trouble sinking $1m+ into it when the DOW is 12k+
Then don't. DCA in over a couple years or more.

-ERD50
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Old 07-03-2012, 10:38 AM   #10
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I have just so many friends that lost so much of their nest eggs in the market crash and ups and downs have NOT returned them back to status quo.
Yet those who held on to their investments and didn't panic sell at or near market lows have fully recovered. Many are well above where they were in early 2008 before the 'unpleasantness' began.
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Old 07-03-2012, 11:28 AM   #11
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What about a SPIA?
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Old 07-03-2012, 12:00 PM   #12
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What about a SPIA?
I do not know much about them. But have always heard that any type of annuity is expensive and in the long run not worth it. But that is all hearsay and reading on the web. I will check specifically. Still in a low interest environment that MUST go up as some point. (Although I have been waiting long enough). I am leery about throwing a wodge of cash at an insurance company.
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Old 07-03-2012, 02:10 PM   #13
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I do not know much about them. But have always heard that any type of annuity is expensive and in the long run not worth it. But that is all hearsay and reading on the web. I will check specifically. Still in a low interest environment that MUST go up as some point. (Although I have been waiting long enough). I am leery about throwing a wodge of cash at an insurance company.
Which would you rather have-- 2% CDs in a near-zero low-inflation environment, or 4% CDs in a 3% inflation environment?

What is Your Personal Rate of*Inflation? - Home - Can I Retire Yet - Your Retirement Roadmap

Wellesley is not exactly what I'd call a volatile investment. In fact it bears a suspicious resemblance to that fabled 4% return you're seeking... admittedly with non-zero risk.

I think the only cure for the angst of economic doom & gloom is to read about asset allocation and the history of returns. Rick Ferri, Jim Otar, Wade Pfau, Dimson & Marsh.
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Old 07-03-2012, 02:56 PM   #14
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I have been reading about SPIAs today. I feel that it is not the best time to get them right now though. However, even now $500k brings about $2500 pm for me and DW for life as long as I do not go to Berkshire Hathaway who seems to want $300 pm for the privilege. So $5k pm for $1m. More than enough for us. Plus we have (what I consider to be) lot more cash in qualified accounts to spare for a rainy day along with DW's income...... When I am 62 I can get about $1500 PM based on the last estimate from SS. Even if we go back to Canada to solve the Healthcare problem and have to pay 50% more for a home it could be doable.

Now, how does one research the viability on SPIA insurance companies? SPIA premiums are NOT insured and what is to stop even mega companies like Allianz and American Equity filing bankruptcy?

Any Canadians out there? Does Canada have SPIAs or what is the equivalent name over there? I trust Canadian financial institutions a little more than US ones at the moment given all the Fraud that is taking place lately. But when UK banks like Barclays are under investigation seems like the only safe place is the Bank of Mattress!

SWR
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Old 07-03-2012, 04:05 PM   #15
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In Canada, only Insurance co's can sell annuities. Banks cannot. insurance co's don't look too stong at the moment either. SPIA's do sound like they could be at least part of you solution.
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Old 07-03-2012, 04:07 PM   #16
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Do you have no regrets whatsoever out of missing out of the last 3 years of stock market returns? Doubling your money is nothing to sneeze at.
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Old 07-03-2012, 04:23 PM   #17
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Do you have no regrets whatsoever out of missing out of the last 3 years of stock market returns? Doubling your money is nothing to sneeze at.
Absolutely Not! I pulled out of the Stock Market in 2001 (Just prior to the First Crash) Never been back in since. I loose sleep over the chance of losing anything. I do not loose sleep over potential loss (IE. Potential Gain). I was fully invested in fixed income at between 6 and 10% for the 10 years from then till 2010/11. So I did not go completely flat. I also had some major tax credits from previous limited partnership investments from the early 90's that covered for some taxes up to 2007. Also we were earning pretty well in SoCal till we FIRED the first time, and our home had tripled in value by the time we sold it. So we were not completely gain free. We then purchased our current home for a fraction of the equity in the SoCAL house all in all we did not do too bad. Could we have done better... yes. But give me a buck for every time I heard that. Could we have done worse... A Lot.

SWR
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Old 07-03-2012, 05:05 PM   #18
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SWR, if you are unable to see your way to investing in anything other than fixed income, then I see only two possible choices for you:

1. Don't retire now, keep working for however many years it takes until you build a bullet-proof nest egg you can survive on for the long run. Absent a nice pension, only the wealthy or very frugal can retire early using "no risk" investments.

2. Retire but cut back your expenses to create as much cushion as you can to delay the inevitable inflation damage to your nest egg. Understand your investment choice increases the odds of you outliving your money and that you are assuming a risk greater than most of us here are willing to take.

Be careful what you wish for - when and if interest rates on cash savings increase to 4% or more, odds are inflation will be gnawing away at an even greater rate. You'd think those of us old enough to have lived through the double-digit CD interest rates of the late 70's and early 80's would recall them fondly but that's not the case. Those CD rates were usually less than the rate of inflation and I hope we never see those days again.
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Old 07-03-2012, 05:24 PM   #19
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SWR, if the loss you see (loss of principle) concerns you more that the one you don't see so clearly (inflation) you do need to take steps to minimize the impact. I think REW overdoes it when he says not to retire. You can retire with relative financial security, but you need to work at least another 10 years, and during that time you must keep your portfolio growing with inflation after taxes. At that point, if your entire fixed income is in short term treasuries you would have a reasonable chance of lasting 30 years.

If you want a probability of success at the 90%+ level or longer than 30 years, like other members here, then REW's advice to not retire is sound.
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Old 07-03-2012, 05:29 PM   #20
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You'd think those of us old enough to have lived through the double-digit CD interest rates of the late 70's and early 80's would recall them fondly but that's not the case. Those CD rates were usually less than the rate of inflation and I hope we never see those days again.
Not to mention that you could lose much of those double digit rates to taxes even when they didn't keep up with inflation. If you earned 10% when inflation was 12%, that 10% probably became 7% after taxes -- meaning you lost out to inflation by 5%. Even with *zero* interest rates today, we're much better off than that scenario because there's almost nothing to tax.
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