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Old 06-14-2008, 05:17 PM   #21
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Whats an SPIA?
single payment immediate annuity
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Old 06-14-2008, 05:38 PM   #22
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Originally Posted by lsbcal View Post
Your original post said you were using the returns to see how a retirement portfolio would turn out. And you were kind of surprised to see that if you have poor returns early on then things don't turn out so rosy. If I've interpreted you correctly, then you would want to smooth out those returns to insure portfolio survival perhaps at the expense of a somewhat lower long term growth rate if we have a good market.

Of course, if you are talking about the accumulation phase then go ahead and go for the growth. I'm not sure you can have it both ways though. If you had a high equity allocation and retired in 1929 you might be in trouble. But if you had a high equity allocation in 1929 and continued to fund it through the accumulation phase for many years, well that is another story that could end happily after all. Of course, if you could not fund the portfolio because you're accumulation phase was interrupted by unemployment in the 1930's then that would be a bit more tragic of a story.
The returns I gave are for my actual 401K since 2001. Im still accumulating. I thought you were saying I shouldnt have an alloaction that volatile right now.

I will certainly be changing my allocation when Im retired, especially in this scenario where I need smoother returns.

I ran the numbers with my same assumed starting retierment portfolo balance and my same assummed monthly withdrawals but this time using the Wellington returns and then again in reverse. There is only a 5.5% difference bewtween the high and low number, which is much more comforting than the 35% difference when using the more volatile returns on my current allocation. This is something along the lines of what Im looking for so thank you.
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Old 06-14-2008, 08:09 PM   #23
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Here is where I see the insurmountable aspect of your situation.
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Now, my goal is to find some scenario that provides me the closest thing to constant 7% returns instead of some good years and bad years that equal 7% over the 10-11 years because if the bad years come first, the 7% overall return wont be enough.
As others have pointed out, if you "smooth" out the downside, you will stifle the potential upside. Shedding volatility means you have to shed risk, and the flip side of that coin is reward.

You are either going to have to accept the risk that your 457 plan is not going to carry you all the way through until your DROP account balance has reached your golden number, or you're going to have to do something to up the odds. You have to either shorten the time period you will be relying on the 457 withdrawals, increase the amount in the 457, or otherwise produce some income that will see you through the years before you start withdrawing from the DROP.

Other than becoming a financial wizard who doesn't have down years, or working longer, I see two basic possibilities.

a.)You can increase your 457 contributions if you are within three years of what is considered the normal retirement age for the plan.

b.)You could get promoted before you DROP and increase your working salary (I'm assuming you will stay in DROP for 5 years so you can participate after retirement - or at least that's what I gleaned from your pension plan's website), as well as your pension and DROP contributions.

I understand option b is not for everyone. I know a lot of new sergeants in their 40's who used to be 30-something cops who swore they would never be a supervisor. Ask them why they promoted so late in their career and every one of them has the same answer: "For the pension and the DROP". I'm an option b veteran, actually got promoted twice in my last two years (second was an "acting" promotion, that counted for pension purposes), and it worked very nicely for me. I had already dropped before I got promoted, but because we got to re-calculate our pension based on the last paycheck, the difference in the pension alone made all the difference for me.

Good luck with it, and if you do figure out a way to make 7% without worrying about the downside, hook a brother up, OK?
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Old 06-14-2008, 08:40 PM   #24
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Saving more money isnt really an option. My wife and I are already saving a monsterous portion of our salaries including both of us maxing out our 457s (we are both cops) and both of our ROTHs, paying off our home early (will be paid off in 3 months) and also adding to our taxable accounts

Can you point me to where you see that I need to stay in DROP for 5 years so i can participate after retirement? As far as I know, I dont have to be in DROP while still working to be in it after I stop working. If youre correct, this changes everything.

Getting promoted would be an absolute last resort. I would rather make due with a little less money in retirement than spend my last few years working evenings with bad days off. Where do you...or did you, work?
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Old 06-14-2008, 09:05 PM   #25
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Utrecht, probably you are doing this already but have you been using FIRECalc? I assume from your posts that you and your wife will have pensions and at some point can take Social Security. This can easily be put into FIRECalc. What you cannot easily get is historical long term results with assets included like international funds and maybe TIPS. If you are that near retirement and perhaps in a high stress job then maybe it would be wise to dial back the risk sooner rather then later.

I've found it best for me to decide on the AA I can live with through the worst known historic downturns. If that negative return you see for this year to date turns into -20% with another -20% following in 2009 then will you be OK with that? Only you and your spouse can answer that question. Just look at how things worked out in 1973-75 for a stress test. If you can handle that and rebalance into equity without getting totally stressed out then my hat is off to you.
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Old 06-14-2008, 09:53 PM   #26
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Can you point me to where you see that I need to stay in DROP for 5 years so i can participate after retirement? As far as I know, I dont have to be in DROP while still working to be in it after I stop working. If youre correct, this changes everything.
This is what I get for trying to skim a pension plan. I was wrong, there were two paragraphs in a row that talked about your options when you leave active service. The first para said you could receive your pension or defer into DROP, and the second said you could leave your accumulated pension contributions with the plan if you didn't have enough time to retire, but you had to take a distribution if you had less than 5 years of pension service. Sorry, my bad.

Some DROP plans have time limits, but yours does not.

Your plan is different in that you all are allowed to defer pension payments into DROP after you leave active duty. Ours is limited to active duty, although we have the option of leaving the accumulated amount there and earning the same rate as everyone else.

That part of your plan is what throws me for a loop. To me, the real cool part of the DROP was I was still getting my full pay while I was also getting pension payments into the DROP. It was like getting a big pay raise, and I was also able to take advantage of a limited availability option that allowed me to stop working while I "burned" all of my accumulated leave banks. It worked out to over 2 1/2 years of retirement at nearly full pay and continued DROP accumulation.

Doing it that way I went from paycheck to pension check and had already accumulated a large chunk of money in my DROP account. I left at 45, so I can't touch the money until 59 1/2, but I had already worked that out in my plan.

So, you're going to defer your pension for 10 years?
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Getting promoted would be an absolute last resort. I would rather make due with a little less money in retirement than spend my last few years working evenings with bad days off.
Yeah, it's not easy for most. A good friend who used to work for me is one of those 40-something Sergeants. He went from a nice day-shift job at a federal drug task force to running an evening shift tactical unit in patrol. His troops are all in their 20's and very, very energetic. As he puts it, "Jumping out of the van and chasing 19-year-old crack dealers was easy when I was 25, but at 47 it starts to wear on you."

The way he looks at it is the same attitude I had (I infected him with it before I left): I can do anything for a couple of years if it results in a nice payoff in my pension. I got promoted to Lt. two years before I retired (day shift Narco to night shift Vice), and spent the last year as an acting Capt. Back then acting pay went on your retirement, and every day they were giving me Captain's pay I showed up with bells on. Including a week I had the flu. The only way I made it that week was by figuring out that every day there was X dollars a month on the pension. My Asst Chief was in retirement mode and I volunteered to go to every community meeting, press conference, townhall meeting or whatever there was that she didn't want to do that allowed me to put in an overtime request form (OT for supervisors was at straight pay, but it was also calculated for pension purposes). When the acting Capt gig was up I went back on night shift with Mondays and Tuesdays off so I could leave with shift and weekend differential pays calculated into my pension.

It sucked, but I figured that no pain = no gain.
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Where do you...or did you, work?
I'll send you a PM on that.
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Old 06-14-2008, 10:49 PM   #27
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Did you make a mistake? Yes and no.

If all 3 scenarios have the same total return and there are no withdrawals, the final balances will be the same no matter what order the returns come in.

The reason "A" and "B" have the same final result is because the returns are the same just in different order. When you account for very sizeable monthly withdrawals, it makes a huge difference in the final balance.

The reason that "C" has a different final balance is because the year 2008 returns arent for a full year. They end on 6/13/08. If they were for the full year, it wouldnt be a total return of 8.2%. So thats throwing your "C" numbers off a bit.

If you play around with the XIRR function on excel, you'll see that when making withdrawals the number change dramatically.
You sure on that math? Or did you communicate correct based on OP?

The order returns do come in matters.

If I gain 50% then lose 33%, that is different than losing 33% then gaining 50%.
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Old 06-14-2008, 10:57 PM   #28
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My thoughts- what do you want from the 401k? I read a 10 year income stream? That definitely suggests diversificiation. The general risks are early down years. The way to hedge that risk is a high amount of cash when you start withdrawing.

Consider this plan:

50% cash (represents 5 years income), 25% bond and 25% equity. If you could expand the 50% cash to be 9 years worth of income, this might work even better.

Year 1- if portfolio return was positive, spend 1 years cash and put .5 years cash into stocks and .5 years into bonds.

You now have 3 years cash and an increased stock and bond position (relative to year 1).

Year 2- spend another years cash. If portfolio went up, put .5 years cash into stocks and another .5 years cash into bonds.

You now have 1 years cash on hand, and a higher stock/bond allocation than before.

The hope would be the appreciation of year 1 and year 2 would not be erased at year 3. You would need to run some numbers to suggest what level of interest and dividends the portfolio returns to you for year 3-4-5-6 to see when you start selling shares.

The longer you can go without selling some shares the more likely this plan works. This is a part of my plan, but I plan on having around 9-11 years cash and then spending 1/ investing 1 for around 4-5 years (until I am left with 3 years cash on hand).
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Old 06-15-2008, 07:41 AM   #29
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$10000 x 150% = $15000
$15000 x -33% = $10050


$10000 x -33% = $6700
$6700 x 150% = $10050
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Old 06-15-2008, 07:57 AM   #30
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My thoughts- what do you want from the 401k? I read a 10 year income stream? That definitely suggests diversificiation. The general risks are early down years. The way to hedge that risk is a high amount of cash when you start withdrawing.

Consider this plan:

50% cash (represents 5 years income), 25% bond and 25% equity. If you could expand the 50% cash to be 9 years worth of income, this might work even better.

Year 1- if portfolio return was positive, spend 1 years cash and put .5 years cash into stocks and .5 years into bonds.

You now have 3 years cash and an increased stock and bond position (relative to year 1).

Year 2- spend another years cash. If portfolio went up, put .5 years cash into stocks and another .5 years cash into bonds.

You now have 1 years cash on hand, and a higher stock/bond allocation than before.

The hope would be the appreciation of year 1 and year 2 would not be erased at year 3. You would need to run some numbers to suggest what level of interest and dividends the portfolio returns to you for year 3-4-5-6 to see when you start selling shares.

The longer you can go without selling some shares the more likely this plan works. This is a part of my plan, but I plan on having around 9-11 years cash and then spending 1/ investing 1 for around 4-5 years (until I am left with 3 years cash on hand).
I'll run some numbers but I cant see how its possible that this would work. It will definately smooth my returns very much, but I need an overall 7% return for 10 years. I cant imagine that 50% cash / 25% bond / 25% equity will do that.
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Old 06-15-2008, 10:57 AM   #31
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Wait until you project out the variance for 30, 40 or more years. As mentioned above, you need to enter your numbers in FireCalc http://http://fireseeker.com/ to start to get your head around the uncertainty we all face. Below is the most basic chart for $1,000,000 with 4% withdrawal for 30 years - "successful" 94.4% all the time (101 or 107 times). So 5.6% would run out of money, but only if they did absolutely nothing to adjust over that 30 years. Unlikely. And then of course if you live more than 30 years...
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Old 06-16-2008, 04:31 PM   #32
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I'll run some numbers but I cant see how its possible that this would work. It will definately smooth my returns very much, but I need an overall 7% return for 10 years. I cant imagine that 50% cash / 25% bond / 25% equity will do that.
This is a spin on the buckets portfolio. The issue in this case is the high withdraw rate- meaning the equity/bond mix needs to generate a higher return to make this work than otherwise.

Here are my numbers for ME. Need 40k cash. Assuming a $1 M portolio/ 4% withdraw rate.

Quote:
9 years expenses is 360k
remaining balance is 640k

40k/640k=6.25% withdraw rate

year 1- spend 40k cash
if portfolio goes up, allocate 40k more to portfolio 680k in porfolio (40/680=5.9% withdraw rate). have 7 years cash left.
if portfolio goes down, keep 40k in cash. Have 8 years cash left.

year 2
if portfolio goes up, allocate 40k more to portfolio 720k in porfolio (40/720=5.6% withdraw rate) have 5 years cash left.
if portfolio goes down, keep 40k in cash. Have 7 years cash left.

year 3
if portfolio goes up, allocate 40k more to portfolio 720k in porfolio (40/760=5.3% withdraw rate) have 3 years cash left.
if portfolio goes down, keep 40k in cash. Have 6 years cash left.

years 4-infinite
if porfolio went up in first 3 years, I have 3 years cash and the portfolio needs to generate a 5.3% return to replenish the cash. Only withdraw in up years, have a 3 year cushion. This is worst case for porfolio moving up, as I did not factor in portfolio increases into withdraw calculations.

If portfolio went down, I just keep the cash for spending while the rest of portfolio recovers over next 3 years. The probability of a portfolio being negative after 6 years (without any withdraws) is quite low, assuming a moderate asset allocation for the bucket which includes stocks, bonds, REITs and commodities.
In the case of the OP, the biggest issue is the short period of the 401k withdraws (10 years). I agree the short period makes this tougher.

If OP had 40k income need, and had only 400k to make it happen, then I would look to do something similar, using a smaller initial cash position.

7 years expenses in cash (280k) and remainder invested (120k)
the 120k would need a huge return (33%) to fund income need.

5 years expenses in cash (200k) and remainder invested (200k) would need a 20% return.

3 years expenses in cash (120k) and remainder invested (280k) would need a 14% return.

Quote:
If you compare the 2 examples it comes down to SWR in both cases- the 40k is a 4% SWR in my case where in second case it is a 10% SWR.
I am aware of one mutual fund with higher than a 10% yield, so more than likely advice to OP is to get the needed return of the 401k to 7-8% range, where more options will be available.
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