Down to near term planning now

[CH]

I started planning for retirement decades ago, and now I am approaching that time in my life.

Here's my situation: millionaire next door type, always lived below our means, age 59, employed (manager at a manufacturing company), married (only once), wife works as a substitute teacher, no access to affordable health care in retirement (only COBRA for 18 months), no debt of any kind, 2 kids through college and self sufficient (at least for now), $1.5M in financial assets (~65% equities, 35% bonds + cash, most in tax deferred accouonts), vested in 3 small pensions (total about $7k/year, no inflation adjustments). I have a degree in electrical engineering and a MBA specializing in finance which has been a big help in understanding how the system works.


I would like to be positioned to retire at age 62 (3 years) with $100K in annual aincome (all sources, including social security). I like my job and may choose not to retire at age 62, but i would like to be positioned to do that in case I decide to, or in case I have to.

I have not yet done a detailed analysis of expenses, and probably don't need anywhere near $100,000, but I'd like income to be on the high side of my needs.

Our philosophy is individual responsibility and that is how we have lived our lives. Starting early, we saved for kids college and retirement. While we would hit the sweet spot of Obamacare and it would help us tremendously, having one group of people pay for (or subsidize) another group's health care costs goes against our convictions of individual responsibility. That being said, if it is not repealed or modified to make us ineligable, we will participate. Some parts we agree with...the big problem is with one group of people paying for another group's health care. As Maggie Thatcher said "The problem of using other people's money is it eventually runs out."

We are not supporters of bail outs (banks, insurance companies, auto manufacturers, mortgage holders, student loan debtors, etc.).

We believe in managing our own affairs and not using paid financial planners or advisors. It isn't rocket science.

I use Financial Engines and the Vanguard portfolio evaluator. Financial Engines advises I cut my equity position from 65% to 55% to minimize risk, and also to raise my international equity position from 10% to 20%. I will be doing the former but not the latter in the near future. The fixed part of my portfolio is about 75% GNMA, 25% TIPS. With mortgage rates being so low, GNMA returns have really dropped. TIPs are still doing amazingly well, but with no inflation in sight, I think it is time to bail there too, so I will be totally resturcturing my bond portfolio in the near future.

Great to be here. I can see many like minded people, and some with different views (which is fine).

 

[pb4uski]

You have done well and seem to be well positioned for ER. I ER'd last December at 56. Some suggestions for you from my experience.

I would go through an analysis of whether you could retire today. If you are positioned to retire today then you will be in a better position if you continue to w*rk - besides, I found w*rk a lot more enjoyable when I knew I could pull the plug anytime, it was reflected in my attitude and candor at w*rk and I really thing my employer and colleagues appreciated it and viewed me as a more valuable employee. Odd, eh!

I found the Lifetime Planner in Quicken to be a great tool for planning as it does deterministic projections of the changes in your retirement nestegg based on assumptions that you provide (your pensions, SS, inflation, investment returns, taxes, living expenses, etc) and is very flexible for different situations. I also use Vanguard and Financial Engines (and FireCalc, OMP and others) for stochastic projections using the same assumptions. Collectively, these tools got me to the point where I felt comfortable retiring.

I would try to get a better reading on what your living expenses will be in retirement. I was a devout Quicken user so had data to develop a retirement era budget readily available and used Quicken's Budget as a tool for that (and Excel). From how you described yourself my guess is that your realistic living expenses in retirement will be lower than $100k a year - mine are about $60k excluding my mortgage and $85k with the mortgage and have been tracking well with my projections.

You should be able to get a sense of retirement health care costs by pricing out health care insurance and COBRA. In my case COBRA exceeded the cost of buying health insurance. Since I plan to do some consulting, I formed an LLC for that purpose and the LLC has access to small group health insurance through the local chamber of commerce and provides health insurance to me and DW and this was about 20% cheaper than individual health insurance with similar coverage and benefits.

My AA is a bit different from yours. My target AA is 60% equities (45% domestic and 15% international) and 40% fixed income for my nestegg, + cash equal to ~ 1-2 years of living expenses. While international has sucked recently, I am a believer in the diversification it provides. Since interest rates are so low, my fixed income allocation is mostly intermediate term investment grade bond fund, high yield corporate fund and a bit of GNMA fund.

 

[CH]

pb4uski,

Thanks for the response and advice. I have never priced out private health insurance. If I had access to reasonably priced health care, I could retire today (if I wanted to, which I don't.). I agree, just being in this position makes it easier to be more relaxed and assertive at work.

A long, long time ago, I did the Quicken thing, entering all the expenses and receipts. My wife really didn't like it and with her limited cooperation, it just didn't work. I do intend to closely monitor expenses for a few months to get the pulse of ongoing expenditures.

I did try FireCalc and it gave me advice very similar to Financial Engines, i.e. reduce my equity exposure. Not familiar with OMP.

I can easily obtain the cost of COBRA from our HR Dept, so I'll do that.

I am not expecting to work in retirement, at least not in any meaningful way.

As I mentioned, I am going to greatly diversify my bond holdings to include corporates and possibly add a small position in Vanguard REIT fund.

 

[obgyn65]

Welcome to the board, CJHorne.

 

[Huston55]

I started planning for retirement decades ago, and now I am approaching that time in my life.

Here's my situation: millionaire next door type, always lived below our means, age 59, employed (manager at a manufacturing company), married (only once), wife works as a substitute teacher, no access to affordable health care in retirement (only COBRA for 18 months), no debt of any kind, 2 kids through college and self sufficient (at least for now), $1.5M in financial assets (~65% equities, 35% bonds + cash, most in tax deferred accouonts), vested in 3 small pensions (total about $7k/year, no inflation adjustments). I have a degree in electrical engineering and a MBA specializing in finance which has been a big help in understanding how the system works.


I would like to be positioned to retire at age 62 (3 years) with $100K in annual aincome (all sources, including social security). I like my job and may choose not to retire at age 62, but i would like to be positioned to do that in case I decide to, or in case I have to.

I have not yet done a detailed analysis of expenses, and probably don't need anywhere near $100,000, but I'd like income to be on the high side of my needs.

Our philosophy is individual responsibility and that is how we have lived our lives. Starting early, we saved for kids college and retirement. While we would hit the sweet spot of Obamacare and it would help us tremendously, having one group of people pay for (or subsidize) another group's health care costs goes against our convictions of individual responsibility. That being said, if it is not repealed or modified to make us ineligable, we will participate. Some parts we agree with...the big problem is with one group of people paying for another group's health care. As Maggie Thatcher said "The problem of using other people's money is it eventually runs out."

We are not supporters of bail outs (banks, insurance companies, auto manufacturers, mortgage holders, student loan debtors, etc.).

We believe in managing our own affairs and not using paid financial planners or advisors. It isn't rocket science.

I use Financial Engines and the Vanguard portfolio evaluator. Financial Engines advises I cut my equity position from 65% to 55% to minimize risk, and also to raise my international equity position from 10% to 20%. I will be doing the former but not the latter in the near future. The fixed part of my portfolio is about 75% GNMA, 25% TIPS. With mortgage rates being so low, GNMA returns have really dropped. TIPs are still doing amazingly well, but with no inflation in sight, I think it is time to bail there too, so I will be totally resturcturing my bond portfolio in the near future.

Great to be here. I can see many like minded people, and some with different views (which is fine).

Welcome CJ-

Nice to have another "engineer" here; I think the forum is only ~60% engineers so, we can always use more.

For determining expenses, suggest splitting into "essential" and "discretionary." I use Fidelity RIP most of the time, and it has this capability. I'd expect the Vanguard tool does as well. Tracking expenses has helped us. Have always tracked at a gross level. But, for the past year have tracked in detail, and we are learning that: (1) we can very likely live within our projected retirement budget and, (2) we need to reallocate btwn the expense categories because some are over budget and others under budget.

I'm more like PB regarding AA to international equities; I think the diversification and exposure to growing economies is important so, my allocation is a bit higher.

All the best on your quest to retire, and may the 'sequence of returns gods' favor you.

 

[pb4uski]

......A long, long time ago, I did the Quicken thing, entering all the expenses and receipts. My wife really didn't like it and with her limited cooperation, it just didn't work. I do intend to closely monitor expenses for a few months to get the pulse of ongoing expenditures......

I wasn't necessarily suggesting using Quicken for tracking your expenses and receipts, I was suggesting the planning tools available in Quicken. (I do use Quicken for my expenses and investments, but I've done so for about 20 years so it is just part of my financial management routine. I put most spending on credit cards and import them from my credit card provider so it is easy in my case.) You could create a retirement by analyzing your living expenses for the last couple years and then tweaking it for how you think it might change in retirement.

If you were to use the Lifetime Planner, you would need to set up a few accounts and enter your investments (tickers and shares owned and Quicken would then look up the prices). The Lifetime Planner then does a year-by-year projection of your taxable and tax-deferred nesteggs, each year adding any income (pensions, SS, asset sales, investment return, etc) and deducting withdrawals (living expenses, taxes, etc.) using assumptions that you provide. You can have special one-time income and expense items (wedding, college, house sale, house purchase, inheritance, etc). Once you have a base case, you can then do some what-if projections changing certain assumptions.

I found Lifetime Planner to be an intuitive and insightful tool for planning. I wish it had MonteCarlo analysis built in rather than only being deterministic, but it is what it is - that is why I use some other tools to supplement the deterministic analysis.

 

[CH]

For determining expenses, suggest splitting into "essential" and "discretionary." I use Fidelity RIP most of the time, and it has this capability. I'd expect the Vanguard tool does as well.

Vanguard's tool is a portfolio evaluation tool that tells you how closely your portfolio of stocks and bonds matches the overall market and what the risk/return balance is...e.g. value vs. growth, domestic vs. international (even by geographic areas such as emerging markets, Europe, etc.). The beauty here is it looks inside each mutual fund you own to determine what the total amount you have invested in an individual category is...and it works with non-Vanguard investments too.

I have used Fidelity RIP which is a totally different breed of Cat. It looks at retirement income vs. retirement expenses, and does so in much better detail than other programs I have found. It does a particularly good job on projecting medical expenses, although it will need a makeover for Obamacare. Last time I logged into Fidelity RIP was January 2011, so I need to do some more work there. I remember the essential retirement expenses being fairly easy to project, but the discretionary being totally unpredictable because I don't know exactly what I will be doing, how much I will be traveling, etc.

I guess it just comes down to making sure you have enough for the essentials and making a budget for the discretionary expenses that you think you can live with.

 

[CH]

I wasn't necessarily suggesting using Quicken for tracking your expenses and receipts, I was suggesting the planning tools available in Quicken. ...
If you were to use the Lifetime Planner, you would need to set up a few accounts and enter your investments (tickers and shares owned and Quicken would then look up the prices). The Lifetime Planner then does a year-by-year projection of your taxable and tax-deferred nesteggs, each year adding any income (pensions, SS, asset sales, investment return, etc) and deducting withdrawals (living expenses, taxes, etc.) using assumptions that you provide. You can have special one-time income and expense items (wedding, college, house sale, house purchase, inheritance, etc). Once you have a base case, you can then do some what-if projections changing certain assumptions.

I found Lifetime Planner to be an intuitive and insightful tool for planning. I wish it had MonteCarlo analysis built in rather than only being deterministic, but it is what it is - that is why I use some other tools to supplement the deterministic analysis.

Decades ago, when I started planning retirement, I used spreadsheets and projected balances forward based on adding contributions and returns and subtracting out expenditures. Then I found the Quicken Investment program you mention. At first I thought it was really great...a refinement of my approach with a spreadsheet. If those projections were realized, I would be an extremely wealthy man today. Then, I learned about Monte Carlo analysis, and observed from my own portfolio how it is just not realistic to assume compounding at a constant growth rate based on asset allocation, as the Quicken program does. Please correct me if I am wrong here.

 

[Huston55]

I have used Fidelity RIP which is a totally different breed of Cat. It looks at retirement income vs. retirement expenses, and does so in much better detail than other programs I have found. It does a particularly good job on projecting medical expenses, although it will need a makeover for Obamacare. Last time I logged into Fidelity RIP was January 2011, so I need to do some more work there. I remember the essential retirement expenses being fairly easy to project, but the discretionary being totally unpredictable because I don't know exactly what I will be doing, how much I will be traveling, etc.

I guess it just comes down to making sure you have enough for the essentials and making a budget for the discretionary expenses that you think you can live with.

Yep, that's pretty much our approach. But, with a little more refinement. We lay out the specific types of discretionary expenses we expect (want) to have, which for us is dominated by travel, and put that into the tool in the "Recreation" bucket. We also base those discretionary expenses on what we've recently done, and we track them in a spreadsheet to validate our assumptions.

 

[pb4uski]

Decades ago, when I started planning retirement, I used spreadsheets and projected balances forward based on adding contributions and returns and subtracting out expenditures. Then I found the Quicken Investment program you mention. At first I thought it was really great...a refinement of my approach with a spreadsheet. If those projections were realized, I would be an extremely wealthy man today. Then, I learned about Monte Carlo analysis, and observed from my own portfolio how it is just not realistic to assume compounding at a constant growth rate based on asset allocation, as the Quicken program does. Please correct me if I am wrong here.

I'm not sure if there is a right or wrong. While sequence of returns is important, the sequence is also reflected in the average since the average is based on an ending value in relation to a beginning value. The risk is that there is ruin between the beginning and the end. I tend to be quite conservative in the investment return assumption and use an assumption that is 2% less than the historical portfolio return so it is conservative. As previously mentioned, I use Monte Carlo analysis as a supplement to the deterministic analysis on Quicken.

 

[CH]

I'm not sure if there is a right or wrong. While sequence of returns is important, the sequence is also reflected in the average since the average is based on an ending value in relation to a beginning value. ... I use Monte Carlo analysis as a supplement to the deterministic analysis on Quicken.

I would not categorize the choice as right or wrong, but more like Monte Carlo analysis as being superior and using a straight percentage return as being oversimplified. Using Monte Carlo analysis vs. a straight portfolio return percentage makes a huge difference. I notice when there is a change (either a run up or a decline) in the market, Financial Engines does not project a corresponding increase in my retirement income. Why not? Because the market tends to revert to the mean...and the methodology of using a straight percentage does not take this into account where the Monte Carlo analysis does.

Many years ago, I remember taking a financial planning class put on by a local guy. Toward the end of the class, he offered to look over anybody's personal situation for free, with the unstated but obvious motivation of drumming up some business. He ran my holdings through his software which worked on the straight percentage basis and gave me a fancy printout similar to Quicken's that told projected a wealth figure at retirement that I hoped was true but in my heart knew it was not. It wasn't!

No problem with looking at it both ways, but I think the straight percentage method should be supplementing the Monte Carlo analysis, not the other way around. Using 2% for an average return will give you conservative results, but why not just use Financial Engines and get the most realistic results possible?

 

[REWahoo]

No problem with looking at it both ways, but I think the straight percentage method should be supplementing the Monte Carlo analysis, not the other way around. Using 2% for an average return will give you conservative results, but why not just use Financial Engines and get the most realistic results possible?

Monte Carlo and straight percentage are both flawed - as is the historical sequence of returns found in FIRECalc. But of the three, the only one that is "real" are the FIRECalc returns.

Now if we only knew for sure that history will repeat itself...

 

[CH]

Very true. Unfortunately the only insight we have on the future is from what has been learned in the past. Monte Carlo is the best we have, but it may not be good enough.

 

[REWahoo]

Very true. Unfortunately the only insight we have on the future is from what has been learned in the past. Monte Carlo is the best we have, but it may not be good enough.

Like you stated in another thread, I also have no desire to be argumentative, but want to ask if you've spent any time understanding how FIRECalc works? And why looking at historical returns rather than relying on a Monte Carlo approach could be more meaningful?

 

[Midpack]

Monte Carlo comes in many flavors as well Will The True Monte Carlo Number Please Stand Up?. Like other methods it's a modeling tool, not an answer...there will always be (considerable) uncertainty.

 

[CH]

Like you stated in another thread, I also have no desire to be argumentative, but want to ask if you've spent any time understanding how FIRECalc works? And why looking at historical returns rather than relying on a Monte Carlo approach could be more meaningful?

Let me answer your second question first the best that I can. Historical returns are averages. That means half of the time you are going to do better than the projection, and half the time you are going to do worse...possibly much worse. Sometimes we can go through a decade of poor market performance which is not accounted for if you merely project X% of annual return, year after year.

The way Monte Carlo analysis works is it looks at historical sequences in stock market returns and based on that, projects a probability of what will happen in the future. I look at 95% probability that my retirement goal will be met, meaning poor market performance. That means that there is only a 5% probability I will come up short. That compares to about a 50% probability that you will be short using averages to project forward. It also means there is a 95% probability I will do better than what it being projected. I like those odds.

Regarding Firecalc, I was on vacation last week, just looking at retirement planning related stuff, and ran across Firecalc which lead me here. I did plug in my numbers and the results seemed approximately in line with what I was getting from Financial Engines. Difference is - in Financial Engines, I have every one of my securities (funds, stocks, bonds, cash) plugged in by ticker symbol and Financial Engines considers the details of each of these securities. From what I saw, FireCalc does not do this but it does apparently use Monte Carlo analysis. As someone points out on here, Monte Carlo analysis is a method and different applications may use it someone differently. Financial Engines also makes recommendations to a specific fund level, where FireCalc does not. Based on my very brief look though, FireCalc seems to be a very good tool, and when I have more time I am going to look at it further.

 

[pb4uski]

My understanding is that Firecalc does NOT use MonteCarlo analysis. IIRC what Firecalc does is a projection of asset value given the cash flow assumptions provided by the user and actual historical investment returns for the asset classes defined in FireCalc assuming a begin date of 1871, 1872, 1873.... (2011 - number of projection years, or 1981 for a 30 year projection).

 

[CH]

My understanding is that Firecalc does NOT use MonteCarlo analysis. IIRC what Firecalc does is a projection of asset value given the cash flow assumptions provided by the user and actual historical investment returns for the asset classes defined in FireCalc assuming a begin date of 1871, 1872, 1873.... (2011 - number of projection years, or 1981 for a 30 year projection).

What you just described IS Monte Carlo analysis. That's how it works.

This is far superior to saying...on average these mutual funds have gone up 6% per year, so I am going to project my assets forward over the next 10 years by 6% per year.

 

[nun]

I'd say the priority for the OP is to come up with a budget so they can realistically plan for future income requirements.

I too believe in personal responsibility and LBYM and have saved carefully, but I also think that social insurance programs are vital parts of a modern society, so I have one of the differing opinions the OP mentions. Social insurance programs to provide health insurance and income should be funded by progressive taxation to redistribute wealth.

I'd say the OP is well placed for a successful retirement as long as he can successfully navigate any gap between retirement and the start of Medicare. The $100k income requirement sounds attainable assuming a 4% WR from the $1.5M, the $7k pensions a year and a couple of SS checks.

 

[nun]

Monte Carlo runs an algorithm numerous time with a range values for the parameters and produces a set of possible rests.

 

[pb4uski]

What you just described IS Monte Carlo analysis. That's how it works.

This is far superior to saying...on average these mutual funds have gone up 6% per year, so I am going to project my assets forward over the next 10 years by 6% per year.

No, Monte Carlo does not use actual data in the sequence it historically occurred. For each scenario Monte Carlo would select returns based on a provided distribution of returns (which could be based on historical returns) and random points within the distribution and it would run numerous scenarios (some of which would "fail" and some of which would "pass").

 

[CH]

I'd say the priority for the OP is to come up with a budget so they can realistically plan for future income requirements.

I too believe in personal responsibility and LBYM and have saved carefully, but I also think that social insurance programs are vital parts of a modern society, so I have one of the differing opinions the OP mentions. Social insurance programs to provide health insurance and income should be funded by progressive taxation to redistribute wealth.

I'd say the OP is well placed for a successful retirement as long as he can successfully navigate any gap between retirement and the start of Medicare. The $100k income requirement sounds attainable assuming a 4% WR from the $1.5M, the $7k pensions a year and a couple of SS checks.

Nun,

Thanks for the encouraging comments on my situation.

I thought about responding with some remarks on socialized medicine, but I don't think this is the place to have that debate. I recognize there are different views with people who are passionate on both sides and it is not an easy problem to solve.

 

[REWahoo]

CJ, the FIRECalc link I provided above gives a description of how the program works. Give it a read and see if you still maintain it uses Monte Carlo...

 

[CH]

No, Monte Carlo does not use actual data in the sequence it historically occurred. For each scenario Monte Carlo would select returns based on a provided distribution of returns (which could be based on historical returns) and random points within the distribution and it would run numerous scenarios (some of which would "fail" and some of which would "pass").

Thanks for giving me this insight. Having just looked at Firecalc briefly, I did not pick up on that nuance. I'd have to look at Firecalc a little more to make any meaningful comment. What I do know is Monte Carlo analysis is far superior for projecting retirement readiness than using an approach like Quicken, where you use a historical return of X% and project it forward.

I'll post a comment on this at a future date, although it may be a while until I have the time...vacation is over and back to work tomorrow.

 

[pb4uski]

......Using 2% for an average return will give you conservative results, but why not just use Financial Engines and get the most realistic results possible?

Just to be clear, I do not use a 2% average return. I haircut the historical average return for my AA by 2% (from ~7.5% to 5.5%) in the deterministic analysis. I also look at Financial Engines.