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Feedback please on current financial plan
Old 09-03-2016, 01:30 PM   #1
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Feedback please on current financial plan

Hi All,
I would like to receive feedback please regarding my current financial plan and next steps (I will try and keep as concise as possible). Thanks in advance.

Age is 53. Current financial situation - Total NW: $2.92M as follows:
• Current house paid off valued at $380k (do not consider part of my investment portfolio; but in an area appreciating nicely each year)
• Rental house valued at $380k conservatively netting 4.5% (in an area that is appreciating each year)
• $530k equities (VTI, VOO, VXUS and equity portion of VWIAX/VWELX - Wellesley/Wellington)
• $345k bonds (intermediate muni-bond fund VWIUX and bonds portion of VWIAX/VWELX)
• $560k CDs (max is 5 year maturity (many with only 6 mos early withdrawal penalty) - average: 2.5%)
• $700k Cash (currently sitting in 1% fully liquid Ally and Compass banks); have been waiting for another 2.5-3% CD opportunity
• $30k VNQ (REIT)

So, not including my residence: equity is about 20% of my portfolio, real estate about 15%, and cash/bonds/cd about 65%.

Very high likelihood of inheritance within the next 10 years – likely to be at least $500k.

Small Non-cola’d Pension at age 65 - $15k/year

Social Security expectations ($60k/year at 70) - please let me know if any of the following logic is incorrect
• in today’s dollars at age 70 Social Security statement says $39,000 plus I believe DW gets 50% of mine at FRA for $16k for total of $55k (at today’s dollars). DW is same age.
• I am assuming 2% avg SS COLA, so SS would be $78k at age 70 (assuming I did my math correctly)
• I am assuming worst case SS can only pay 78% due to shortages – so, 78% yields $60k at age 70

Expenses (plan for $80k/year on average)
• Typical yearly necessary expenses are $58k
• We plan an additional $7k/year to cover out of the ordinary expenses (examples: I had back surgery 7 years ago that maxed out high deductible medical of $10k; had a house pipe burst 5 years ago that was not covered by insurance for $3,500; etc)
• Travel plan: $15k/year (some years we will spend more and some less)

My current thoughts on a plan:
• Before the end of this year, quit work (or ask if I can severely cut back hours to very part-time) – expect to be close to $3M NW at that point
• Take 1 year off – no work (after that, consult maybe once every 6 months for 1-4 weeks to stay current in my field just in case; it is enjoyable to me in very small bits; and to bring in a little extra spending money; 1 week’s consulting will likely bring in about $4,000) … probably will only do this for a few years then stop (once I feel 100% comfortable that my plan is working)
• Enjoy life – travel, hiking, biking, partake in more local events, gardening, cooking, exercise (get in really good shape – I have been exercising but want to do even more), maybe do some volunteering, blogging, etc.
• I have the goal of leaving a large inheritance to my kids (who are now adults) so want a plan that will not need to dip into my principal (basically allows me to live off my investments)

My own thoughts of my risks - in anticipation of some of your comments
• Inflation: I know I am taking inflation risk by only putting 20% in equities. However, I also know that if the market tanks 30+% in 1 year and I lose $160k that I can totally stomach that and expect it to rebound; but if I invested 50% ($1.3M) and I lost about $400k that I would panic and want to sell. I have been there/done that. So, this is my risk tolerance that allows me to sleep at night. I believe between the inheritance, Social Security and real estate that I will be OK and these will mitigate any inflation risk
• This might sound odd, but the more savings I have, the more I am willing to add volatility risk and stomach market fluctuations. So, I believe I would be comfortable putting 50-100% of the expected inheritance in equities
• I have a detailed spreadsheet with what-if scenarios and ran it through firecalc (assuming I did it correctly) and both tell me I am OK

I actually semi-retired several years ago and did part time work for several years and loved it. Somehow I got myself back into full time work – partly because the job offer was work from home and partly to add enough to my portfolio to feel comfortable. I am now feeling financially comfortable but wanted to get your sanity check if you think my plan will work.

Thanks in advance.

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Old 09-03-2016, 04:47 PM   #2
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I would first suggest that you run your situation through Firecalc, as you will get a more comprehensive result. Your initial WR on just investments is about 3.2%. That is good to start, but with only 20% equities, you will not have much in terms of inflation protection. You will have future pension and SS income, which may cover a fair part of that. You also suggest that you will do some part time work, which also helps. Have you fully covered the cost of medical insurance/expenses? The travel budget gives you room to cut costs if needed, which is also good. $15K per year is also my estimate for travel. I think your situation looks reasonable, but I would defer to the comprehensive calculation.

"The mountains are calling, and I must go." John Muir
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Old 09-03-2016, 05:04 PM   #3
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In my opinion, you have too little in equities. I am 57, have over twice the net worth, and keep a mid six figure balance in cash (bearing 1%), but have a 70% equity, 25% bond portfolio. Not drawing any pension or SS yet. I am comfortable having 2+ years in expenses to weather the market fluctuations. The cash balance keeps growing because we only tap out approximately 1.3% of our portfolio value each year (through dividends).
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Old 09-03-2016, 07:59 PM   #4
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The key calculation you have to do in 2016 for your FIRE in 2017 experiment is gross income - expenses = net income. If you've diligently been tracking investment income and living expenses for at least several years, you can be confident that your 2017 prediction won't be too far off the mark.

I have always had low exposure to equities and have done quite well nevertheless. I received a small inheritance a couple of years ago - shares of stock - that I haven't bothered to sell. I have kept the stock because most of the companies have high dividend yields.
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Old 09-03-2016, 08:26 PM   #5
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You have nearly 1.2m in cash or near cash. You seem way too risk adverse. Long term, that hurts you. Use the calculators to run the numbers and see where you end up.
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Old 09-04-2016, 07:56 AM   #6
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I agree with the other posters that you have too much of your net worth in cash. Consider a very gradual increase in exposure so that you can dollar cost average into the market. Even getting your exposure up to 40% over the next 10 years might be enough, and certainly would protect you from a bad sequence of returns during the early years of your retirement.
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Old 09-05-2016, 02:07 PM   #7
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Originally Posted by COcheesehead View Post
You have nearly 1.2m in cash or near cash. You seem way too risk adverse. Long term, that hurts you. Use the calculators to run the numbers and see where you end up.
Thanks, all for your replies.

So, I just ran my numbers through Firecalc. Entering a portfolio of 20% in equities and 80% in either 5 year treasuries or Long Interest Rate yielded 100% success rate. I obviously cannot put real estate investments into Firecalc so that is probably the closest I can do. It told me, “The lowest and highest portfolio balance at the end of your retirement was $1,755,574 to $15,241,794, with an average at the end of $4,747,307.”

If I change the equity amount to 40% it told me, “The lowest and highest portfolio balance at the end of your retirement was $2,500,000 to $19,239,792, with an average at the end of $6,749,879.”

So, clearly 40% equities yields better results than 20%. Having said that, only investing 20% in equities yields a 100% success with little volatility risk.

Any thoughts or comments?
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Old 09-05-2016, 02:16 PM   #8
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Because your WR is only around 3%, and it goes down quite a bit after you begin taking social security, it's hard to imagine any scenario where your portfolio would fail. Even at 20% exposure to equities you are hedging against inflation successfully.

So if only keeping 20% in equities allows you to sleep at night, I don't think it's going to hurt you. But I would consider gradually increasing it over time, at least to 30%, just to ensure you are protected against heavy inflation. A poor sequence of returns is not going to harm you at such a low exposure rate.
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Old 09-05-2016, 02:28 PM   #9
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+1 You're all set. Quit, enjoy life and skip the consulting thing... you don't really need it.

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Patience is the art of concealing your impatience.
Slow and steady wins the race.

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