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ER Scenario - Does it make sense?
Old 05-13-2009, 10:53 AM   #1
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ER Scenario - Does it make sense?

EMERGENCY FUNDS - Yes (14 months cash = $67K)
DEBT - None
HOUSING - Currently in rented accomodation. I don't own a house.
AGE - 44
RETIREMENT SCENARIO - I plan to semi-retire now (no future income expected in this scenario). I am eligible for US Social Security of $22,464/year if taken at age 67.
USA TAX RATE - 15% Federal / 0% State
DESIRED INTERNATIONAL STOCKS ALLOCATION - 60% - My reasoning for this percentage is as follows (please comment if you disagree with the following logic). I live in UK and expect to spend my retirement mainly outside of the USA. Hence, I need to protect myself from currency fluctuations - particularly if the USD falls against GBP or the Euro - as I predict most of my retirement expenses over the next decades will be in these 2 currencies (GBP and Euro). My logic is that my high ratio of international stock vs. US stock will be hedge against such a depreciation of the USD vs GBP or Euro (might happen given USD's appreciation vs GBP and EUR since 11/2008).

ACCOUNT HOLDINGS (All in Cash - no capital gains to pay as I allocate my portfolio from cash)
- US Taxable Accounts: $910K
- US Tax-Deferred Accounts: $223K
- UK Tax-Deferred Accounts: $127K (held in GBP)
- TOTAL: $1,260,000

USA BROKERAGE ACCOUNTS - ETrade, Scottrade (Wide range of Mutual Funds and ETFs available.)
I prefer to invest using ETFs over Mutual Funds as ETFs are more tax-friendly for an overseas resident (in addition to the other advantages).

NET COST OF LIVING - $58K/YEAR (includes rent).

ESTIMATED ACCOUNTS WITHDRAWAL RATE - 4.3% ($54K) to 5.2% ($65K) per year.
(My intention is to take a fixed amount per year increased annually by the inflation rate.)

HOUSING - It's possible that I may purchase a home in the next few years rather than renting. In which case my intention would be to pay cash (no mortgage) and to keep the same portfolio asset allocation as below.

Here are my questions that I'd appreciate comments on:

1) Do the logic/assumptions above make sense?

2) Are the following asset allocations sensible? - will they meet my early retirement scenario and be likely to last through retirement etc.?


15% VTI --- Total US Stock
39% VEU --- International Stock (Developed & Emerging Markets)
6% VBR --- US Small Value Stock
5% VNQ --- US REIT
7% BND --- Total US Bonds

14% TIP --- US Inflation-Protected Bonds
4% BND --- Total US Bonds

7% TIP equivalent = UK Gilts (held in GBP)
3% BND equivalent = Total UK Bonds (held in GBP)

Stocks 65% + Bonds 35% (60% of Bonds in US TIPS and UK Gilts)
Domestic US Stocks 40% + International Stocks 60%

3) Is this average 7.4% return rate realistic for planning purposes over the next 30 years given this asset allocation?

US TAXABLE ACCOUNTS------------------------------------------------------------------Actual RR
15% VTI --- Total US Stock------------------------------------------------------------------8.0%
39% VEU --- International Stock (Developed & Emerging Markets)--------------------9.0%
6% VBR --- US Small Value Stock------------------------------------------------------------9.0%
5% VNQ --- US REIT--------------------------------------------------------------------------8.0%
7% BND --- Total US Bonds-------------------------------------------------------------------6.0%

14% TIP --- US Inflation-Protected Bonds-------------------------------------------------1.5%
4% BND --- Total US Bonds-------------------------------------------------------------------6.0%

7% TIP equivalent = UK Gilts (held in GBP)-------------------------------------------------1.5%
3% BND equivalent = Total UK Bonds (held in GBP)---------------------------------------6.0%

*** TOTAL RETURN RATE (pre-tax)--------------------------------------------------------7.4%
*** REAL RETURN RATE - after 3% Inflation deducted--------------------------------4.4%

The ER is 0.26 for my portfolio which would need deducting from the Return Rates above.

Thanks for your help!

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Old 05-13-2009, 11:15 AM   #2
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1) Given your situation more international stocks to better balance your currency risk, lower your normal bond holdings and I'd say since you are in fact retiring right now, more TIPS--act quickly
2) There are so many variables in that question I don't even know what to say. First, I have to make a judgement on you(for example you should sell your tips when the fed raising its rates really high), I don't know the holdings in your international fund, I don't know how long it will take Bernanke to try to weed out inflation, etc. All those factors lead to grossly different guesstimates.
3) Sure...idk man. I'm a person that tries to perdict the market(not small things a couple months down the road, but big things a couple of years down the road) and since I have such a large time horizon I'm usually right. So, I can't answer that unless I had a clue when you were planning on buying the home. Keep in mind there is a difference between residential real estate(your place) and commercial real estate(your reits).
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Old 05-13-2009, 11:59 AM   #3
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Since you are only age 44, social security at age 67 is almost a quarter century in the future. I really hate to say this, but I would not count on it. i would suggest that you work out your budget without it, and then if social security survives, you will just have a higher income than expected.

Lots of people have no REITs in their portfolio.
Happily retired since 2009, at age 61.
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Old 05-13-2009, 12:31 PM   #4
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I agree with dshibb's point 1 about increased international - especially given your plan for overseas retirement. While you think you are "higher than average" in international equities they now form about 60% of the worlds total equity so you are actually overweighted in US equities

I also second W2R's point about SS. I don't factor it in at all in my plans and I'm just a little older then you.

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Old 05-13-2009, 12:42 PM   #5
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How do you plan to cover health care expenses? Not sure that UK benefits cover all services in the U.S. Could easily cost $8-10,000 per annum if you can get it at all without working.

Your numbers look well within the rules of thumb. I like Lucia's Buckets of Money concept in his first book of the same name. It might help you focus your holdings in such a way as to emphasize steady income and appropriate time threshholds for various types of holdings.

A part-time job generating even half your desired income would vastly improve your cushion.
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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Old 05-13-2009, 02:57 PM   #6
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Replies/Changed Original Post

Thanks for your further comments - they are very helpful. I have made extensive changes to my scenario in the original post above.

Here are the changes:
-- upped my international (stocks) to 60% with 40% US Stocks now
-- upped my TIPS/Gilts to 60% of my bonds.
-- changed the rest of the asset allocation to meet the ratios (65-35 Stocks-Bonds with 40-60 of the stocks in international vs US)
-- added a long-term average return rate by asset class (estimated from the Ferri website) which shows a 7.4% expected RR before inflation.
-- clarified the role of any real estate purchase (would be separate from portfolio)

I have more work to be done on reducing spending etc.

Dental and Medical insurance are covered by the state in the UK.

I'd certainly welcome your further comments on all of this.

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Old 05-13-2009, 03:09 PM   #7
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I feel that your initial withdrawal of $65K at 5.6% of your portfolio is too high for someone your age. You should also count your ETF/Mutual fund expenses as part of your SWR, since the SWR studies were done using Indexes, not real investment vehicles like ETFs. Even the 4.3% is too high imho, given that SWR studies that showed 4% success rates usually had a time-frame of 30 years. You should be looking at a timeframe of at least 50 years.

For the timeframe reason, I chose to go with Bob Clyatt's 4%/95% rule.

To give you a glimpse of where I'm coming from. I am 48 and ER'd last year. Due to the market crash, my SWR at the beginning of 2009 was 5.5% (including MF fees), and I decided that it was too high, and I plan on working this year to supplement my withdrawals.

On the other hand, you can never be 100% sure, and you're willing to work part time, so it may work out for you.
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Old 05-13-2009, 03:49 PM   #8
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I'd say that is pretty close. Just keep in mind that if you handle it right over the next 10 years you should get at least 10%. Example: 4-5 years down the road, the inflation rate is 10% and the fed raises rates to around 7-8%(and the rate increases are 50+ basis points and are enacted close together), sell off TIPS positions, sell of the vast majority of the domestic stocks and start buying up 30 year municipals at around 15%.
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Old 05-14-2009, 01:13 PM   #9
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Originally Posted by Want2retire View Post
Since you are only age 44, social security at age 67 is almost a quarter century in the future. I really hate to say this, but I would not count on it. i would suggest that you work out your budget without it, and then if social security survives, you will just have a higher income than expected.
I really hate to agree with want2retire on SS being a variable, but she makes an excellent point.
SS will be there, but at what level and for whom?
Our SS statements are not a binding guarantee of SS benefits. They are text printed on a page with the word "If" liberally used. Congress can change the rules at any time, involuntarily or not.
Treat it as gravy and create your own steak and potatoes. I'm only 6 years older than you and that has always been my approach, FWIW.
Otherwise, I'm an optimist.
"All our dreams can come true, if we have the courage to pursue them." - Walt Disney
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