How much is enough to retire early on?

[Mysto]

Hey R Wood - I was replying to the original poster who it appears does not have a cola'd pension (lucky you have one - I wish I did)

If you are happy with your return - good for you.

I stand corrected. Fixed income only keeps ahead if:

1. CPI really measures inflation (It doesn't - Ask CFB)
2. You make no withdrawals
3. You don't pay taxes
(and you are lucky enough to get the best rates)

hard to be retired under those conditions unless the income isn't needed - of course then why the discussion or worry?

 

[OAG]

Sorry Mysto, my error. The Inflation numbers I have used are the ones from all of the Army Retired Pay CPI's and more recently the SS rates. Tried to attach a Excel file of the rates but seems you cannot do that with this system.

Found a link that may give better data at Historical Inflation data from 1914 t the present which is still close. I guess the discrepancy comes from the Military Retirement System using different method back in the late 70's and very early 80's.

 

[maddythebeagle]

Wow I am very surprised by the number of early retirees on this board with massive cash positions. It goes against everything I have ever read on the subject, yet it seems to work! Just out of curiosity, for those of you with at least half their portfolio in cash, what is your SWR (or planned SWR)?



R Wood, It sounds like over the past 7 years the real return on cash has been about 5.40%-3.82% = 1.58% on average. Has this been your average withdrawal rate for the past 27 years and has your nest egg kept up with inflation, meaning did it grow on average 3.82% a year over the past 27 years?

Not to mention the lowest current tax rate being 15% for interest income and many people on these boards consider their personal inflation rate to be much higher than 3-4%....esp. for somebody in their 50s paying for insurance on their own=huge wildcard...

 

[kjpliny]

Assuming neverending growth in the economy is like believing you will never die. All good things must come to an end, and peak oil will reverse the trends we've seen in past markets. Don't assume investing in stocks will always be what it has been.

The Great Depression was temporary, Peak Oil is forever. Google it.

<== self acknowledged doomer =)

 

[twaddle]

Large cash or bond positions are coming into vogue as viable alternative allocation strategies.

I'm familiar with a few "interesting" approaches:

1) Ha's famous Morlock strategy in which you maintain a large cash position waiting for market crashes, and then switch to a large equity position once deep value is available.

2) Taleb's Black Swan strategy in which you maintain approx 90% in cash or treasury bonds, and use the remaining 10% to swing for the bleachers with potentially high-return speculative investments. Your downside is always capped to 10%, while your upside is unbounded.

3) Larry Swedroe's approach to Fama and French data in which he allocates about 70% to bonds (mix of TIPS and nominals) to reduce volatility and allocates the remaining 30% to ScV (50% US, 50% international), EM, and a smidge of commodities. His expected returns are similar to 100% stock portfolios, but with much reduced beta.

 

[DangerMouse]

The cash portion of our portfolio is approx. 45% of our total holdings. We are happy with this and can not see any need to move the money to bonds or tips. We plan on a SWR of 4% and are currently earning 7%. I don't even know what the average return on TIPS or bonds would be, but as with equities I can't see the point of taking on additional risk for what may be a smaller return.

 

[twaddle]

The cash portion of our portfolio is approx. 45% of our total holdings. We are happy with this and can not see any need to move the money to bonds or tips.

Cash does look pretty good right now with a 3% real return, however you're obviously exposed to declining interest rates now that the fed has telegraphed a rate cut.

CD's would let you lock current yield, but bonds could be even better: lock in current yield and get capital appreciation if rates fall.

 

[clifp]

Getting back to the OP.

Plugging a few numbers into Firecalc as well as common sense 1.2 million/40 years = $30K suggest that you are fine. Once you factor in social security, I think you can reasonable expect to be able to withdraw $40K

I am more of risk-taker[-]gambler[/-] than you so I have a higher equity allocation. Your two biggest risk are unforseen medical expenses and inflation. Not sure how to deal with medical, but for inflation I'd suggest looking at TIPs.

Assuming that you have moderate amount of money in a IRA, you can purchases TIPs with ~2.5% real return. 1.2 million * 2.5%=30K real return.

 

[Lyle]

Dallasguy

The cost of living in Dallas area is reasonable and not likely to sky rocket up so I think you are fine(we live there also). I have calculated our expenses at closer to 40K here,but there are two of us.

I say go for it. You will likely find you have plenty.

Lyle

 

[Texas2step]

Dude! you have 1.2 million and no debt. At 51 I would retire. I live in dallas also, all my life. If I were able to retire I would move to a slower paced rural town, but that's just me. I think you are good to go, give notice and start living.

 

[jIMOh]

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now.

What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

1.2 M, 66% in cash.

At 4% SWR, this should generate 32k per year.

You are OK.

What I would do is start shifting money to tax favored investments- what is in IRA form? Roth form? taxable?

for example, take out 32k per year, then put 2k into a dividend paying vehicle... and maybe cap out tax bracket if this is a 72T and convert the balance of tax bracket to a Roth.

over time you will be withdrawing money at a lower tax basis.

Over time the 2k per year added to a dividend based investment should also help accumulate some assets where you can live off dividends, which tend to keep pace with inflation.

The 400k equity investment can generate close to 12k per year in dividends (3% yield). Adding 2k per year to this over next 17 years suggests $600k might be in dividend paying stocks by time SS kicks in at age 68.

 

[124C41+]

A good resource for answering your question is the Department of Labor Web site for the Employee Benefits Security Administration. Search for their publication, "Taking the Mystery Out of Retirement." If you work through the worksheets you will have your answer.

 

[RetireeRobert]

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now.

What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

If you take $1 million and a conservative SWR of 3.2%, that gives you $32000/year. The other $200,000 consider an emergency fund, but it could also throw off plain income (no touch principal of this fund) of $8000 at a conservative 4% earnings rate.

Total income $40,000, and you are considering the $200,000 an emergency fund where you do not touch the principal except for emergencies.

Only question is if you can sleep at night knowing inflation can eat you alive--remember the 80's? With 33% in equities you do have modest inflation protection. Perhaps part of the 66% cash could go to TIPS to further moderate inflation risk, yet maintain most of the allure of cash.

Then you safety valve is Social Security in 11 to 15 years.

YES---You can retire early!!

Do it!!

 

[Maurice]

Telly: Why be selective? Average Inflation as measured by CPI for last 27 years is 3.82% (which includes the 2 years you mentioned). For the last 20 years it has averaged 2.975% (Call it 3%).

Re the inflation question - I just finished Alan Greenspan's new book. His opinion is that the low inflation we saw globally in the last 20 years is an historic anomaly largely attributable to the fall of communism in the eastern block and the (relative) liberation of the Chinese economy. He sounded less optimistic about what the next 20 years would bring.

Out of curiosity I chose your timeframes (27 and 20 years ) and looked at the period up to 1990, roughly the start of what Greenspan considers the historically anomalous period.

For what its worth, the 27 years up to 1990 inflation averaged 5.57%. The 20 years up to 1990 it averaged 6.3%.




Now, back to your original question, I say go for it! 8)

 

[OAG]

Re the inflation question - I just finished Alan Greenspan's new book. His opinion is that the low inflation we saw globally in the last 20 years is an historic anomaly largely attributable to the fall of communism in the eastern block and the (relative) liberation of the Chinese economy. He sounded less optimistic about what the next 20 years would bring.

Out of curiosity I chose your timeframes (27 and 20 years ) and looked at the period up to 1990, roughly the start of what Greenspan considers the historically anomalous period.

For what its worth, the 27 years up to 1990 inflation averaged 5.57%. The 20 years up to 1990 it averaged 6.3%.




Now, back to your original question, I say go for it! 8)

What is the source of those inflation numbers you use? BTW see my previous response #11.

 

[OAG]

Re the inflation question - I just finished Alan Greenspan's new book. His opinion is that the low inflation we saw globally in the last 20 years is an historic anomaly largely attributable to the fall of communism in the eastern block and the (relative) liberation of the Chinese economy. He sounded less optimistic about what the next 20 years would bring.

Out of curiosity I chose your timeframes (27 and 20 years ) and looked at the period up to 1990, roughly the start of what Greenspan considers the historically anomalous period.

For what its worth, the 27 years up to 1990 inflation averaged 5.57%. The 20 years up to 1990 it averaged 6.3%.




Now, back to your original question, I say go for it! 8)

What is the source of those inflation numbers you use? Also see my previous response #11.

 

[Maurice]

I used the data from your link.

The 7 year lock in sounds good. Also, the above post was not meant to criticize your decision, we all have different risk appetites. I just thought Greenspan's comments were something all of us should consider, regardless of the makeup of our portfolios.

 

[OAG]

I guess we were talking about two different things. I track CPI (which, in the earlier years of my now 28 year military 28 year retirement, was under a different (although, much better) method). Inflation is real but, IMO, it impacts all of us differently. I think as one gets older the inflation impact becomes less relevant as long as one can or has added significant savings the nest egg. This appears to be what the OP has done and it looks like, based on his expenses, he will be able to continue to do so. Of course if you are looking at a 30 to 40 year early retirement inflation can become very relevant.

 

[retiringby50]

(yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this)

My parents immigrated here in the 40/s - 50's (one earlier than the other and didn't know how to play the stock market/mutual funds game. They invested in CD's for the most part and were happy with their 3% - 5% returns (although I remember 12% in the late 70's or whenever that was). When they passed away, they had a house worth about $725K that was paid off and about $225K in cash. It can work. And yes, they could have made so much more, but in the end, they were taken care of with everything they needed and wanted.

 

[Milton]

If you are happy with your return - good for you.

That is the acid test, isn't it?

While a significant cash position is very unlikely to result in an optimal longterm return, if the relatively low income is sufficient for the investor's needs and he or she is leery of volatility, that's really all that matters.

 

[template]

That is the acid test, isn't it?

While a significant cash position is very unlikely to result in an optimal longterm return, if the relatively low income is sufficient for the investor's needs and he or she is leery of volatility, that's really all that matters.

I confess to being more risk averse than most forum members. I reduced my stock mutual fund holdings to about 13% a couple of years ago and have slept better since then.

 

[Spanky]

CD Real Return

Significant cash is fine if it can support your needs. This is appropriate when your withdrawal rate is low, say 1 to 2%, for those with generous COLA pensions from the federal/state/city government or the military. For the rest of us who require about 4% withdrawal rate from our portfolio, a 100% cash or CD portfolio will not suffice since inflation and taxes will literally wipe out its return (as illustrated by the attached table) though the tax rate may be too high but still valid to demonstrate its effect to CD return.

 

[template]

... For the rest of us who require about 4% withdrawal rate from our portfolio, a 100% cash or CD portfolio will not suffice since inflation and taxes will literally wipe out its return (as illustrated by the attached table) though the tax rate may be too high but still valid to demonstrate its effect to CD return.

Spanky,

Thanks for posting the chart. I suspect it was created by an investment company. A few observations:


(1) My tax rate since retiring has been considerably lower than the tax rate used by the chart -- about half.

(2) I shop for CD rates and usually get higher interest rates than those shown in the chart.

(3) Even using the chart's inapplicable assumptions, CDs kept pace with or beat inflation and taxes during 14 of the last 20 years.

(4) The chart doesn't quantify peace of mind for those of us trying to avoid risk during retirement.


I have a somewhat small ($31K) non-COLA pension and figure the approx $2M nestegg will last until we croak. Most of that money is after tax (i.e., outside any 401K or IRA).

 

[Spanky]

Template,

As suspected, the tax rate is questionable in the chart. Sleeping well at night without worrying about the volatility of the markets is definitely something that many would die for. As long as the income generated form a CD (or laddered CD) portfolio satisfy one needs, there is no reason to take on more risk. Congrats on your financial achievement and enjoy your journey.

Spanky

 

[Milton]

A related article that may perhaps be of interest: How big a 'nest egg' do you need to retire? - Cracked Nest Egg - MSNBC.com.

Extract:

“The traditional methodology is giving very bad advice,” said Lawrence Kotlikoff, an economics professor at Boston University. “The targeting for how much to plan on spending in retirement is being done by people that are trying to sell securities and insurance policies. That right there is a conflict of interest.”

Kotlikoff, who has developed his own methodology (more on that later), argues that for some people, the typical method of shooting for a fixed minimum income for life creates a savings target that is higher than it needs to be. But that suits the financial services industry just fine, he says.

“I’m not suggesting that everyone is oversaving or that we don’t have a saving problem with a lot of the population. We do,” he said. “We also have an oversaving problem with a lot of the population. They’re different people.”