Interested in hearing your opinion on this

[Medit8]

Reading an exchange between Twaddle and CFB (I forget where), I was struck by the simplicity of a model that was discussed. I hadn't considered this as a possible structure, but now I am:

Cash 800,000 @ about 5%-Monthly withdrawals of 6000 which would last somewhere around 12 years. I will not account for inflation, because I am withdrawing more than I need and will build a separate cushion (in my operating currency) which should offset the erosion effect.

Equity (about 1million) invested fully and left untouched for 12 years. A mix of US large and mid-caps and international stocks. Barring a prolonged bear market, would it be ambitious to expect that to grow to roughly USD 1.8 million (roughly a 7% annual return)? I know this is crystal ball stuff, but I'm not asking for facts, merely opinions.

I then need roughly 5000 in inflation adjusted returns which Firecalc says should be okay until I'm 90.

Plan would be implemented June 2009 when I turn 46. Am I missing something? Grateful for your thoughts.

 

[dex]

$72K/year living expenses - Why so high?
Did you factor in pension or social security?

 

[Medit8]

Hi Dex, need the funds for the kids education. I have no pension and no SS.

 

[twaddle]

M, that sounds like the bonds-first thingy.

It should work fine, but the issue for most people is the increasing volatility as you deplete the bond allocation.

Also, you want to be careful about putting your bond allocation all in a money market fund. You might also consider a more diverse stock allocation. And, finally, you want to see how that strategy works during the worst-case historical sequence.

Did you play with the spreadsheet mentioned in the thread? If not, you should before you decide to implement the strategy.

Harvesting Withdrawals in Retirement

 

[RetireeRobert]

Cash 800,000 @ about 5%-Monthly withdrawals of 6000 which would last somewhere around 12 years. I will not account for inflation, because I am withdrawing more than I need and will build a separate cushion (in my operating currency) which should offset the erosion effect.

Equity (about 1million) invested fully and left untouched for 12 years. A mix of US large and mid-caps and international stocks. Barring a prolonged bear market, would it be ambitious to expect that to grow to roughly USD 1.8 million (roughly a 7% annual return)? I know this is crystal ball stuff, but I'm not asking for facts, merely opinions.

I then need roughly 5000 in inflation adjusted returns which Firecalc says should be okay until I'm 90.

Plan would be implemented June 2009 when I turn 46. Am I missing something? Grateful for your thoughts.

The $1 million pot---if you leave it untouched and it does (in fact) earn 7% annually, then after twelve years that would be worth $2,252,000 (assuming no tax drag---is it all in tax-deferred accounts, or would you make -0- trades and not have to pay cap gains taxes--either then or after the 12 years?)

If you earned 5% annually on that pot for twelve years the $1 million would grow to $1,796,000 (same assumptions as above).

So the part about growing the $1 million pot of equities looks doable. With that pot of $1,800,000 at the end of 12 years (you would then be 58?) you could then do an SWR at 3.35% to yield your desired $60,000 ($5000 a month). That seems safe (even slightly conservative), and under the Firecalc model your withdrawn "income" would be inflation adjusted each year.

Your first part for the first 12 years, using the $800,000 in fixed income (cash, CD's, MM, bonds?) to yield you $72000 for 12 years also seems doable. 12 x $72000 is $864,000, so this pot only needs to earn $64000 over the whole 12 years to let you come out right at -0- at the end. Likely you can go longer than 12 years, or have some left to add to your other pot.

If you are confident of the $72000 income for the first 12 years to meet your needs (including college payments?), and you are confident of the $60,000 thereafter (it would start at $60,000 and then go up with inflation) to meet your needs in that stage, you plan will accomplish that, in my opinion.

I think it reasonable to assume diversified equities would earn 5% annually over a twelve year period.

For worst case scenarios, from age 46 to 58, if holes started to form in your plan, you could likely plug them with a return to w*rk, either part or fulltime. It wouldn't be the end of the world. And if your equities earned the 7% or even 8% or stretching for 9%, you would be way ahead of the game given your stated income needs/desires.

 

[Medit8]

RR, that's exactly the kind of positive feedback I was hoping for. It is obviously completely contingent on unforseen future events, but your logic makes sense and I feel better about structuring my retirement funds this way. Thanks.

 

[RetireeRobert]

RR, that's exactly the kind of positive feedback I was hoping for. It is obviously completely contingent on unforseen future events, but your logic makes sense and I feel better about structuring my retirement funds this way. Thanks.

Your welcome, and I like your nickname---Medit8. Clever, laidback, interesting, all at the same time! Very good.

 

[clifp]

Lets that sounds like 1.8 million with a 4% withdrawal for 12 years, followed by a 3-4% withdrawal rate for roughly 30 years, depending on the equity market. Seems pretty straightforward.

I think you are being conservative which is a good thing except for one aspect. You are basically ignoring inflation. As long as inflation remains at managable 2.5% it has been running this century you can hand wave it away, by saying I am withdrawing more than I need and building a seperate cushion. However, if inflation increase it is a different story.

Even at current inflation rates you'll have 35% less real purchasing power at the end of 12 years. Can you live on $3900/month (65% of 6K)? Do you have assets like a house with a fixed mortgage, real estate, or some inflation adjusted bonds that benefit by inflation.

 

[cute fuzzy bunny]

Sounds pretty doable. Once I got past my astonishment that any discussion that Wab and I had was productive...or even read...by anyone

Nothing in any prior discussion I've had limits the "first bucket" to being entirely fixed income. In fact, my first bucket is around 30-35% equities but they're all large ponderous dividend bearing ones of reasonable volatility.

Nothing also limits that "second phase" money to being entirely equities either, and thats not the case in my situation either.

As far as the effects of inflation, unless we see long term double digits, no asset class outside of equities surpasses regular inflation with decent growth. TIPS returns are crappy when inflation isnt high. Inflation has only been that high once in recent history for a short period of time.

That doesnt mean it wont happen again. But unless you have a huge bet on TIPS, the inflation protection wont help as much. Make a big bet and you'll get sucker punched by the lousy returns over the long haul. If we have multiple long periods of double digit inflation, the economy will crap out and it wont matter what you invested in.

I was reading a couple of threads the last few days where everyone was lamenting the loss of a years ER income (or more). I lost a small chunk too, but 95% of the "loss" was in my second phase bucket which I wont be tapping for 15-20+ years. Thats the beauty of this...volatility is interesting but not very relevant.

By the way, I dont think there has to be any hard rules around shifting money in either bucket or between them. If my second phase bucket doubled in a couple of years, I might harvest some of that into my first bucket and increase the longevity of the first bucket. And if we're just not spending enough out of the first bucket I invest it towards growth using the "morlock strategy".

Right now my overall allocation is 11% cash and cd's, 42% stock, 43% bond. 30/70 in the first bucket and 80/20 in the second. We'll take early social security and a couple of small pensions to supplement the first bucket and start harvesting the second bucket when the first bucket gets down to 2-3 years worth. If we need a "third bucket" we'll reverse mortgage the house.

First bucket withdrawals are severely reduced by eliminating debt and unnecessary expenses, which enables us to primarily get by on the ~5% yield from the first bucket.

 

[Medit8]

Thanks for the feedback, guys. I like the "bucket" approach.

BTW, house is paid for, no debt, cars owned outright (both 1 yeard old).

There is signficant adjustment capability in 12-16 years time when the kids are off the payroll.

 

[TickTock]

Medit8,

I've only been exposed to the buckets strategy since reading these boards, so I don't feel qualified to comment on it. However, for a more conventional approach as a cross-check:

$1.8m @ 4% SWR = $72k / yr, which is what you want to withdraw, and is more than you need. You expect expenses to drop by 1/6 in 12 years.

I think any reasonably conservative strategy will work for you.

Go for it!

 

[youbet]

Medit8,

I've only been exposed to the buckets strategy since reading these boards,

And that's one of the downsides to these boards........

 

[Alan]

There is signficant adjustment capability in 12-16 years time when the kids are off the payroll.

My biggest ever "pay raise" was when DD graduated and got a job in 2003. 2nd ever biggest pay raise was this year when DS graduated and got a job.


It also removes a lot of emotional stress once you know they are independant and doing the right things. Giving kids roots and wings is the best thing you can do for them.

 

[TickTock]

And that's one of the downsides to these boards........

 

[Twinkle Toes]

And that's one of the downsides to these boards........

Whoop, whoop, whoop ... testosterone allert!

 

[walkinwood]

Equity (about 1million) invested fully and left untouched for 12 years. A mix of US large and mid-caps and international stocks. Barring a prolonged bear market, would it be ambitious to expect that to grow to roughly USD 1.8 million (roughly a 7% annual return)? I know this is crystal ball stuff, but I'm not asking for facts, merely opinions.

My 2 cents...

A 100% equity portfolio is risky unless you're ALWAYS looking at a date 12 years out. In your case, that's not true. You'll reach a date where your need to tap into that pool is just 3, 2, 1 year. At that time, being 100% in equities is risky. Think 2002, 2003.

CFB mentions the use of bonds in that second bucket. I think that's a great idea. Most calculations for the SWR assume an asset allocation of 50-80 % in equities.

My suggestion - open to criticism - is to decide on a bond-equity allocation for your entire portfolio (include both buckets) and then try to maintain that allocation as the years progress. ie. your 2nd bucket starts getting more bonds in it as the first bucket empties. Or, (again as CFB mentions), move money periodically (opportunistically?) into your first bucket so your date of reckoning with the 2nd bucket always stays out 7+ years in the future.

 

[2B]

The more I look at everything and read the books the more I've moved toward the "simple life" approach. You can look at "buckets" and all sorts of different strategies but, bottom line, there are just too many variables to really factor in to be "certain" of anything.

I'm in a straight 40% cash/CD allocation which is 7 years of "high spending" or 20 years of "low spending." When officially retired, I'm assuming that I'll start close to the "high spending" level but if the market tanks I'll transition to the "low spending." That would probably give me a decade of living expenses covered until SS kicks in which could just about keep me going on the "low spending" level for the rest of my life.

Reasonable equities return will do nothing more than provide an enhanced lifestyle. My intention is to rebalace equity gains annually into my cash pile and maintain years of living expenses at the ready.

My equities are broken into 30% US large cap, 10% US small cap and 20% foreign (broad index and emerging). Nothing fancy here and probably a classic Bogglehead layout.

 

[haha]

I'm in a straight 40% cash/CD allocation which is 7 years of "high spending" or 20 years of "low spending." When officially retired, I'm assuming that I'll start close to the "high spending" level but if the market tanks I'll transition to the "low spending."

This seems to assume a huge gap between "high spending" and "low spending".

Just thinking about giving up any of the things I spend money on really annoys me. Like better food and entertainment. My whole life I have tried to keep essentials such as rent or mortgage low so I could spend more on fun. I really hope I never have to change that.

Ha

 

[2B]

This seems to assume a huge gap between "high spending" and "low spending".

There is a big difference and it's mostly travel. Ultimately, we all have to have a plan for what happens if the market tanks just after we retire. The "failed" FIRECalc years are all the years just before and during major market corrections. Obviously, the right time to retire is just before a major uptrend. I've been woefully incapable of really timing the market so I'll just have to have a fallback plan that I hope I never use.

 

[RetireeRobert]

The more I look at everything and read the books the more I've moved toward the "simple life" approach. You can look at "buckets" and all sorts of different strategies but, bottom line, there are just too many variables to really factor in to be "certain" of anything.

I'm in a straight 40% cash/CD allocation which is 7 years of "high spending" or 20 years of "low spending." When officially retired, I'm assuming that I'll start close to the "high spending" level but if the market tanks I'll transition to the "low spending." That would probably give me a decade of living expenses covered until SS kicks in which could just about keep me going on the "low spending" level for the rest of my life.

Reasonable equities return will do nothing more than provide an enhanced lifestyle. My intention is to rebalace equity gains annually into my cash pile and maintain years of living expenses at the ready.

My equities are broken into 30% US large cap, 10% US small cap and 20% foreign (broad index and emerging). Nothing fancy here and probably a classic Bogglehead layout.

I have always been kind of fond of the KISS rule myself, in various situations----"Keep it simple smartone". The simpler it is, the easier (and more likely) for one to maintain the plan, and not go off course on a tangent.