Just thought I’d post this before my portfolio value drops below again.
I’ve been refining my numbers and I now think I’ve reached a milestone in our financial plans. I believe my IRA has grown to a size it will meet our needs based on all the assumptions I’ve made (actually, it was there last year). This is spend the entire IRA by the time I die scenario. Of course everything has to work perfectly in order for this scenario to work. The main assumptions are dying 35 years after retirement, the portfolio averaging an annual return of 7%, inflation averaging 3%, all pensions & S.S. income pays as expected and we’re at or below my retirement expense target.
Since I’m pessimistic that everything will work perfectly in retirement, I’ll continue working at building a cushion over the next several years. My next goal is to be able to retire assuming a 6% return, with the final goal that the IRA will grow enough to last forever (<4% SWR). In theory, a 50% fixed income, 35% domestic equity, and 15% foreign equity asset allocation should produce an average 7% return. Our plan is to have 30-40% FI and the rest equities, so a return of 6% or larger is not out of line.
Some may think that a 3% inflation rate is low, especially under today’s conditions. One thing I’ve realized is that 25-30% of our expenses have an inflation rate of 0%. The mortgage portion of our retirement expense is set with a FRM. After the first few years in retirement, this expense will go to $0 (another budget item covers maintenance and taxes). Healthcare inflation won’t be a problem since we have paid medical insurance in retirement limiting our out-of-pocket expense. These two items should allow us to survive a higher rate on other items than the past average inflation.
Reaching this milestone has changed our investment plan. I’ve lowered the risk level I’m willing to accept. Early in my plan, when I had no idea what we needed, I figured a 12-15% average annual return was needed to reach our retirement goals. This of course means we had to take on more risk. With this milestone reached, I’m now scaling back the risk level on our investments, figuring a 7-9% return will meet our retirement goals. This transition will likely take up to three years as most were long-term investments within the first year or two of their 3-5 year span. This knowledge also made 2007, a down year for us, not as big a problem as it would have been under our prior risk level (i.e., I might have had to take on even more risk to make up for it).
What was most comforting from the expense thread was that those of you who’ve retired have been able to be at or below your retirement expense projections. It makes me think that we’ll be able to do the same since I’ve fudged my expenses to the high side.
So, what did you do when you thought you were near your goal? Did you scale back your risk level or did you go on as is? Also, do you think I might be overconfident having reached this milestone? Please shoot me down if you think I’ve made a bad assumption or missed something. I don’t want to have an “Oops!!” in retirement if it could have been avoided. Thanks.
I’ve been refining my numbers and I now think I’ve reached a milestone in our financial plans. I believe my IRA has grown to a size it will meet our needs based on all the assumptions I’ve made (actually, it was there last year). This is spend the entire IRA by the time I die scenario. Of course everything has to work perfectly in order for this scenario to work. The main assumptions are dying 35 years after retirement, the portfolio averaging an annual return of 7%, inflation averaging 3%, all pensions & S.S. income pays as expected and we’re at or below my retirement expense target.
Since I’m pessimistic that everything will work perfectly in retirement, I’ll continue working at building a cushion over the next several years. My next goal is to be able to retire assuming a 6% return, with the final goal that the IRA will grow enough to last forever (<4% SWR). In theory, a 50% fixed income, 35% domestic equity, and 15% foreign equity asset allocation should produce an average 7% return. Our plan is to have 30-40% FI and the rest equities, so a return of 6% or larger is not out of line.
Some may think that a 3% inflation rate is low, especially under today’s conditions. One thing I’ve realized is that 25-30% of our expenses have an inflation rate of 0%. The mortgage portion of our retirement expense is set with a FRM. After the first few years in retirement, this expense will go to $0 (another budget item covers maintenance and taxes). Healthcare inflation won’t be a problem since we have paid medical insurance in retirement limiting our out-of-pocket expense. These two items should allow us to survive a higher rate on other items than the past average inflation.
Reaching this milestone has changed our investment plan. I’ve lowered the risk level I’m willing to accept. Early in my plan, when I had no idea what we needed, I figured a 12-15% average annual return was needed to reach our retirement goals. This of course means we had to take on more risk. With this milestone reached, I’m now scaling back the risk level on our investments, figuring a 7-9% return will meet our retirement goals. This transition will likely take up to three years as most were long-term investments within the first year or two of their 3-5 year span. This knowledge also made 2007, a down year for us, not as big a problem as it would have been under our prior risk level (i.e., I might have had to take on even more risk to make up for it).
What was most comforting from the expense thread was that those of you who’ve retired have been able to be at or below your retirement expense projections. It makes me think that we’ll be able to do the same since I’ve fudged my expenses to the high side.
So, what did you do when you thought you were near your goal? Did you scale back your risk level or did you go on as is? Also, do you think I might be overconfident having reached this milestone? Please shoot me down if you think I’ve made a bad assumption or missed something. I don’t want to have an “Oops!!” in retirement if it could have been avoided. Thanks.
