Hi, New & wanting to retire early

[rjohnla]

Hi Everyone, looking forward to the information available on this site. About me, 57, no debt, rent, invested in cash or cash equivalents, conservative but would like some return. Just see a lot of bubble markets now - stocks, housing. And, risk of deflation rather than inflation, where cash is then the best place to be; a lot of bargains with value of dollar to go up making everything less expensive. In sum, could take cash have now and minimal amount of social security starting at 62, estimate living to 90. With no gains in assets would have $60k per year, minimal taxes. I made most contributions to 401k after tax. Any comments, etc., welcome. Healthcare is of course a concern.

All the best,
WAVE3

 

[rjohnla]

Can other's post here, it's a new thread?

 

[Gumby]

Can other's post here, it's a new thread?

Yes, they can. Welcome aboard Wave3.

 

[travelover]

..........invested in cash or cash equivalents, conservative but would like some return. ..........

Welcome. Asset allocation has been discussed here frequently, but it seems that to hedge the risk of future inflation, you just about have to invest in equities.

 

[REWahoo]

... invested in cash or cash equivalents, conservative but would like some return. Just see a lot of bubble markets now - stocks, housing. And, risk of deflation rather than inflation, where cash is then the best place to be; a lot of bargains with value of dollar to go up making everything less expensive. In sum, could take cash have now and minimal amount of social security starting at 62, estimate living to 90. With no gains in assets would have $60k per year, minimal taxes.

... Any comments, etc., welcome.

I suspect one reason you haven't gotten any response is due to your take on our financial future and your all cash position.

You are either right about what the future holds and correctly positioned for it or wrong and have painted yourself into a corner regarding inflation. Either way, there isn't much advise to be offered.

 

[growing_older]

Welcome. Glad you found us. I'm wondering why you are so concentrated with cash and cash equivalents. Aren't you worried that these investments won't grow enough to support your retirement?

 

[rjohnla]

Yes, I did FIRE Calc basic and see the ribbon range from 1871 to date (I believe) projects with current portfolio should grow to between 5-13. My fear actually, is I lose principle and have to come out of retirement. So my forecasts aside, I just say I have this much, divide by life expectancy and say I will get no more growth and will live on that amount per year. Having trouble switching from savings to investing. Although have used Rydex to time markets, lost money every time.

 

[rjohnla]

Just to add: My degree is in Int'l Fin. (although work in Int'l Bus.) in 1995 I switched from fundamental analysis to technical analysis. So read reams on technical indicators and market history and how individual investors - seems the majority lose money, but then there are many I believe who do quite well. Maybe, some type lump some fixed annuity with payouts until I checkout?

 

[Katsmeow]

Yes, I did FIRE Calc basic and see the ribbon range from 1871 to date (I believe) projects with current portfolio should grow to between 5-13. My fear actually, is I lose principle and have to come out of retirement. So my forecasts aside, I just say I have this much, divide by life expectancy and say I will get no more growth and will live on that amount per year. Having trouble switching from savings to investing. Although have used Rydex to time markets, lost money every time.

Most people that post here don't feel that trying to time markets works out in the long run as you no doubt found out.

On the other hand, the problem with cash equivalents is that the value of the money you are spending will be eroded by inflation. Let's say that 25 years ago you could have lived on $60k a year. In 2012, you would need $119359.60 to get the equivalent value.

The Inflation Calculator

So, the way I see it is that if I was spending $60k a year now and I was keeping my money in cash, then in 25 years that $60k a year would be more like $30k a year. Now, if I can live on $25k a year then no problem. But, if I need to spend $50k for my chosen lifestyle then I might have a problem.

I know you are dividing by your life expectancy. But - what happens if you live longer than your life expectancy. I know a number of people who have far exceeded the life expectancy they had at age 60.

 

[growing_older]

So you've tried market timing (unsuccessfully) and Rydex (unsuccessfully) and technical analysis (unsuccessfully). Are you ready to try some long term investing methods that you can be successful with? Holding cash-mostly is not going to be that. You might want to read bogleheads.org wiki or recommended books. Many people here have been successful in different styles of investing, but a reasonable asset allocation with periodic re-balancing is a very common way to be successful at investing over a long term.

 

[travelover]

..... I just say I have this much, divide by life expectancy and say I will get no more growth and will live on that amount per year.............

Just to add: My degree is in Int'l Fin. (although work in Int'l Bus.)........

I have a hard time reconciling these two thoughts. Don't they teach you in international fiance classes about inflation and the long term affect? You can't simply divide your portfolio size by your life expectancy to get a safe withdrawal rate.

 

[rjohnla]

Sorry for delay responding. Yes, they teach it. What they don't teach is deflation, which has occurred numerous times in US since year 1800. So people end up always taking the up-side to beat inflation. With deflation, financial and other assets get smashed. Dollar is worth more because there are less (retirement / default on debt). Looking at now and years past don't see inflation with 0% interest rates, like Japan 20+ years.

Just an add: our colleges & U's (at least when I went in 80's) white-washed technical analysis and deflation. It's the Markowitz theory (10 assumptions, I believe you must disregard yet do exist in the real world. So we have been riding the efficient portfolio and diversification since to 40's. Not to say it didn't work in the past. It was only after I got out of college did I start researching tech & deflation, cycles, long-term trends, etc.

RE: Today more Bulls than Bears so the foregoing worked since 2009. Not so well 2007-2009. If you would have invested in S&P Index in 2000 you would be breaking even now. Most people buy stocks or funds and do much worse. Weiss, Dent, Prechter, Stack all very cautious right now. Sure there are many bullish as well. Just consider funds are borrowing money to buy stocks (not good) and cash balances are all time low in funds not borrowing. Every one is 'in' now, so whose is left to buy or sell to?

 

[ERD50]

... You can't simply divide your portfolio size by your life expectancy to get a safe withdrawal rate.

Why not?

That is a simple, yet worthwhile calculation, IMO. What it tells you is, you could take an inflation adjusted withdraw, assuming your investment does as well as inflation. So a 30 year portfolio calculates to a 3.33% WR, a 40 year a 2.5% WR.

It's also ignoring 'sequence of returns' effect, but an investment that only keeps up with inflation probably won't be too volatile.

I would not hang my hat on that number, but it's a reasonable data point to consider in light of other calculations.

-ERD50

 

[rjohnla]

Hi ERD50, you lost me... What does "IMO" mean? And, what do you mean by 'sequence of returns' - sounds interesting. Fyi, basically did same, as a test. Money I have, excluded SS, divided it by various retirement dates and life expectancies (85 & 90) and then averaged the numbers. Let's say the average was $55K. Also, calculated no gains in current net worth (conservative, don't want to run out of $). Also, Fire Calc looks real good. Anything advice. I'm 58.

 

[seraphim]

Wave

You're trying to guess what will happen rather than set up a portfolio to weather all possibilities. Your money, but it seems you should have already learned you lesson about market timing and trying to predict the future. You seem resistant to other peoples' opinions on the matter - so good luck with your chosen AA and hope your crystal ball works better this time.

Addendum - we cross posted and your last post seem more accepting of advice. Perhaps I read you wrong.

 

[seraphim]

IMO - in my opinion

 

[rjohnla]

Thanks for IMO. You wrote "You seem resistant to other peoples' opinions on the matter - so good luck with your chosen AA and hope your crystal ball works better this time." I am open to other ideas, but 58, single, have to take care of myself. Worried about losing 20-30% or more; then back to work at 70? P.S. I'm relying on other investment advisors advise: Prechter, Weiss, Stack, Shiller. I'm just not that savy.

 

[seraphim]

ERDs percentages for withdrawal also assume a 60/40 or better stock/bond AA - returns which an all cash portfolio will not provide. We all keep several years of living expenses in cash, in case of extremely bad phases. But with an all cash portfolio and taking even withdrawals based on life expectancy will see your buying power diminished each year by inflation until you haven't enough buying power left to meet necessary living expenses. Then what? I haven't seen that you've shared such figures such as portfolio size, expected SS payout, and anticipated total expenses in retirement, so it's difficult to advise further.

 

[seraphim]

Your advisors are essentially sales people, selling a product that will make them money. The products are supposed to meet your needs, but the advisors have no fiduciary responsibility to act in your best interests. Their fees detour irate your earnings. I can't imagine any competent investment advisor advising you to maintain a 100% cash portfolio.

Using a 60/40 asset allocation, for example: the stocks provide returns designed to make up for inflation. The bonds add a stable base of income which help counteract the times the stock market is low. In retirement, you want three assets to pull from: stocks (when the stock market is high), bonds ( for when the stock market is low and the bond market is doing well), and cash for the years both bonds and stocks are doing poorly - such as in a recession.

Deflation may occur, but won't last forever - if it does we're all screwed anyway. Three years of cash - or more if it makes you comfortable - to carry you through, then restock the cash from the sales of stocks or bonds when those times are good. If you have extra cash when markets are low, that's called a buying opportunity.

Rebalancing permits you to sell assets when they are high, to buy the opposite assets when they are low. Buy low, sell high.

This is quick and dirty, but unless you can live entirely on SS, I hope you can reconsider the wisdom of an all cash portfolio.

Morningstar.com has a free learning center on stocks, bonds and portfolios that is outstanding and is essentially a college course cut down into small easy bytes, but with your college degree I didn't know if you covered all that material or not

 

[ERD50]

ERDs percentages for withdrawal also assume a 60/40 or better stock/bond AA - returns which an all cash portfolio will not provide.

No, not at all.

In this thread, I just said if you divide your portfolio by expected years of retirement, that you get a number that will support an inflation adjusted WR as long as the portfolio keeps up with inflation. I said nothing at all about what that portfolio would be comprised of - that would be a follow up discussion.

edit/add: And an all cash portfolio is not going to keep up with inflation. I sure would not bet on deflation over my entire retirement.

An alternative view would be you could take a non-inflation adjusted withdraw, and your portfolio would not need gains at all. It is nothing more than the simple arithmetic of (portfolio)/(years).

To the question about 'sequence of returns' - this just means that portfolios are volatile, and there is an effect when a portfolio drops several years in a row. A fixed or inflation adjusted initial WR keeps taking a bigger % from that dwindling portfolio. FIRECalc does a good job of reporting this, as it uses historical dips/peaks. A simple arithmetic approach does not account for this.


bold mine:

We all keep several years of living expenses in cash, in case of extremely bad phases.

No we don't. That would be ~6-8% cash, or 9-12% if 'several' means 'more than two'. I typically keep about 4 months cash, so less than 2%.


-ERD50

 

[seraphim]

Sorry ERD - didn't catch your condition about 'if it keeps up with inflation'. But the original premise of the 4% SWD did assume a minimum stock/bond asset allocation. That's what I thought you were referring to.

And I'm also aware the actual amount people keep in cash varies, but that does not negate the purpose of maintaining a cash account, nor the wisdom of what is currently called a bucket system. You are comfortable with 14 months in cash, I prefer several years.

I'm trying to keep the explanation in general terms.

 

[rjohnla]

Already mentioned by seraphim, deflation. I have been doing a lot of research, or rather other's I read have. 76-82?=High Inflation; 82-99=Disinflation (Great for financial assets, we saw that.) 2000-date Deflation leading to Depression. Right Bear markets are shorter than Bull markets. Bear market is usually quick & painful. As, most people, sad to day, buy high, sell low. Today, after 5 years individuals are all in, while insiders a cashing out at a very fast rate. Just don't see how we after disinflation, it will bounce at 0 inflation and head back up, why not break 0 inflation to the downside; deflation, then back up?

 

[nash031]

Thanks for IMO. You wrote "You seem resistant to other peoples' opinions on the matter - so good luck with your chosen AA and hope your crystal ball works better this time." I am open to other ideas, but 58, single, have to take care of myself. Worried about losing 20-30% or more; then back to work at 70? P.S. I'm relying on other investment advisors advise: Prechter, Weiss, Stack, Shiller. I'm just not that savy.

Just my opinion, but you are too focused on the infrequent and short-term. To wit, the market has declined by more than 20% just twice since 1975, and has hit double figure declines just four times. Meanwhile, the average return has been right around +7.0%. The largest individual decline in the market since 1975 occurred recently in 2008-9, but the market recovered its entire value in less than three years.

You cited deflation happening many times since 1800:

Deflation has occurred 54 times since 1800 (26% of the time). Of those, 40 occurred before the year 1900. Prior to 1851, the "CPI" was based on prices paid by Vermont farmers to support their family. CPI didn't even come into existence until 1890.

Since 1890, the "more accurate" (my term) CPI has indicated deflation only 16 times, and only once since the 1950s (in 2009). Conversely, the average inflation over that same period is approximately 2.5%.

If I were you, I would plan for something that is most likely to happen, otherwise you become the financial equivalent of a "prepper" (someone who invests in canned goods and ammunition in the event of the zombie apocalypse). Risk does not just mean "losing principle." Risk also means "losing purchasing power" which can happen either by loss of principle or via the inevitiability of inflation.

The key is to find a plan that can weather tough times in the market, but also ensure you come out ahead of (or at least equal to) the effects of inflation. You sound to me like someone for whom a 60/40 stock/bond allocation would work well. Moderate risk with good potential for growth above inflation. I also suggest the Bogleheads wiki as a good place to start where no one's trying to sell you anything.

Bottom line: inflation is highly likely to erode your portfolio (and thus your standard of living if all-cash) over the course of the next 40 years. While an equity downturn WILL happen again in your lifetime, its effects will likely be short-term, and a properly allocated portfolio will allow you to get through the downturn without going back to work.

 

[rjohnla]

Many thanks for the detailed response. Have to consider it, your analysis and stats.

 

[seraphim]

"Just don't see how we after disinflation, it will bounce at 0 inflation and head back up, why not break 0 inflation to the downside; deflation, then back up?


Perhaps it will perhaps it won't. No crystal balls of which I am aware. You puts your money down, you takes your chances lol. Best we can do, IMO, is construct a plan which will weather everything except Armageddon, then update our withdrawal and lifestyle activities accordingly, if necessary.

As I mentioned elsewhere, I'm currently 28% cash. But that money is in a secure value account with yields similar to 10 year treasury and the principle is secure. Not everyone has that option these days. That 28% works as bonds for me. Should deflation hit, I reduce my lifestyle and access those cash accounts and let my true bond and stocks weather the storm.

Good luck