War games - 2% vs 4% today

Research on Safe Withdrawal Rates

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unclemick
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War games - 2% vs 4% today

Post by unclemick »

Nowadays - 2.39% yield - Vanguard Balanced Index a 60/40 type fund.

With the above info and what we know to date(or think we know).

Theory wise: what would I tell a 50 yr old ER retiring today, single, 40 yr? span, no heirs(0 estate required), to make a portfolio provide a retirement income stream.

1. A 500k portfolio

2. A 1.5 mil portfolio

Make your own assumptions about what can be crafted as the minimum 'core' income stream to cover recurring expenses.

Anyone?

BTY - there are elements of my case (1993 - 2004) in here. That was then. This is now.
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Post by Mike »

S&P dividends lag inflation for long periods of time, adding 40% bonds will only magnify this effect. You can't live off the dividends from balanced index because you will likely fall behind inflation. You would have to save some of them for future inflation adjusts. A young retiree should probably be conservative, because he can take more as his portfolio grows in value. If hard times hit early on, the conservative approach will increase the odds of preserving his portfolio long enough for the market to recover. The early years are the important ones for an early retiree.
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Post by hocus2004 »

This is off the top of my head, UncleMick. My guess is that my answer to this question will change as we continue our explorations into what the historical data says re various investment questions.

I would urge the investor to aim to invest for the long term and suggest that doing so requires thinking through how he would respond to a worst-case scenario. I would stress that many investors say that they intend to invest for the long term, but that the historical data shows that many who start out thinking they will do so fail to do so because they are surprized by unanticipated developments, and suggest that the key to investing for the long-term in the real world is making informed assessments of how one will likely respond to worst-case scenarios before one puts one's life savings at risk.

I would suggest that the investor read JWR1945's "A Bright Future" post with care:

http://nofeeboards.com/boards/viewtopic.php?t=2598

I would note that, even if a pure numbers analysis suggests going with very little in stocks at today's valuation levels, I view it as a not-bad idea for a $1.5 million portfolio investor to go with 30 percent stocks on the thinking that, prices could go up in the short-term and the investor is more likely to stick with a Using TIPS to Wait It Out Until Stock Prices Return to Moderate Valuation Levels Strategy if he gets to participate in any temporary price run-ups. I would suggest that a portion of the 30 percent in stocks be put in high-dividend stocks and the other portion in an index fund. I would be open to a number of reasonable alternatives, such as investing in Berkshire-Hathaway stock, investing in REITs, investing in real estate, investing in value-oriented stocks, investing in individual stocks in cases in which the investor has done a good bit or personal research, investing in a business that the investor will operate in retirement, and so on.

I would recommend that this investor up his or her stock allocation gradually as valuations declined, with the goal of getting to a 50 percent stock allocation when PE10 is at an historical mid-point level and to a 70 percent allocation when PE10 is at an extreme low-point level. An exception would apply if the investor simply did not feel comfortable with high stock allocations in any circumstance. If the investor wanted to build a larger portfolio to leave money to heirs, I would ask such an investor to examine carefully the historical record to try to build up more comfort in the idea of investing reasonable percentages of his portoflio in stocks. If the investor really had no concern about leaving money to heirs or to charities, I would be OK with a strategy calling for less investment in stocks on the thinking that the most important thing for this investor is preservation of capital rather than long-term growth of capital.

I would suggest a lower stock allocation for the $500,000 portfolio investor on the thinking that this investor is not in a position to sustain large losses even on 30 percent of his portfolio. I would suggest a 15 percent stock allocation for this investor, but if the investor was personally inclined to go with something a bit higher or lower than that, I would not feel too much concern over a decision to use a somewhat higher or somewhat lower percentage.

I would inform the investor that I possess no particular expertise in portfolio allocation, and that all that I know is what I picked up from the research I did in putting together my own Retire Early plan and from trading ideas on discussion boards. I would urge him to seek advice from lots of different sources and to check all claims made against his own common sense and against what he has heard from alternate sources before committing to a plan. I would make note of JWR1945's observation that investors are often surprised by things that they didn't expect to be surprised by.

Finally, I would provide the investor with the web address for this board, and suggest that he keep up to date on the research being developed here. I would advise him to spend some of the free time that will open up to him in retirement learning how to invest better by reading old books on the subject, books that have stood the test of time and become recongnized as classics. I would advise him to update his retirement plan once each year, reexamining his investment strategies and making adjustments as needed to reflect changing personal circumstances and changing outside-world realities.

Portions of this analysis would apply to an investor in the accumulation stage, but a good bit of it would not.
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Post by JWR1945 »

I have not come up with any suggestions yet. My personal preference is with dividend-based strategies these days because long-term TIPS are only yielding 2% to maturity.

Here are several things to keep in mind.

1) TIPS and I-bonds provide a floor. A cash equivalent that matches inflation exactly (i.e., which has zero percent interest in real dollars), allows you to withdraw 2.5% of the initial balance (plus inflation) for 40 years.

2) When comparing TIPS and traditional longer-term bonds, remember to look beyond the first year. Today's 20 and 30 year TIPS have a 2% yield to maturity. Compare this with a traditional bond assuming that inflation is 3% per year. [Last year's inflation adjustment was 2.7% for federal retirees on the older CSRS annuity.]

The TIPS interest payment in nominal dollars is 2% of the initial balance in the first year. It is 5% in the second year. It is 8% in the third year and so forth.

TIPS match the interest payments of 10-year bonds in year 2. They exceed them substantially starting in the third year.

3) Housing, pensions and social security need to be part of the calculations. One's home can provide additional income in the later years if the basic retirement plan fails. Most pensions do not include an inflation adjustment and this must be kept in mind. Social security kicks in soon enough to provide a major jump in income for the retiree who starts with $500000.

4) It is likely to be a good idea to keep getting credit for quarters of social security coverage. Working a couple of weeks before and after the break between pairs of quarters gets you the most credit for the minimal amount of work.

5) An income of $20000 after taxes and health insurance should be more than adequate. This would be a very comfortable income floor for most people in most parts of the nation.

6) Past investigations have favored treating all retirement assets as a single, integrated portfolio. Separating out a special account for a few years is generally bad in an overall, numbers-only analysis.

7) Rebalancing is generally a good idea when different investment categories have similar returns. Rebalancing can be a bad idea when stock valuations are low since it limits the upside. Rebalancing is a good idea when valuations are high such as they are now.

Allocation switching based on P/E10 is a good alternative to rebalancing.

8 ) I checked out Vanguard's annuity service. For a man born on January 7, 1955 (50 years old), beginning withdrawals on March 1, 2005, living in Florida, a payment of $500000 would generate $1371.32 per month (or $16455.84 per year) plus inflation for the rest of his life. This is 3.29% of the initial balance.

If one were able to purchase TIPS in a tax sheltered account and if the TIPS were to yield 2.0% for 40 years, he would be able to withdraw 3.655% of his original balance. [This also assumes that he can sell TIPS as needed without any capital gains or losses.]

9) Should one decide to buy TIPS at 2% interest for now, he could wait on the sidelines and withdraw 4% per year for a long time. He would still have 51.4% of his original principal (plus inflation) at year 20 and 18.9% (plus inflation) at year 30. This gives him plenty of opportunity to purchase stocks at favorable prices later on. However, he would not be able to reach year 40 if he failed to invest successfully.

10) Finally, when considering your stock allocation, ask yourself how you would respond if prices fell in half overnight. With unclemick's balanced fund, asset values would fall about 30%. If you have a high stock allocation, you might have to delay retirement. Dividend-based strategies help offset this. The dividend income stream from unclemick's balanced fund would be likely to continue.

Have fun.

John R.
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Post by ben »

I would probably put him in a well low cost, globally well diversified portfolio of 40% global equities/10%REITs/40% global FI(Incl. TIPS) and 10% commodities/gold.

The equities could have a dividend theme to them (DVY/value Etc.).
The above would pay around 3% in dividends/interest and using JWR estimate which I find usefull of 20-30k needed per year (included healthcare) the 1.5M retiree would be able to leave of the income stream.
(above is my plan by the way; except have a bit more commodities/gold ;) ).

Now the retiree with 500k could use same portfolio but would have to take some capital gains from best performing asset(s) too to reach the minimum of $20k or so. (yes - I WOULD recommend that he spends less than the 1.5M guy).

History (well last 30-50 years where have the data) have shown that adding international/reits/commodities Etc. to a portfolio increases the w/r with around 1% - so hopefully the extra buffer in a well diversified portfolio will off-set some of current high valuations.

One could do a ton of great variations with the 1.5M portfolio (split in 2 portfolios - 1 equity only and 1 TIPs only and only look at the equity portfolio in 20 years or so when TIPs used?) but as mentioned that all comes down to risk tolerance.

Cheers!
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Post by JWR1945 »

Perhaps we can get unclemick to narrow down our retiree's profile. OR, more likely, we can get him to provide us with several different retirees that all fit the original outline, but who differ in other respects.

One thing that I forgot to address was the possibility of our retiree's working part time at something that he really loves. This is similar to hocus's approach.

The biggest payoff right now for our retiree is to keep expenses low. For example, the Historical Surviving Withdrawal Rate for 50 years is roughly equal to the rate for 30 years less 0.3%. That is, roughly going from 4.0% withdrawals to 3.7% has meant the difference of two decades.

Working part time is another way to do the same thing. The expenses do not necessarily go down, but the amount that investments must cover does go down.

Have fun.

John R.
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Post by unclemick »

Heh, heh, heh - my mind was made up before I posed the question.

For the 500k cat, buy a copy of Your Money or Your Life and try for the famous/ er infamous $50/day on the other forum (Dory36).

Then buy either: Vanguard Retirement Series - Income and WAIT. 3.67% yield times 500k = roughly $50.27/day or $18,350 per year.

Rationale: you have plenty of time(40 yrs) for Schiller, P/E 10, and my old buddy Ben Graham to get better stock values. And - heh, heh - there is 25% Inflation Protected Securities in the fund - Vanguard must know something.

Or buy Vanguard Wellesley - and WAIT/or not. 3.56% times 500k = $48.76/day or $17,800/yr. Some part time as a cab driver may be required.

Rationale: Chases Bernstein's value premium to some extent , underweights stock, and there are elements of a dividend strategy.

As for the 1.5 mil cat - Well I'm going to have to stop reading Ben's posts - heh,heh - puts crazy ideas in my head - like the two portfolio idea - I already have balanced index plus dividend stocks as tall poles.

There you have it - only one fund is necessary - go fishing - and if sometime in the next forty years, valuations get better, adjust accordingly.

Of course, I gotta putz, and don't follow my own advice. It's a war game and does capture elements of what I've read here so far and fits my prejudices.
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Post by JWR1945 »

I may be dwelling too much on TIPS. Using TIPS at today's interest rates is not my preferred approach. OTOH, as a numbers guy who knows the formulas, it is much easier for me to present these results than for someone else.

Suppose that our 50 year old retiree buys long-term TIPS with a 2.0% yield to maturity. Suppose that he withdraws 4% (plus inflation) of his holdings each year for 15 years. He ends up with 65.4% of his original investment.

[His TIPS Equivalent Safe Withdrawal Rate is 7.78% when the basic interest rate is 2% and the time span is 15 years. If the withdrawal rate is 4%, the remaining fraction of his portfolio at year 15 is [(7.78-4)/7.78-2)] = 0.654.]

If our retiree started out with $500000, he would still have $327000 at the end of 15 years. He would be able to withdraw 5.122% of this for 25 years before running out of money, which would bring the total to 40 years. This would drop his withdrawal amount to $16750 per year for the remaining 25 years.

The shortfall that must be covered by social security would be $20000-16750 = $3250 or $271 per month. [I used age 65 in these calculations. He would probably have to wait until age 67 before collecting social security.]

I have not included taxes and medical insurance in these calculations. But a part time job is likely to cover the gap. Assuming that our retiree has picked up skills throughout his career, he could easily add $5000 to $10000 from his part time work.

Have fun.

John R.
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Post by ben »

Not fair to add in the part time job in the equation - the question was clear that he retired today - not that mumbo jumbo about working on the side. I agree it is a seperate option but to say someone with $500k in the bank will HAVE to have other income stream is wrong in my book. Cheers, Ben
(and RETIRE at least should mena having the money NOT to work - even if one decides to do it anyway).
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Post by Mike »

500k is a little tight for an early retiree, but a frugal and healthy single could probably do it. The 1.5m is quite comfortable.
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Post by ben »

Mike - I agree but in low cost parts of USA you would live quite OK I hear, and in Thailand you would live like a king! (Ok, a prince at least!). It all depends... Cheers, Ben
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Post by hocus2004 »

Working part time is another way to do the same thing. The expenses do not necessarily go down, but the amount that investments must cover does go down.

There's a second benefit to the working part-time option. When you remain a part of the work world in some way during retirement, you are no longer strictly in the Distribution Stage. An early retiree who continues to work is partly in the Distribution Stage (because he uses his investment earnings to cover some of his costs of living) and partly in the Accumulation Stage (because new money is coming in, and in some circumstances there is more money coming in than there is going out). One of our most important findings is that stocks offer a far more appealing long-term return for investors in the Accumulation Stage. Early retirees who work tap into the benefits enjoyed by investors in the Accumulation Stage while also gaining much of the freeom to do what they please with the hours of their days possessed by those in the Distribution Phase. For some, it is an option that offers the best of both worlds.
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Post by hocus2004 »

Heh, heh, heh - my mind was made up before I posed the question.

Exactly so.

And it ain't just exactly so for you, UncleMick. It's true of everyone who has posted so far on this thread, is it not? We all have our little hobby horses, and we all seem to find an argument for why they apply no matter what the question of the day happens to be.

It's not just us either, of course. It is the entire community. No, it is the entire world. It is people. This is how people are. It's not that they are bad. It's that they are good. There is something within people that makes them want to reach out and help other people. This is why discussion boards exist. Why the heck else would so many give up so much of their time and energy for no cash compensation whatsoever?

People like to help other people, and so naturally when a question comes up they turn to what has worked for them and they use that experience as fodder to help others. This is the whole point of this darn communications medium. It is a people medium. If you want great writing, buy the New Yorker. If you want visuals, buy a cable service and make yourself dizzy with visuals. What has a discussion board got that all the other options ain't got? It's got lots of diffferent people contributing lots of different perspectives rooted in lots of different varieties of life experiences. That's the whole shebang. That is what we are supposed to be about.

That ain't what intercst is about and that ain't what the REHP study is about. The REHP study is "proof" that one investing approach is better than all the others, don't you know? It's got tables in it, statistics, data, all sorts of scientific-sounding stuff (he just "forgot" to include an adjustments for changes in valuation--as Church Lady would say: "how convenient.) The REHP study is a club that intercst uses to beat senseless anyone who puts forward an investing idea that does not jive with his dogmatic view of how people should go about financing an early retirement. The way it works is that others are "allowed" to offer their views, but intercst is sure to chime in and note that, while these others may do what they please, he has already "proven" that the "optimal" way to invest is to have a 74 percent allocation to S&P stocks, and that this approach is "100 percent safe" while also providing huge amounts of growth, and that anyone who thinks different is "mentally ill." And he has a Goon Squad to back him up in the event that anyone is not graceful enough to bow out of the thread and admire his superior wisdom at that point.

The Gospel According to Intercst says that everyone participating on this thread is mentally ill. I say we are not. Well, if we are not, I say that we need to develop the gumption to tell him that we are not and to correct him the next time he puts forward some nonsense assertion that an investment in 74 percent S&P stocks is "100 percent safe." We all know that that is not even remotely true. It's not true, and that means that people should stop saying it. When people do say it, they should be corrected. Politely, but firmly.

It's not just that we run a serious risk that we are going to cause a lot of busted retirements by allowing this individual to continue to run his con on our boards. It is also that he does damage to the board experience when he offers these dogmatic views that may never be questioned without a big-time flame war being started by him and his DCM supporters. There are many people who believe that the REHP study is nonsense but who hold back from saying so because they don't want their lives threatened and they don't want to find themselves in the middle of big-time flame wars. These are the sorts of people we want to hear from. These are the people we learn from, not the intercsts of the world. I want to hear from people who have something useful to contribute, not from someone who lost interest in the subject of early retirement the first time he ever saw stock prices drop just a little.

UncleMick is decribing a reality of nature. People form viewpoints and they then tend to approach all questions with the particular perspective they have developed. That's not such a bad thing so long as a nice variety of perspectives is being voiced. The entire system breaks down when one person claims that he possesses scientific support for his particular viewpoint and that none of the others does. During the first five years of the existence of the various Retire Early/FIRE/Passion Saving boards, The Study has trumped all in discussions of investing, and that has been a very bad thing.

We need to assert our freedom. We need to gain the right to say what we believe without having to ask permission of the Great and Powerful intercst. This is what matters. We have enough smart people in our community to offer all of the insights that anyone needs to put together a reasonable Retire Early plan. But having smart people does not count for much if those smart people are afraid to speak honestly and frankly and completely about their beliefs. It disgusts me when I see smart people like raddr (who it is evident to me knows ten times more about investing than intercst ever will) walking on eggshells out of fear that he will say something that will get him on intercst's bad side.

It's all nonsense and it all should be put to rest. The rest of us are here to share information. This guy is here to have people genuflect before him and kiss his ring and sigh about how wonderful it is that he "invented" the concept of early retirement and thereby led all the rest of us out of the darkness. He didn't lead me out of the darkness, and he didn't lead FoolMeOnce out of the darkness, and he didn't lead Wanderer out of the darkness, and he didn't lead a whole bunch of other people out of the darkness.

He started the first board. Let's all buy him a watch or something and get over it already. The guy's disruptive posting practices have become a stone cold bore. We are all wasting a lot of time on something that is not worthy of so much discussion. It is a quirk of fate that the one poster among us unwilling to follow the rules that govern the posting practices of all others happens to be the one who started the first board. Our community needs to mature and realize that there are going to be times when you have to remove posters who behave in this way, not because you don't like them, but because the community is more important than any one individual in it.

Your mind was indeed made up before you posed the question, UncleMick. And intercst's mind was made up before he began work on his famous "study." The study proves nothing to anyone who wasn't as fanatical in his pro-stock views as intercst is before he read it. It's not research, it's a rationalization. It's not science, it's science fiction. Can we let it go? Can we put the nonsense behind us? Can we move on?
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Post by hocus2004 »

I may be dwelling too much on TIPS.

TIPS are an option. They are not the only option, but they are a darn good option is all sorts of circumstances. The reason why I like TIPS is that they offer me a good holding place while I wait for stocks to return to more reaonable valuation levels. I am by nature a stock guy. Someone like FoolMeOnce, who has lots of experience with rental real estate, does not need to deal with stocks if he doesn't want to. So someone like FoolMeOnce doesn't need to deal with TIPS either if he doesn't want to. If you are primarily a stock guy, then you need somewhere to go when valuations get out of hand. For that sort of person in that sort of circumstance, I think that TIPS are mighty attractive..

Using TIPS at today's interest rates is not my preferred approach.

I think people make too big a deal about the interest rate being paid by TIPS. Obviously it would be nice to get the 4.1%real return that was available with TIPS not too long ago, and the 5.85% SWR that went with it, but I have doubts as to whether aspiring early retirees are ever again going to see an investment option that offers that particular combination of safety and long-term return. TIPS are not so awe inspiring when they are paying a 2% real return.

But you aren't buying the TIPS for the 2% percent real return anyway, are you? If you are planning to hold onto the TIPS no matter what, then the return they offer should be a major consideration in a decision to buy them. But that's not what I understood the "A Bright Future" post to be about. That post is making a case for using TIPS as a means of preserving capital while stock valuations return to more reasonable levels. If that's the purpose of the exercise, then it is not proper to look only at the starting-point return being paid on the TIPS in assessing what sort of income stream you are going to obtain from going with this investment option.

Your research shows that the SWR for 80 percent stocks at the valuation levels we experienced in 1982 was 9 percent. If you obtain a 2 percent real return from TIPS for a few years and then switch to a stock investment that provides a 9 percent SWR, you are not getting a long-term annual 2 percent real return are you? You are getting something a whole bunch better. I don't know if we are going to see a 9 percent SWR from stocks again in our lifetimes. But surely we are going to see an SWR from stocks of better than today's 2.5 percent.

If a portion of your portfolio is going to be invested for a time in TIPS and then for a time in stocks with a high SWR, should not the return from the stock years be counted as well as the return from the TIPS years? As UncleMick is sometimes known to add: "Well, shouldn't it?"

It's what the investment class pays over the remaining years of your life that matters, not the number that applies on the day you purchase it. TIPS today give a 2 percent real return, but that is not their primary appeal. Their primary appeal is that they give flexibility. Asset classes with the volatility of stocks do not provide an equal degree of flexibility (except in the la-la land inhabited by REHP Study enthusiasts). Stocks sometimes go down in value big-time, and that means that the size of your portfolio goes down big-time, and that means that you possess a diminished level of financial freedom from that point forward. The simple four-letter word often used to describe this phenomenon is "risk." High-valuation stocks got lots of risk. TIPS got very little of it. When it comes to risk, little is better.

Risk avoidance is not just for little old ladies who pulls the covers over themselves and remain in bed all day because they are afraid of what might be lurking out in the Big Bad World. Risk avoidance is something pirates care about too. Pirates don't deliberately sail into rough waters, you know. They do so if they must to achieve their goals. But they avoid rough waters if they can. Not because they are sissies. Because they want the loot!.

They want the booty! That's the point of the game. That's why we do what we do, to capture the booty. We need to rethink first principles and get back to where we once belonged. The purpose of the game is not to make the stock gods pleased with us. The purpose of the game is to capture the booty. If stocks do the job, we go with stocks. If stocks leave a little something to be desired in the SWR department, we take it in another direction, perhaps the TIPS direction. Do we not?

I'm a pirate. I want the loot. The "loot" in my eyes is stocks with those hot 9 percent SWRs (I would settle for a juicy 6 percent SWR, or, in a pinch, for even a satisfying 4 percent SWR, but a tasteless 2.5 percent SWR does not get my pirate blood racing). Pirates take risks, but smart pirates aim to take only calculated risks. I aim to be a smart pirate.

TIPS possess a whole bunch of appeal to smart pirates. Not because they provide a government guarantee of a 2 percent real return. That is not the sort of thing that impresses a pirate. Pirates like TIPS because of the juicy SWRs usually available from stocks in the days following the sorts of days we are living through today. Presuming that stocks perform in the future somewhat in the way they have always performed in the past, and so on and so forth and blah, blah, blah, blah, blah.
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Post by hocus2004 »

Not fair to add in the part time job in the equation - the question was clear that he retired today - not that mumbo jumbo about working on the side.

It ain't mumbo jumbo, Ben. It's an option, a powerfully effective option for those in the circumstances that make it so. If you want to be absolutely rigid in your understanding of what "retirement" means, you had better forget about this business of winning financial freedom early in life. That's not the conventional and traditional and accepted and well-understood way to do it. You'll retire on the night of your 65th birthday and you'll get a watch and a swell send-off. Don't be thinking that anything else is possible for you. Don't be getting any funny ideas in your head.

Or--

Let all the funny ideas in your head as you please, but permit others to get funny ideas in their heads too. This "retirement is what I say it is and nothing else counts!" business is yet another of the intercst dogmas. You can probably guess how impressed I am with the fact that intercst doesn't count what I did as "retirement." I guess I'll just have to go back to my corporate job, won't I? Either that or spend the next 50 years of my life never moving from my place in front of the television screen so that I come into compliance with his definition of "retirement."

Not this boy. I retired from what I wanted to retire from (having someone else control what I did with my time) and I kept doing what I loved doing (journalism work, which is one of the great joys of my life). I'll go back to the consulting firm before I will retire the intercst-approved way. It's only mumbo jumbo, but I like it, like it, yes I do. I would think that an 007 admirer would appreciate the appeal of doing what you want to do with the rest of your life.

I orginally designed my plan to conform to the old boring conventional stupid view of what retirement is. Then I got a clue one day. I was trying to think up ways of making that Retire Early dream come true sooner. And I took note of the fact that I intended to continue working in journalism (but according to my rules, not according to The Man's rules) for a long time to come. I allowed my feeble brain to cogitate on the implications a bit. What I came up with is a conclusion that there is no reason on God's Green Earth why I should not count the money that I am going to be earning anyway when working out the financing of a plan. There's no rule that says that an early retiree must count these earnings. It's OK by me if someone wants to count all future earnings as slack. But if someone wants to count them and is conservative in the estimate used, I think that's just fine too.

UncleMick didn't say whether the hypothetical individual we are discussing plans to work during retirement or not. We just don't know. It could be that, if that individual is reading this thread, he will look at JWR1945's point and it will hit him--that's the answer! For some, it really is the answer. You can waste many hours worrying about stocks this and TIPS that and real estate the other thing. Or you can do some work you love that brings in $10,000 a year or $20,000 a year or whatever and make the entire issue go "poof!"

This is an anti-mumbo jumbo board. I got fed up with the mumbo we were hearing from DCMs and I started this place so that aspiring early retirees with an interest in engaging in civil and reasoned discussion on how to finance their plans could do so. True mumbo jumbo will be subject to serious scrutiny here. What JWR1945 put forward was not mumbo jumbo. It was an option. A realistic option. A good option for those in the right circumstances. The sort of thing we want to see put forward.

I know you didn't mean anything improper by your mumbo jumbo comment. I appreciate all of your contributions and it just happened that you included a phrase in your post that permitted me a chance to get this little rant off of my chest. But my concern with the intercst approach to running a discussion board community is NOT limited to the SWR questions. There are all sorts of nonsense dogmas that he has imposed on us for over five years now and I want to see them all blown away in the wind. I want to hear what people other than intercst have to say, that is what all of this is really about. I want to hear what others have to say about SWRs. And I want to hear what others have to say about working in retirement. And I want to hear what others have to say about all sorts of other things.

No dogmas! It is far too early in the game for anyone to be imposing dogmas on us. We have only been at this for five years. We are still in the exploration stage. Those who must insist on rigid adherance to their dogmatic views are kindly invited to take their posting energies elsewhere. There is no place in this community (I mean the larger community, not just this little board) for rigid dogmatists at this stage of our developmental process. That's my take.
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Post by hocus2004 »

I would probably put him in a well low cost, globally well diversified portfolio of 40% global equities/10%REITs/40% global FI(Incl. TIPS) and 10% commodities/gold.

It seems to me that this portfolio allocation has a nice mix of safety and growth. If I had a little more slack in my plan, I could see going with something along these lines.

I gave up the option of generating more slack in order to get to work sooner building my writing business, on the hope that that will someday provide an even stronger income stream. I view the "investment" I have made in my writing business as the high-risk portion of my "portfolio." It's because of the risk that I took in that area that I needed to stress stability and safety in development of my other income streams.

One could do a ton of great variations with the 1.5M portfolio (split in 2 portfolios - 1 equity only and 1 TIPs only and only look at the equity portfolio in 20 years or so when TIPs used?)

JWR1945 has posted research at this board showing that, so long as you can be sure not to take any money out of your stock investment, you can count on a 3.5 percent annualized real return even at today's valuations (if I recall the numbers correctly, please correct me if I am stating this improperly). What Ben is describing here is an approach where the SWR for stocks would not apply because you would be using an alternate investment class to generate the income stream needed to cover your costs of living. I see a good bit of appeal in strategies that permit the investor to tap into the better results available to stock investors who are not using stocks to cover the bills.
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Post by unclemick »

There is yet a third way - individual dividend stocks - select say from utilities, oils, telephone, banks/insurance, REITs, food, drugs, etc.

Even I don't have the courage to go 100% here. 15% but not 100. You have to make friends with volitility and focus on div/div growth.

For those with great courage - an international portofolio of dividend stocks could be constructed. This is an area, I'm tempted to explore in future.

BTY - this is rooted in history(aka the Norwegian widow) - many a soul retired in the 'old days' with a small pension/or SS with Ma Bell, a local bank, local utility stock, and perhaps a big oil before modern portfolio theory, spreadsheets, computers, index funds, etc.,etc.
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Post by JWR1945 »

unclemick wrote:There is yet a third way - individual dividend stocks - select say from utilities, oils, telephone, banks/insurance, REITs, food, drugs, etc.

Even I don't have the courage to go 100% here. 15% but not 100. You have to make friends with volatility and focus on div/div growth.

..etc.
David Dreman pointed out that a person can construct an index type combination of stocks with an emphasis on high dividends and other indicators of value.

Historically, it has been a better performer than simply going after high dividends, but it has been more volatile on the downside.

Still, it is reasonable for an individual to combine John Bogle's idea of 15 or more individual stocks to mimic an index with David Dreman's measures of value, especially in terms of dividend yields.

Yes, you can have some of the best features of higher dividends and a broad based index fund.

Have fun.

John R.
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Post by JWR1945 »

ben wrote:Not fair to add in the part time job in the equation..(and RETIRE at least should mean having the money NOT to work - even if one decides to do it anyway)
unclemick's thread starting post came out about the time that Tim Fleischer posted thoughts on my profile, suggestions, advice (dated Jan 11th, 2005) at dory36's Early Retirement Forum.
http://early-retirement.org/cgi-bin/yab ... 1105454597

I was influenced by his comments, which included his willingness to work part time and his already having a moneymaking hobby.

I was influenced by unclemick's real life situation. He has a small, fixed dollar pension.

I was influenced by the approach that hocus has pioneered.

To top it off, you, ben, bring an entirely new dimension into this discussion. It makes a lot of sense for you to invest internationally because you do not reside in the United States. For example, TIPS cushion the effects of inflation for residents of the United States as exchange rates vary. They do not provide a cushion for you. Because of where you live, you are much more familiar with exchange rates and the other details of international investing than most citizens of the United States. In addition, you have a special opportunity for a higher standard of living because of the low cost of living in Thailand.

In contrast, I know just enough about international investing to know that I can get hurt through my ignorance. I do not know enough to use it to my advantage. unclemick is likely to learn enough to make reasonable investments. At worst, he will blame any losses on his male hormones.

In fact, unclemick has already expanded his thinking.
unclemick wrote:Heh, heh, heh - my mind was made up before I posed the question.
For the 500k cat, buy a copy of Your Money or Your Life and try for the famous/or infamous $50/day on the other forum (Dory36).

Then buy either: Vanguard Retirement Series - Income and WAIT. 3.67% yield times 500k = roughly $50.27/day or $18,350 per year.
..
Or buy Vanguard Wellesley - and WAIT/or not. 3.56% times 500k = $48.76/day or $17,800/yr. Some part time as a cab driver may be required.
..
As for the 1.5 mil cat - Well I'm going to have to stop reading Ben's posts - heh,heh - puts crazy ideas in my head - like the two portfolio idea - I already have balanced index plus dividend stocks as tall poles.
..
Of course, I gotta putz, and don't follow my own advice. It's a war game and does capture elements of what I've read here so far and fits my prejudices.
Intentional or not, this thread now has a wide scope.

Have fun.

John R.
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Post by JWR1945 »

unclemick wrote:Nowadays - 2.39% yield - Vanguard Balanced Index a 60/40 type fund.

With the above info and what we know to date (or think we know).

Theory wise: what would I tell a 50 yr old ER retiring today, single, 40 yr? span, no heirs (0 estate required), to make a portfolio provide a retirement income stream.
..
BTY - there are elements of my case (1993 - 2004) in here. That was then. This is now.
No theory is complete unless it can be implemented.

A retiree's comfort level is important. Factors such as part time work may cross the gap between a solution that is only written on paper and a person's course of action.

Another factor is the danger of a market meltdown. We do not want retirement plans to vaporize if the stock market heads south suddenly and sharply.

Have fun.

John R.
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