jIM_Ohio is Investing to retire early

DS1 weights 4.06 lbs and is going through the car seat challenge tonight. He will be strapped into his carseat for a couple of hours in the ICU and they need to see if he has any cardiac episodes as a result of the car seat.

DW and I will be staying at hospital all night on Thursday in a transition room with DS1. If he handles schedule and feedings well, DS1 gets to see his HOME!

DS1 ripped out his feeding tube today. This means he is on bottle feeds for the remainder of his stay. He had his first bottle on Friday, I think.

DS1 weighs 3 lbs 4 oz
DS2 weighs 3 lbs 4 oz

boys are stable and gaining weight (still), so things appear to be on up and up.

DS1 is 3 lbs
DS2 is 2 lbs 14 oz

DS2 gained 80 grams yesterday-almost 3 ounces.

We spent $1300 on various baby things on Sunday. I think spending like this could really stimulate economy. My wife and I did our part.

Diaper Genie
Comforter set x1
baby sleep/motion detection systems x2
swing x1
bouncy seat x1
crib sheets
winnie the pooh decorations for nursery
outlet covers
power strip covers
cupboard locks

and the list goes on and on.

It is amazing what things cost retail for kids. Babies R Us was packed. The trip filled my honda ridgeline and I could barely see out the back.

New babies means a new budget. Wife and I are working through it over next few weeks.

Because they are preemies, we have decided to avoid daycare for first 9 months. Our boys are at high risk of infection and sickness, so we need to protect them from diseases like RSV and other illnesses.

Issue 1- tax return is expected to be 4k (refund in 07 without kids was 3k+). The plan is to change wife's withholdings and bring home about $400 more per month.

Issue 2- wife's student loans were paid off with 2007 tax return. Monthly savings of $220.

$620/month should pay for diapers and formula.

That should allow the Roth's to stay in the budget at $875/month for 2008 and maybe 2009.

Issue 3- I am losing 10k cash income per year from soccer because my work schedule is moving from 8-5 to 2-10. The benefit to this is we will not need to pay for daycare.

Issue 4: My wife's car lease is up in Aug of 09. That is $350/month we need to keep in budget to get her another car. She puts around 50k miles on car every 3 years for work (travels quite a bit locally). More than likely another lease. We will owe close to 4k when we turn this lease in as well.

Issue 5: My truck payment of $700 will be done in Aug of 2010. This money comes into budget for something.

Suggestion 6: Take the $700 truck payment and apply it to 2nd mortgage (7.5% interest rate). 2nd mortgage is 55k or so right now. My math had the $700 paying this off in 5-7 years at around 2015.

Suggestion 7: take the $700 car payment and $400 mortgage payment and start a multiprong weath building strategy:
$300 for college fund twin A
$300 for college fund- twin B
$500 into new car fund for me
All $1100 is actually the same account because all needs are medium term. PRPFX is fund I use for this account (this is also the mortgage paydown account/ secondary emergency fund).

Overall plan up to this point is to retire at age 53 (kids will be 18 then). We have 160k already set aside, and set aside close to 17k per year for retirement.

Thoughts?

Here are baby pics for anyone interested.

My wife and I want to take pictures of our sons before they grow out of their incubators with objects which show relative size.

Wedding rings were suggested already by hospital- those pics will be taken tommorrow.

A friend gave us two build a bears which are each bigger than each of our sons, but the issue with the bears is
a) they cannot be put in incubator (not sanitary) and no one really knows how big a teddy bear is (you could buy a teddy bigger than me and I'm 6'1" 170#.

I was thinking maybe a coffee mug or similar. Any other ideas?

Like their father, my kids could not wait. My wife had an emergency C section on March 27 to deliver 2 boys. My wife was 28 weeks pregnant.

The good news is my wife came home. She had been in hospital since the 20th week of her pregnancy and our house was getting lonely for 8 weeks for me.

The boys are stable in the ICU at a great Neo-natal unit. Within 5 days they were taken off all breathing support (they are breathing on their own). Now we need to see kids grow.

DS1 was born 2 lbs 14 oz and was 2 lbs 11 oz when he was weighed yesterday.

DS2 was born 2 lbs 6 oz and was 2 lbs 3 oz when he was weighed yesterday.

I am opening an account with Permanent funds for a mutual fund called Permanent Portfolio (PRPFX).

The fund owns gold, silver, US bonds, swiss francs, and US growth stocks.

The purpose of this fund is to pay down our mortgage. Each year we hope to put in $1000-$3000 in this fund, then somewhere around year 20 of our mortgage, we should be able to cash in the fund and pay off the mortgage.

The fund was chosen because it diversifies what we have now (we do not own 3 of the asset classes the fund holds), it should also have low taxable distribitions (gold and silver do not pay dividends and account for close to 50% of holdings). The fund needs to beat the 5.75% rate on our first mortgage and 7.25% rate we have on our second mortgage. I am anticipating a return of close to 8% per year from this fund.

2007 tax year summary:

Married filing jointly

Gross Income 103k
Adjusted Gross Income 65k
effective tax rate 8%

That was my lowest effective tax rate since working full time. I am curious what others effective tax rate is?

I have decided to use the self directed brokerage option in my 401k. It costs $20/quarter to maintain, plus transaction costs.

My plan is to put 10k into the self directed brokerage 2X each year. In the 6 months between the brokerage deposits, the money will be invested in my companies normal 401k offerings.

I will track my IRR of both and make sure my choices beat my companies choices.

Company's choices are nameless funds.
43% to domestic large caps
25% to domestic small caps
5% to company stock
15% to foreign developed markets
10% to foreign emerging markets
1% to high yield bond fund
1% to core bond fund

(no mid cap offering)

Brokerage choices will let me do 1/3 aggressive and 2/3 diversified positions.

14% PRPFX (growth)
7% ULPIX (aggressive growth-2X S&P 500)
14% PRFDX (large value diversified)
7% ADVDX (large value dividend accelerator)
10% PRDMX (diversified mid cap)
5% CGMFX (aggressive growth)
10% PRDSX (diversified small cap)
5% xxxxX (aggressive small cap- looking for this now)
20% PSLIX (diversified international)
5% xxxxX (aggressive foreign or global)
3% RPSIX (diversified bond fund)

The bond position will grow 1% from sales of all holdings every 6 months.
I will rebalance 2X per year. In June I will make sure 2/3-1/3 allocation is true. In December I will balance the whole portfolio.

Wife asked earlier in the month about making an extra mortgage payment each year, to pay it off sooner.

I suggested we take the money and invest it as a compromise. In a taxable account which could be used to pay down mortgage if one of us lost a job, or used to payoff mortgage if the money was invested properly.

She agreed to let me invest the $500-$2000 we would pay extra each year. Because the mortgage rate is 5.75%, I think I can pick just about any mutual fund and beat that. My choice is PRPFX- holds some gold, some silver, some bonds, some swiss francs and some stocks. Expecting 7-10% annual returns from Permanent Portfolio.

This was first year I tracked each account, it's value, it's contributions and performance. My 2007 year return was 6.96%.

Ending values for 2007.

Roth IRA me 7.7% return; value $29,133
Rollover IRA-me -2%, value $70,333
401k me 6.7% return; value $41,202
Roth IRA-wife -.88%, value $1,982
Rollover IRA-wife 9.50% return; value $6,870
401k-wife 24.66% return; value $14,165
savings account-both $4000

deposits for 2007:
$4000 savings (this started the EF for us)
my 401k $8575
my Roth $4000
wife's 401k $4338
wife's Roth $2000

We have already added $2400 to savings for 2008. We have already contributed to my Roth for 2008, wife is contributiing prior year to her Roth for Jan-Feb-Mar-April.

My wife and I had an irritable discussion. We need to free up 13k per year to pay for day care (twins are due in June- babies 1 and 2 for us).

We found most of it:
$625 (cancel my Roth IRA payment each month)
$250 (cancel wife's Roth IRA payment each month)
$220 (pay of wife's student loans early.

I remember a budget conversation 2 years ago and I had mapped out a plan to pay off wife's student loans by April or May. Then a few months after the conversation she changed her mind. Now that we need the money the discussion was not pleasent.

It will take $3000 to pay off the loans (to free up the $220/month needed). Loans are small ($600, $700, $400, $700, $550 type ammounts) with low interest (7%).

It's tough when one spouse plans (me) and one does what she feels like (wife).

Irritable discussion- that's our PC term for we did not agree.

Siemens bought out UGS (my employer) in march. Prior to that UGS was owned by EDS. Prior to that SDRC was my employer until that dark day when the CEO sold out and merged us into EDS.

The 401k money prior to UGS has the option of being rolled into Siemens 401k plan, or rolled into an IRA. All UGS 401k money must be merged into Siemens plan. If you ever wondered why the 401k divides money up by "rollover contributions", "employee contributions" and "employer contributions", it because at times like this, you need to know who contributed what.

I chose to rollover the 69k from SDRC/EDS into an IRA with T Rowe Price.

Funds selected:
PRFDX (T Rowe Equity Income) 42%
PRDMX (T Rowe Diversified Mid Cap Growth) 14%
PRDSX ( T Rowe Diversified Small Cap Growth)14%
TRIGX (T Rowe International Growth and Income)14%
PRIDX (T Rowe International Discovery)8%
RPSIX (T Rowe Spectrum Income) 8%

The Siemens plan looks OK... it has one fund for domestic large cap, one fund for domestic small cap, one fund for international large cap, another for international small cap...

but no ticker symbols for any of above... no expense information for any of above... no return history for any of above.

I have a self directed brokerage option for the 401k which I might be considering.

**edit**- chose T Rowe Spectrum Income over New Income. Spectrum income is a fund of funds, which is 75-80% in bonds and cash (other 25% is in PRFDX). Because spectrum income has exposure to high yield and foreign bonds, it's return is higher than most bond funds (8-9% type returns). New Income is one of many bond funds in Spectrum Income.

On June 1 I adjust my contribution percentages to keep 401k in line for next 6 months.

Increased allocation of RYTFX to 11% (was 10%).

Increased allocation of VFINX to 24% (was 23%).

Increased allocation of VEXPX to 11% (was 10%).

Increased allocation of VEXMX to 11% (was 10%).

Decreased allocation of VTRIX to 23% (was 25%)

Decreased allocation of VWNFX to 20% (was 22%).

I also liquidated 1% of each position to bonds. This is the first time I have held bonds in nearly 3 years.

The goal is to maintain the 75/25, 45-15-15-15-10 allocation. The bond position was added, and I rebalance again on Dec 1. Dec 1 I will reset contributions to "normal" levelas and buy/sell to rellocate. If markets trend upward the next 6 months, I will liquidate another 1% to bonds. If markets drop, I will go back to 100% equity.

Got a letter from the IRS yesterday. 2005 tax returns were incorrect. I sold $6500 worth of stock and never received the 1099. We moved twice between the sale and the tax return (the sale was part of our house down payment).

JP Morgan did not have our updated address.

In addition to that my wife had some stock which was liquidated from toysrus. My wife is 32. She worked at kidsRus when she was 17-18. 1099 was not received either. This was a $31 tax hit.

Looking to get a tally on issues to take care of ro retire early.

1) Health care costs
2) 0 debt
3) saved enough for a 3% initial withdraw rate

other thoughts?

I am going through a refinance right now for first and second on our house. I just ran some numbers and I'd like someone to "check my math". I can send an extra $1250 to mortgage each year (payments of $625 in Nov and Dec) or can invest the same in a taxable account the same two months.

(2nd) Mortgage:

55k, 7.410% apr. 30 yr fixed payment of $382.
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Invest (do not pay off early):

Mortgage payment of $382 for 30 years.
Costs $82,348 in interest payments over 30 years
Costs $1250*28 (first 2 years do not invest the money)= $35,000
"result" is $154,000 in investments after 30 years (plus paid off 2nd mortgage). Assuming 9% rate of return.

Pay down (do not invest until 2nd is paid off):

$625 payment in Nov and Dec each year (except first two years).
Costs $41,208 in interest
Costs $1250*16 yrs of paying down=$20,000
(2nd mortgage paid off in 16 years according to my calculations).
If I invest 12*381+$1250 each year from 16-30 ($5834/year) with same 9% rate of return
"result" is $187,000.

Am I missing something? I was expecting to see the "late investment" not exceed the "invest early".
When I went through same numbers for first, it made sense to invest (much lower APR), but with second I am seeing a different trend.

We are opening a Roth IRA for my wife in may, and we (I) had to go through selecting a mutual fund for her to start with.

I look at our Roth's as "One Entity". My Roth has 30k+ in it, invested in:

PRFDX (~6k) T Rowe Equity Income
PRWCX (~5k) T Rowe Capital Appreciation
RPMGX (~5k) T Rowe Mid Cap Growth
PRNHX (~5k) T Rowe New Horizons
PRIDX (~2k) T Rowe International Discovery
PREMX (~3k) T Rowe Emerging Markets Bond

This is about 45% large cap, 20% mid cap, 10% small cap, 8% International small cap and 17% international bond.

It was obvious to me the hole was "international large cap".

I then looked around for foreign large caps. T Rowe International Growth and Income made the short list. Glanced at two other T Rowe funds (Overseas and Global Stock), along with a few other good International funds (Dodge and Cox).

Dodge and Cox required a $1000 initial deposit with restricted automatic investing, so that "lost" the race with T Rowe. We are sending $300 to open the account and contributing $300/mo to open with Int'l GrIn.

TRIGX was chosen because it follows a good investment philosophy:

"Investment Objective
The fund's objective is long-term growth of capital and reasonable income through investments primarily in common stocks of mature, dividend-paying, non-U.S. companies.

Strategy
Invests in large-capitalization, dividend-paying companies outside the U.S. The stock selection reflects a value orientation. "

Has solid returns over mid term (month end/ quarter end):
1 Year 24.12% 29.92%
3 Years 21.55% 22.79%
5 Years 18.78% 17.93%
10 Years N/A N/A
Since Inception* 10.17% 10.24%
Inception Date December 21, 1998

And reasonable expenses
Expense Ratio As of 10-31-2006 0.91%

I am always interested when people post to discussion groups, asking about "which mutual fund to pick". Helps remind me to think about WHY I picked the funds I did.

Mutual funds in some ways are like shoes. To some people, they only need a few mutual funds and they are happy.

To other people, having many mutual funds is important for one reason or another. And why someone chooses a mutual fund will also change from person to person.

If you need to know, I own more mutual funds than footwear- I THINK. But my wife has more shoes for sure.

The important thing to remember is a mutual fund selection can last a lifetime. I have to buy new footwear once every 3-4 years.

Step 1- know your "asset" allocation and risk tolerance. This means know if you want large caps, small caps, international, bonds, money markets- and/or whatever you want to invest in.

If you don't want to do step 1, then buy a single mutual fund (one size fits all)... either a total stock market index fund or a target retirement fund.

Step 2- plug and play various funds into the asset allocation. Most research suggests return has more to do with the allocation than any specific fund inside the allocation. Meaning you could pikc from any of the 6-7 mutual funds a fund family has for Large Caps, and choose another fund for bonds. The mix of 80%-20% or 50%-50% between these two funds will have more impact on returns than which fund you did or did not pick.

Step 3- if you want to interrogate a fund, I suggest looking at the following criteria:

a) will this fund be held in a taxable or tax advantaged account (IRA's, 529's and 401ks are tax advantaged).
b) what are the top HOLDINGS of the fund.
c) what percent of fund is in top 10 holdings (if 25%, this fund in concentrated, if 10-15%, the fund is diversified). This tells how much risk you are taking with fund compared to similar funds.
d)what is 10 yr and 5 yr history?
e)what are expenses (.75% or less for managed, .15% or less for an index fund).
f) how does fund rank relative to comperable funds?

Came home a few days ago and there were 2 credit card bills waiting.

One was from a business trip my wife took. Bill was $1200 and needless to say her expense check was slightly more than half the bill.

One was from a soccer purchase I did last October and I gave my wife the cash to pay the bill off.

Because she does the checking account month to month I did not see these bills until this week. OUCH.

Add to that our bank was charging us $5 for each of my 7 mutual fund purchases in my IRA, plus a $15 excessive transaction fee which I just caught.

I went ballistic on Tuesday. The wife was not happy at how upset I got over what she called "little" things.

Since then, called the bank and they waived all the fees.

Tapping into emergency funds to pay off the credit cards. I am more relaxed now, but I didn't sleep too well until this was taken care of.

Next step is use the "calculators" on whichever fund company you choose to determine an allocation. If you want to do a quick one by hand, I created my own calculator below.

The allocation will be % stocks, % bonds, % cash. It will further break this down to % large cap, % small cap, % foreign, etc...

The allocation is "created" based on you honestly answering questions.

Simple questions like:

How long do you have to retire?
If you invested in soemthing and it lost 10% in one year, what would you do? Lost 10% in one day, what would you do?
If you invested in something and it lost 25% in one year, what would you do? Lost 25% in a day what would you do?

The reverse is also useful... 10% yearly gain... 10% daily gain... 25% yearly gain... 25% daily gain.
------------
Here is a simple way to allocate (if you want it)

Start with a

score1 of 0
score2 of 0

score1 is "minimum" % stocks you want.
score2 is "minimum" % bonds you want.


What is your age?
What age do you "expect" to retire? If you do not know, use 68.

What is difference of two above? This is "time".

For each decade in "time", add 20 to your score1. Round up for score one (so 11 rounds up to 2 decades).

If "time" is less than 20, then subtract time from 20. This is score2. Do not round for score 2.

The next step is what "return" do you want.

decide if you want more or less than an 8% return.
for every 2"points" you want above 8% return, add 20 to score 1.
for every 1 point at or below 8%, add 20% to score2


4 examples of calculator:

Ex a) 30 yrs to retirement, want a 10% return.

3 decades*20%=60%
10% return adds another 20%

This situation requires a minimum of 80% equities. How you allocate the other 20% is up to you.

Ex b) 30 yrs to retirement, want a 12% return.

3 decades*20%=60%
12% return adds 40% (4 points above 8% return, 4/2=2*20%=40%)

This situation requires 100% stocks to come close to a 12% return each year. This can be done for short amounts of time, I would not expect 12% returns to sustain over more than a 5-10 year period.

Ex c) 15 yrs to retirement, want an 7% return.

score1: 2 decades*20%=40% minimum equity
score2: time is 20-15=5%, plus 8% return adds 40% more to this (20% for 8% and 20% more for 7%)

So mimumum allocation for this example is 40% equity and 45% bonds. The last 15% can be moved to equities or bonds as you see fit.

Ex d) 15 yrs to retirement, want a 11% return.

score1: 2 decades=40% equity
10% return adds another 20% (within 2 points of 8%)
The additional 1% from 10 to 11 needs another 20% equity.

score1 total is 80% equity.

score2: 20-15=5%. 5% is the minimum amount of bonds.

The conclusions:

The longer you have, the more equities you should hold.
The shorter time you have, the more bonds you should hold. Anything less than 20 years to retirement should have a minimal amount of bonds (with this position growing larger closer to retirement).

If you want more than a 10% return, GOOD LUCK. 8% return is quite doable. 11% is pushing it. Using bonds for anything 8% or less is to increase probability of getting the desired return without adding on too much risk.

Long term return of equities is between 9-10%. There have been 10 year periods where equities have only returned 7%.

Long term returns of bonds is between 4-8%. There are periods where bonds do well for extended periods. It is possible to "time" these periods... entry point will be important (for example right now is a bad period to invest heavily in long term bonds). Low rates, inverted yield curve.

The next step will be dividing equities up to large cap, small cap, international etc...

If you know you want to save for retirement, and know how much you want to set aside, and think you want an 8,9, or 10% return starting now until the daay you retire, you have done 75% of the work.

You have researched "saving", you know you want to invest. The devil is always in the details.

The "last step", IMO, is choosing an asset allocation. The good news is this is flexible. There is not one right answer.

The bad news is this step is quite flexible. "Paralysis by analysis" may result.

Do a little research, make a decision, and use the flexibility to adjust as you learn.

Step 1) Choose a mutual fund company.

suggestions:
a) T Rowe Price
b) Vanguard
c) Fidelity
d) Dodge and Cox

go to the website of each company above and look around. This might be the easiest way to decide.

a) T Rowe Price is best known for their low cost managed funds. T Rowe has been around a long time, and has some mutual funds which are more than 30 years old!

All T Rowe funds are no load. You can open an account in any fund for $0 IF you commit to using the automatic asset builder service (which contributes $50/month minimum).

b) Vanguard is best know an an "index" house. Meaning their "better" funds generally track an index of some type. This yields average performance at a low cost.

The fund "minimums" at Vanguard are much higher than T Rowe. But research this on your own, I only know this based on what I read on discussion groups.

c) Fidelity has the largest offerings of any mutual fund company in the world. Some of it's index funds are cheaper than Vanguards. Some of it's managed funds are more expensive than T Rowe. But if you want a fund which invests in XYZ, more than likley Fidelity has a good choice of how to invest in XYZ.

I do not know fund minimums for Fidelity.

d) Dodge and Cox. D&C is a much smaller version of T Rowe Price, IMO. Managed Value funds which perform quite well.

Fund minimums for an IRA at Dodge and Cox are $1000.

Choosing a fund company has some inertia to it. You can switch houses "anytime", but you might have short term trading fees and more paperwork than if you made a decision based on the fund house.

After creating a "retirement plan", which is built on achieving a certain income level from a certain savings level (see previous blogs for this), a next logical step is measuring if you are "on track".

One technique I use frequently and quicly is the rule of 72. Take the interest rate on an investment. Divide this into 72. The result is the number of years it will take that investment to double.

4 examples
12% interest return. 72/12=6. 12% return takes 6 years to double.
10% return. 72/10=7.2. 10% return takes 7.2 years to double.
9% return. 72/9=8. 9% return takes 8 years to double.
6% return. 72/6=12. 6% return takes 12 years to double.

Backwards check. $100 invested
yr 1 $110
yr 2 $121
yr 3 $133
yr 4 $146
yr 5 $160
yr 6 $176
yr 7 $193
.2 years=$200 (money doubled)


So a way to check retirement. Take the amount needed to retire. If you have not calculated this, use "Current Income/.04" as calculation of what you need. See previous blogs for explanation on this.

My example: Assume you need $1,000,000 ($1 M) saved.

Half this ($500,000) do you have this saved yet?

If not, half it again ($250,000). Do you have this saved yet?

If not half it again ($125,000). Do you have this saved yet?

If not, half it again ($62,500). Do you have this saved yet?

If not half it again ($31,250). Do you have this saved yet?

If not, half it again ($16,625). Do you have this saved yet?

When you do the above, count the number of "halfs" you did. Each time you divided by half, add 8 years to your current age.

This will suggest when you could retire with a 9% return on your investments.

As you save more, especially at younger ages, this equation will look more favorable on your situation.

If you have a retirement plan, and want to check progress, there are many ways to do it.

I am not advocating this as the best way, only way or even a reasonable way... this is something to think about.

When you withdraw money during retirement, there are several forces working "against" you.

1) You are spending money you have saved
2) The markets returns are not predictable
3) inflation can do damage over time even if you account for #1 and #2. Inflation is the "increased cost of goods and serviced". Milk which was once $.99 a gallon now sells for $2.39 a gallon. That's inflation.
4) at some point a person loses their earning power. A person's ability to work and earn more money might be single biggest factor in retiring. If savings tank, and you cannot earn more money, what will you do?

I will use 3 examples of people using different withdraw rates. I will assume all people live 30 years after retiring.

Example A, person has saved $500,000 and withdraws 3% of assets in year 1.

3% of 500k=$15,000.
every year after, this person increases withdraws 3% (to account for inflation).

Assuming a 6% gain each year in retirement, this person would NEVER run out of money. The 3% withdraw rate is quite conservative and each year this person has more money than they had the previous year, except for first two years.

Example B. Person saved $750,000 and withdraws 4.5% of assets. 4.5% of 750k =$33,750. Every year this person increases withdraws 3% (to account for inflation).

Assuming a 6% gain each year. After 30 years, this person has less than half of the $750,000 left. The point being between a withdraw rate of 4.5% and inflation of 3%, the compounding effect will significantly reduce assets.

Example C. Person saved $1 M and withdraws 5% of assets. 5% of $1 M is $50,000. Every year this person increases withdraws 3% to account for inflation.

Assuming a 6% gain each year. In 29 years, this person ran out of money. They spent their entire savings in 29 years.

The risks I am trying to illustrate is what percent can you take out. 4% is usually used as the "planning figure". If you are 30, 20 or even 10 years away, use the 4% number as the target.

There are several things you can do to adjust for withdraws and prevent running out of money in a 30 or 40 year retirement:

1) Only take out the "3% inflation" factor in years market went up (in a down market, keep spending in line with previous year (when market goes down).
2)Purchase an annuity to replace a portion of your "fixed income". The annuity guarantees money for life.
3) Delay SS payments to age 70, to maximaze that benefit, knowing that SS will "never" go away.
4) reduce spending


There are risks with "drawing down" principle, here are risks, not mentioned yet

1) If market drops within first 2-3 years of retirement, this is single biggest risk not mentioned (if market drops 20% in any of above cases, only to "come back in years 5,6,7,8 of retirement, all of situations above would have drastically worse results.

2)High inflation would destroy all of these simulations. I listed example for mild planning, not trying to illustrate what would actually or never happen.

3) Investing to get a 6% return during retirement involves being around 40-60% invested in equities (probably). Getting a 6% return from a conservative investing tool (bonds, money markets, CDs) is not an easy thing to do, and these conservative instruments will lose to inflation most of the time (3% yield from a CD with 4% inflation means you "lost" 1% of money).

One additional point, there is a technique called "Monte Carlo Analysis" which will do most of this for you. Runs through random market patterns, inflation patterns and such to see if "amount", "withdraw rate" and "years to live" last your projected lifetime.

How to create a retirement plan.

Primary question will be "what is your picture of retirement".

Could be "stop living at work and start working at living".
Could be stop doing what pays the bills and start doing what stimulates the brain
Could be to travel the world

Could be combinations of above or things not mentioned.

For this discussion, I will assume you will spend a similar amount of money in retirement as you do while working.

I will assume a person makes $55,000 for this discussion

Objective #1. Determine how much you need.

ex A: If you want to retire early, take your current income and divide by .03. $55,000/.03=$1.84 M. Once you reach $1.84 M in this case, you can retire early.

ex B: If you want to retire in your 60's (closer to standard retirement age), take current income and divide by .04. 55,000/.04=$1.375 M (about 500k less than above).

ex C: If you choose to retire late (past age 70), take current income and divide by .05. $55,000/.05=$1.1 M. 700k less than early retirement.

The point is you can save yourself money by working later in life.

The .03, .04 and .05 is "withdraw rate", which will be discussed later. This % is defined as the % of nest egg you withdraw the first year of retirement. The lower the %, the more conservative the retirement plan.

Objective 2, learn to adjust "what you need". If you can "live on less" in retirement, you can make more assumptions. Live on less because you have a paid off mortgage, you moved to a condo for lower bills, you retired early, but chose a second job to pass time away... these factors allow you to reduce the 55k (used in example above). A traditional assumption is a person can live on 80% of their income in retirement.

so the calculations above:

55000*80%/.03=$1.47M (saved 400k)
55000*80%/.04=$1.1 M (saved 200k)
55000*80%/.05= $880,000 (saved 300k)

Issue 2- saving enough for the "retirement plan".

This depends on current age, retirement age, % of income you save, and how aggressive you invest.

3 examples (all with people either making 55k, or thinking they will be making 55k the year they retire). All examples assume a 10% annual return.

ex 1: A High School student (age 16) making 10k. saves 5% of his earned income in a Roth IRA. Assume this person skips college and works the day they graduate.

5% of 10k=$500.

At age 72, this person has the 1.1 M needed to replace 100% of a 55k income. They saved only $28,500, and have a total savings of $1.1 M

At age 69, the person in this example has enough to replace 80% of 55k.

If you add Social security into this situation, this person could retire in their 60's with their savings replacing 50-60% of income, and SS supplementing the rest.

ex 2: A college graduate which does not start saving until age 25. Make 40k coming out of college. Saves 10% of income (10% of 40k=$4000).

Somewhere between aged 64/65 this person will have enough saved for the early retirement option ($1.8 M).

This person contributed $164,000 to their retirement fund.

ex 3: a couple which did not start saving until their 40's. They make 68k, but have decided they can retire spending only 55k per year (55k is 80% of 68k). They save 20% for retirement once debts are paid off at age 45. 20% of 68k=$13750/year.

Between aged 68 and 69, this family would have saved their goal. ($1.3 M).

They saved $343,000 to reach this goal.

ex 1: set aside 28500 to have $1.1 M
ex 2 set aside $164,000 to have $1.8 M
ex 3 set aside $343,000 to have $1.3 M

ex 1 return (1.1M/28,500)=38X return
ex 2 return (1.8M/164000)=10X return
ex 3 return (1.3M/343000)=3X return

The time one's money was put to work is the biggest factor to achieving goals (this is "the power of compounding"). Time can be overcome with a higher savings rate, or resetting goals "lower" for retirement.

There are 2-3 threads going with pay down mortgage or investing... and when it "makes sense" to pay down mortgage.

All calculations were done with a spreadsheet downloaded from microsoft. I modified sheet, some, but all this could be done with standard sheet and somewhere to write down if then answers.

Issue #1, being debt free has a psychological value, and this post is not meant to demean, replace, or suggest what that value is.

Issue #2, paying down a mortgage is "risk free" rate of return. Whatever loan rate is (5%, 5.75%, 6%) is the lowest risk investment you have, assuming savings accounts, T Bills and other fixed income securities yield less than the interest rate on mortgage.

The numbers

100k mortgage, 6% interest rate. Payment is $599.55. First month is $99.55 principal and $500 interest. Total 30 yr interest payment is $115,838.19. Loan repyament period is 360 months (30 yr fixed).

Situation 1. pay extra $50 each month. Overall interest reduced to $91,268 (saved about 14k), repayment period shrunk to 295 months (saved 65 months*599.55=38970.75 of loan payments.

Total extra payment was 295*50=$14750.

situation cost $14750 over 295 months to save $63,540 over 65 months.

situation 2. Pay $100 extra per month for first 10 years. Overall interest reduced to $82,974.02 (saved $32864). Repayment period shrunk to 286 months (9 months shorter than above). Saved 74 months*599.55=$44,366.70 in payments.

Total extra payment was 120*100=$12,000 (2750 less than situation above).

situation cost $12000 over 120 months to save $77230 over 74 months.

Meaning the extra payments were fewer, cost you less out of pocket, and saved you more money. This is because these payments were applied eariler in loan period. Early repayments count more than later repayments.

situation 3. Person pays $200/month starting in year 20. overall interest paid is $109,846 (27k more than previous situation, 6k less than standard 30 yr fixed). repayment period shrunk to 323 months. This is nearly 40 months more than previous situation.

The extra payment in situation 3 was $16,800 (the highest of the 3 situations). Because the extra was paid at the end of the loan, it did not "compound" in reverse as much as lower payments applied earlier.

Does anyone out there have an HSA with a high deductable health plan?

Second question- does it work well?

Third question- do you have kids and how old?