There was an article on the Currency Harvest ETF (DBV) that I mentioned selling, personally. The trade was more about managing exposure to one outcome as opposed to trying to make a big call. I think that if the yen made a fast move to 108 or 109 that it could disrupt a lot of things and I had too much exposed there.
There were several short pieces about various aspects of retirement planning. One of which was about retirement planners on brokerage firm web sites. I have a different take than most of what I read. Basically whatever you have saved; you can only take 5% out per year. Actually a reader left a comment on this topic ages ago saying it is closer to 4.2% but 5% gives what I believe is a 92% chance for success.
Another point I differ on is the "plan on needing 70% of your pre-retirement income." How much will your expenses decline when you retire? Expecting an instant 30% decline in expenses, which what I think that cliche is saying, doesn't really add up to me. If you do some planning such that your final mortgage payment and final car payments come the month before you retire, it is possible your expenses could drop by 50% or maybe more. If you will still have those expenses where will the decline in expenses come from? Well fewer lunches out, less drycleaning and less commuting cost seem like possibilities but is that 30% of anyone's expenses?
Notice in that last paragraph I said nothing about income (save for quoting a cliche). Some people spend less than their income and some spend more. Relative to your income you either spend to much or you don't. If you do, well something is going to give at some point. So back to "whatever you have you can't spend more than 5%." If that is not enough you will have to do something fix the equation; either keep working or spend less and maybe you have another idea you can share.
Another article in this retirement series was about whether to pay off the mortgage early or not. It is very rare that numbers work out such that paying off the mortgage early makes sense. That being said, we paid off our mortgage a couple of years ago. The emotional benefit, which the article does touch on, is huge. When I am asked about this I tend to say the same thing which is it makes no sense moneywise, it is an emotional decision that needs to be made by the individual.
The last article to mention was one about the Dakar Rally. The Versus Channel (the old OLN) has a show about it tonight. If you have never seen this it is pretty cool and worth the time (I'm TiVoing it because of the Super Bowl).
An acquaintance of mine does this race every year, wild stuff.
20 comments:
In regards to an early payoff of your home mortgage, I am with you. Sure, the cash that paid off the mortgage(s) could probably earn more being put to work elsewhere, but the peace of mind that comes
with owning your primary residence free and clear cannot be measured by a periodic investment statement.
Sir John Templeton has said many times that amongst the initial financial moves he made in his life was to own his home mortgage-free.
we were 38 when we paid our house off. Part of my motivation was the way I earn my living, self employed.
The security of knowing it would be easy to pay our expenses if my income disappeared is comforting.
There is no dollars and sense behind that, just sentiment
ditto that. Financially speaking it is "better" to rent the smallest apartment you can fit it and use the "savings" to invest at a "higher" return. but home ownership is about a lot more than annual return.
Yet, i would also argue that it also makes financial sense in some instances to pay off the mortgage. Like you, i am self employed in my 30s and paying off the mortgage allows me to stay self employed even in difficult years. Since i believe that investing in myself and my business is a very savvy financial investment, then paying off the mortgage makes sense financially as well.
Another more specific point is in regards to savings. I used to keep 6 months worth of expenses sitting around in a money market account. Now, i have a home equity line of credit that is 2-3 times that. So, instead of having the money sit around, i can invest it at a "higher" rate of return, and rely on the HELOC as my safety net.
also homes are a great way to defer taxes on capital appreciation. It is like an IRA with a high cap, since you do not have to pay taxes on the appreciation till you sell and even then you can roll it into another house tax free.
also, with the added return of the market, there is the added risk. Instead of trying to dampen the risk by allocating money into bonds, or cash, or a REIT, you can dampen it by allocating the money to pay off your mortgage.
great stuff as always... Go Packers!!!
Roger,
As someone who retired young (at 52) and now with seven years retirement experience under my belt, I read your comments with great interest.
I have run many Monte Carlo simulations since I retired and I find that if you retire in your 50s with little or no pension, you need to limit your annual withdrawals to about 4% of assets to have a mid 90s% chance of the money lasting 40+ years.
Also, the first year I retired, we lived on about 50% of my pre-retirement income. I think that was because retirement was new and exciting and I was content to just decompress and unwind on my front deck, reading and napping. When I retired and moved to Prescott we paid off our mortgage and car so had virtually no debt.
A funny thing has happened since then. We found that each year we took on more and more hobbies, activities and travel and now I find my income needs have about doubled since my first year of retirement. Of course I do adjust my spending each year based on that 4% withdrawal rate so in a good year I will have a larger budget for the next year and vice versa. It seems to work for me and so far we haven't had to go back to work.
Who are the Packers playing?
Well, my team will be the world champs for about another 7 hours or so, and then...
http://atlasshrugs2000.typepad.com/photos/uncategorized/nuclear_explosion.jpg
RetiredinPrescott,
Maybe it was your number I cited?? Your real world example makes the point I think. This is not a static thing and many assumptions made point the wrong way, IMO.
In a way I am retired in that I expect to do what I do until the end. I don't feel like I save for reitremtn I feel like I am saving for the unknown.
Sami, the strategy is valid even if not ideal for everyone but you lost me wiuth the Packers comment lol.
i am a Packers' fan living in Bears land -- just outside Chicago --...
Go Packers!
Hi Roger,
I still have to disagree with a generalization of being able to live on less that 70% of one's current income. I can think of many situations where that is not possible. I will agree based on the extent one makes more than one needs to live on and to the extent to what one's income is above the median income. One also has to take into consideration one's expenses that are guarenteed to go up like medical expensis. I am probably several standard deviations below the averager income (my wife and I are totally disabled, and have a long time before retirement) and the only amount I can save is to fully fund our iras and house taxes. No nice 401ks with large company contributions. I would encourage you to heve people realistically look at their spending. I still disagree with the generalization, even to the audience of your blog, that one can live on 70% or less of pre retirement income. (forgive my spelling).
Still enjoy the blog.
sorry if i wasn't clear, i am saying 70% of income is bad number. I am saying that I think expenses are the driver not income. 70%, 80% whatever, it is a flawed approach. I am saying look at expenses.
Roger is correct when he says to look at EXPENSES in retirement regardless of your level of pre-retirement income. When I retired I started putting together an Excel spreadsheet where I track all of our expenses for a year. Based on that I set up a budget for the following year that doesn't exceed a 4% drawdown of our total assets. I've been doing this for seven years now and it seems to work.
retiredinprescott is 100% right on the 4% annual drawdown. Now, that's based on putting your retirement nestegg in a balanced (bewteen stocks & bonds) portfolio. Which is something that I will never do in a million years.
Also true that paying off one's mortgage early, just to "feel comfortbale" is highly personal but not financial. Once retired, it's hard to ever get at that equity if needed, unless you set up a HELOC while you are earning income.
I always have to scratch my head when I read columns on drawing down from retirement accounts. Almost without exception, columnists refer to a "x percent annual withdrawal or draw down" without defining what they mean by this. For people who presumably make a living through effective communication, this omission can cause serious misperceptions among readers. For example, columnists are never clear whether the objective is to retain the original principal (inflation adjusted?) at death, or to ensure that one dies with enough to pay for funeral expenses, or something in between This makes a tremendous difference in the calculations.
If I read a column that suggests a "4 percent annual drawndown", I'm hoping the author is assuming, say, an 8 percent return (before tax), less an assumed rate of inflation (say, 4 percent). This means that one can withdraw 4 percent of the principal amount of the account at the start of each year and retain the same inflation adjusted principal over time as at the start. However, I can't be sure what the writer meant because under this formula, the principal should last forever.
I try a fairly simple approach by investing in above average dividend yielding ETF's and try to live solely on the dividends. This is tax effective (15 percent max federal rate of tax under current law) and the assumption is that the dividend yield and stock prices will at least keep me in running place after inflation. I'm not too concerned about stock market fluctuations since the dividend yields are not as volatile. I then sit back and read, with great amusement, all the sage ambiguities of professional columnists.
Anon: It assumes about a 6-7% annual growth rate and the 4% suggestion is based on actuarial tables so that one can take income and still have the principal gorw enough to keep up with imflation and never run out. It's actually quite simple and what the financial planning community rely on. And, yes, it's based on certain assumptions of expected rate of return on a balanced portfolio of stocks & bonds.
Glad to see so many people who understand that you must look to a percentage of your preretirement expenses, not preretirement income. Some newer publications are trying to scare people into thinking that they'll need more than 70% of their preretirement income level to retire; perhaps as much as 100%. Get real. I spend only about 70% of my income right now, and that should go down when the mortgage is paid off and the kids are through college. Consider the source of these articles. Many are from financial institutions whose bottom lines depend on us saving.
Roger - I think you're the first person to point out 70% may not be enough. I've posted questions regarding my concerns about retirement calculators and all I get is other calculators that still miss my point. If you retire before 65, you will pay alot for health benefits that your employer my employer now pays for. Plus you have to pay taxes on the money you withdraw.
Thanks for your reply (6:21am) to my message of 3:32 am. Sorry to be the bane of your blog, but I really don't understand your message. IF, as you write, the model is designed to grow principal at the same rate of inflation such that it will never run out, you obviously do need to use any actuarial tables. One would only need to use actuarial tables in the formula if the model assumes principal, adjusted for inflation, is being reduced. Maybe you wrote the reply too early in the morning?
the 621 post was not from me, my brother left that reply
I would say the 70% rule comes about mainly because we don't save anymore once retired. My wife and I save over 25% of our gross income so we can retire. So, in effect, we are living on 75% currently. It's disposable income that our expenses are paid out of, not total income. Our tax rate will drop too with less income so there is the 70% rule while continuing all other expenses at the current level. We'll be paying off our mortgage this year too so will actually be needing only 55% of gross until our medical insurance bills increase (when my wife retires soon too), about the amount of our mortgage now but by then my Social Security should just about cover that at $15,000 a year. The calculators never seem to figure in SS dollars in this formula so that is another fallacy. They seem to assume you will need to pull every expense dollar out of your nest egg. A lot of it is scare tactics so people run to financial advisors who then make a great living off the fear. Instead people need some basic financial education as these decisions are not really rocket science, just a litte knowledge and some common sense.
Needing 70% of your pre-retirement income and where is the 30%reduction in expenses going to come from?
We were saving 26% for retirement plus we no longer had to pay social security, medicare and the higher tax bracket. Then we moved to pay no state income tax plus a lower property tax. Being debt free also helps. Ralph from TN
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