Last week my post about retirement issues garnered a lot of comments.
I had a follow up thought about the best time to retire, or more correctly start to tap your portfolio for income. The best time is right after the market goes up 25 or 30% in a year. If you just capture most of that effect you will have a lot more money than you did 12 months prior.
An $800,000 portfolio can generate about $32000, safely. If that is what you have right now and you are planning on retiring soon you might be reasonably expecting to take about $32000 out (or more precisely $35,200), you might be gearing up and planning for that amount. Then if you get only a 20% pop in the next 30% year you would have $960,000. Since you planned to take out $35000 but could safely take $42,240 you now have a cushion of safety, in a manner of speaking.
There is obviously an element of tongue and cheek in this idea but there is some truth too. Up 25% years do come along once or twice in a decade. Even if we enter a period of below average stock market growth (which I believe will be the case) there will be the occasional up-a-lot years.
The idea does not have to be wait-to-retire-until-the-next-one but figuring a way to take less from your portfolio until there is an up a lot year would take some ingenuity or thinking outside the lines and anyone pulling this off would clearly be much better off.
Retirement expertise is more of a financial planning thing than a portfolio management thing but figuring out how and when to retire (if ever) requires a lot of pre-planning. You stand to benefit from smart decisions and will have to live with the consequences of any bad decisions. It makes sense that in any one retirement plan there will be both good and bad decisions.
The best way to mitigate bad decisions or unintended consequences is probably to use conservative assumptions for everything (market returns, your returns and how much you can take out).
As a matter of philosophy being conservative will give you more options in the future; being under mortgaged (better yet no mortgage), only having one car payment instead of two, not having a balance on credit cards, living below your means and so on.
This line of thought is intellectually appealing to a lot of people but I can tell you first hand getting people to actually live this way is much tougher than getting them to think of living that way as being a good idea.
11 comments:
Good morning, Roger. As an early retiree, I'm one who not only enjoys your blog but appreciates your occasional foray into retirement portfolio issues. I'm intrigued by American Funds' Capital Income Builder--CAIBX--because it has historically been a "4% solution" while growing assets at the same time. If you can/will, I'd love your perspective on it. It's one of only a handful of dividend growth funds and CEFs.
Thanks very much.
As a 50-year old hoping to retire at 60 (and not draw on SS till 67), I plan on eliminating all debt by 60, while maxing out my retirement plans, and improving the balance of my taxable portfolio. This whole subject seems a lot like all the press given to most peoples never-ending desire to lose weight, a lot of desire but not a lot of consistent follow-through. BTW, didn't you used to have another blog devoted to retirement/financial planning issues ?
so m-star says CAIBX has a 5.75% load, it looks like the cap gains paid out at the end of the year has been substantial over the last few years. the return in some years has been far ahead of the SPX. it seems like it will have to always favor certain things to get that 4%. I don;t know whether it is a good hold going forward but it has been more than reasonable over the past few years. One aspect that I think merits consideration is that dividends don't matter anywhere near as much when the market has an up 25% year.
ai, i was spread too thin trying to do the other blog.
Today's post got me to thinking about the dividend capture funds. I recalled an old post (1/31/05) where you were favorably disposed to the approach and talked about even paper trading a similar approach of your own. Did you ever try it? Do you still like the strategy?
Thank you for your down to earth blogging.
If you just capture most of that effect you will have a lot more money than you did 12 months prior.
Only if you're in the market.
the dividend capture idea is appealing on some level, especially if you sprinkle in some foreigns that only pay once or twice a year. the work involved seems like it would be substantial but i do think it has merit.
Roy, your statement is correct. You know from having read the site for a while that I am not a sell everything person and further just as you need a trigger point for defensive action you need one for offense too. there is no need to get in at the bottom, just to capture a lot of the effect.
The corollary to your thesis is that it's more difficult to retire when the market is down a lot. I can remember, as a much younger man, when some of my collegues couldn't retire in the early '70s because their retirement accounts had shriveled considerably. I'm not a big fan of target date funds, but the concept of incresingly conservative investing as one ages seems consistent with your approach to retirement portfolio management.
Roger, if past is prologue you may be interested in the following. 45 years ago my wife and I started out with nothing. We were advised we should always set aside money for our retirement and the amount was 10%. We chose 12% and we did it religiously-no matter what. This money was invested in mutual funds and there were a number of years performance was dismal. Today we are rich. We tinkered very little with these investments. I suppose we could have done better but the fact is we did great! The other early advice was "traders die broke" so we never tinkered. We withdraw only 4% and we will never run out of money. All our needs are met. We both had jobs we love. That is most important. When I read of people wanting to retire early the first thought is they don't have a good job ie, a job they love. That should be priority one.
great comment!
your point about enjoying what you do is one I have made before.
specifically being stuck in a job you hate risks wasting your life, further hanging on to some job for "the next bonus" and doing that more than once is a spiral waiting to happen.
I started this phase of my career with two clients and making almost no money. I believe my excitement about what I do has contributed greatly to be able to construct a viable vocation. ditto the writing, the TSCM gig has been pretty good to me even is the add revenue has not been so hot).
people who hate their job end up wishing their life away which is bad for all sorts of reasons.
thank you for your story.
Yes, a great story - proof that slow steady and disciplined wins. My only "slight" quibble is about the
if-you-want-to-retire-early-you-must-hate-your-job part; I want/am planning to retire early and I like my job "pretty well". The wanting-to-retire-early for me is simply all about the freedom to do whatever I wish, whenever I wish; perhaps create a new career, perhaps create a blog, who knows. It doesn't mean I hate my job; I imagine this is the camp a lot of early-retiree-wannabe's fall into. Again, great comment, great blog.
Great advice, as always.
I had planned to retire this June, at 63, but after running the numbers, decided to put it off for another year. I'll save $30,000 in expenses, the market ought to be up $20,000, and if the financial sector recovers at all, my options, presently under water, will be worth at least $20,000. Another year accrual on my pension and Social Security will mean an additional $3300 a year -- for the rest of my life. That's a bonus of about $100,000.
In my experience, happiness consists in making prudent decisions -- so my co-workers will enjoy my shining face for another year.
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