Was listening to an earlier podcast from the Retirement Answer Man from May of this year. His four Podcasts during that month dealt with the assumptions people make in planning for their retirement. Obviously these assumptions will greatly affect the amount we save, the timeline of our retirement, and the potential happy future we will have.
Some of the areas covered by
Life Assumptions (how long will you live, how long will you continue to work, who will care for you as you get older, etc.)
Costs (spending, regular inflation, healthcare inflation, use of averages, etc.)
Markets (returns on stocks, bonds, withdrawal strategies, etc.)
Rules for making assumptions (recognize these are assumptions, be flexible, beware of extreme assumptions, etc.)
It made me think of the assumptions we are currently using, especially after our meeting with the financial advisor at the end of 2019.
Our base assumptions:
Longevity: Me 97 Years old, Mrs. 39 Months 99 years old
Work till I am 58, Mrs. 39 Months is 60
Take Social Security at 67
Social Security annual increases: 2%
Healthcare inflation: 6%
Investment returns (60/40 split): 7.2% before inflation
Budget and pay our own medical until we hit 65. Medical costs will be roughly what they are now (plus expected medical inflation rate)
Budget of $78,000/year for expenses (including medical for first 5-7 years) – adjusted for inflation
Move to new home at some point, but it will be roughly same cost as what we sell existing home
Place we move to will have roughly same living costs as what we currently have (i.e. no savings)
So what are the assumptions you are using to do your planning?
I tend to re-balance every six months (In July and January). Re-balancing – make it regular and timely. Its helped save me some money (I didn’t suffer as much in Feb/Mar as others, as I took a share of my stock increases for 2019 and purchased bonds with them). So now its July and time to re-balance again.
Now, my standard allocation is:
30% Index Bond funds
17.5% S&P 500 Index
17.5% Small cap Index
17.5% International stocks index
17.5% REITs index
I have found in the first six months of 2020 that my bonds were up to around 33% of my investments, while my REITS were down around 15%, and the stocks were lower as well. Usually, I’d just rebalance everything to the numbers above, and be “on my way.”
However, the Chinese Covid virus and the market volatility had me thinking. The “Fed” (US Federal Reserve Board) in an attempt to keep the market afloat, has dramatically dropped interest rates, and begun buying debt again. The result is that, as before, savers got punished and folks looking to increase their debt could find easy money. It thus made bonds less attractive, as any new debt issued is going to be at lower interest rates for the foreseeable future.
What is someone to do as they close in on retirement? Typically you pull money away from the volatile market and embrace safer investment alternatives – but you can’t do that with rates this low. I’ve tried experimenting with an income account for years, and I just can’t make it work with dividends. So I am stuck, like so many others, in shifting my allocation to more stocks.
In early July, I returned to the allocation that we had for most of the last 20 years:
20% Index bond funds
20% S&P 500 Index
20% Small Cap Index
20% International stocks index
20% REITS index
Based on my previous horrible timing, I’m assuming we’ll have a stock collapse in the next 3 months, so be ready.
Have you made any changes to your investment allocations recently, based on current events?
Finally was able to get everything together for the taxes in 2019. We
use a CPA because of some complications, though its fast closing in on the time
when I plan on taking back over doing our own taxes (I did them up till about
Well, we got the info back, I reviewed them, and the end result was…..
we owed about $2,400 to the Fed (and $500 to our state). Plus penalties. Ouch.
I thought we’d prepaid enough to make sure this wasn’t an issue, but
apparently not. We’ll have to take some money out of savings to pay for it.
This way, we won’t be selling stocks during the current down market. That is
why you have spare funds in place.
I can kick myself a bit, but in the end, the next step should be to
evaluate your current tax withholdings for 2020 and make sure they are taking
enough out. Low and behold, after running the numbers – we were about $2,800
low in withholding, based on what I see coming for the year.
Back to the federal/state W-4 form, where we determine withholdings,
make a few adjustments which will reduce our available income a little over
$200/month, and we should be set for taxes at the end of 2020. Better to take
action at the beginning of the year than to try and find money at the end of
I tend to try and get our taxes to $0, or have us owe a little money. I
know some people like to get a nice refund, but I’d rather not give the
government and interest free loan. I can use the money better.
Hopefully, your tax situation is better than mine!
Well, our advisor had some major family health issues with a loved one
(cancer), so needless to say, it took a while to get our final report. We got
it yesterday, in the form of a large, 3-ring binder, full of lots of data,
analysis and recommendations. There was analysis of cash flow, net worth and draw
down for several scenarios:
Base scenario of both of us continuing to
work for 4 more years, till I hit 60 and Mrs. 39 Months hits 62
Scenario where we pull out more than the
minimum from our 401K from 60-70 in order to reduce our RMDs
Scenario where we I leave my current job,
and get a much lower paying job that I love that earns $40K a year, and
work at it till I hit 67
Scenario where we have a major health
issue requiring long-term health care when I hit 80
Scenario where we retire the July (my FI
The analysis was very comprehensive. It was also very disheartening. In
the first three scenarios, they all ended up pretty close to the same, we end
up running out of money when we are 94/96 (i.e. three years before my target “death”
date of 97/99). The major health and my July 2020 scenarios pretty much had us
running out of money in the mid-80s. Since Mrs. 39 Months family has lots of
her Aunts living into their 90s and 100s, that doesn’t seem like a good bet for
So why the difference? What has the advisor’s numbers coming in so much
under my original planning? I’ve identified some callouts:
Original vs. Adjusted Budget: My
original budget had us spending $72K/year, but after going deep into
conversation with Mrs. 39 Months, this was revised up to $78K/year. Only
$6K, but it does add up
Social Security & cost-of-living
adjustments: I used the reports that came from social security to
estimate our payments, but the reports assume you continue to work till
you hit your retirement age (67 for us). Stopping at 60/62 reduces it, and
stopping in July 2020 would reduce it even more. In addition, the advisor
assumed a Social Security increase of 2% a year (below his inflation rate,
see below), so the money will slowly be losing it purchasing power. I just
assumed a straight line that would match inflation. Seeing the current
state of social security in the US, I can’t say I disagree with the
Inflation: My original planning
just took inflation out of the picture. I used historical investment returns
post-inflation (i.e. the returns I used had historical inflation already
taken out). The advisor used a 3.25% inflation rate and a 6% for medical.
I can’t really argue with the assumptions – they do appear somewhat logical to me.
Return of investments: This is
where I have real issues with the advisor. Based on our asset allocation
(about 60% stocks, 40% bonds/savings) he came back with an estimated
return over 40 years of 5.3% (i.e. only 2% above inflation). Since the
average stock return from 1926 – 2018 is almost 10%, I found that too low.
I’ve asked him to do another scenario with a 7.2% return (more in line
with a 60/40 split)
Lifestyle spending: I have asked
him to drop some of our lifestyle spending (travel, dining out, etc.) by
35% starting at age 75. I just don’t think we’ll be traveling or partying
as much in our 80s and 90s.
We’ll see how this works out with the changes, but overall, I have to
say I’m a little disappointed in the results, though not in the process. I
believe the advisor is being very conservative in a lot of his assumptions –
which appears to be the opposite of the FI community. Let’s face it, we are all
very optimistic go-getters!
This sort of falls in line with news that the FI community found out about recently from the Financial Samurai blog last week. He wrote that he was planning to go back to work after 7+ years of early retirement. In his post, he listed his reasons (I invite you to read the posting) and I’m sure many of the readers could see his points (though his budget is way out of line with mine, since he lives in San Francisco). If you read closely, I think a lot of his reasons are non-financial. He just misses being around folks, the comradery, etc. It goes back to all the warnings that run through a lot of our community postings – you need to retire “to” something, rather than “from” something.
So, since I enjoy many of the aspects of my work, I am not too “bummed”
about the potential of having to work longer in order to achieve “Fat FIRE.” We
will see where the journey goes.
The year 2019 will go down as one of the best years for most people in
terms of their investments. The S&P 500 (everyone’s standard for judging US
stock performance) went from $2,607.39 to $3,235.14 (Jan 1 to Jan 1) – a 24.0%
increase. Tack on the 1.77% dividend yield and you were seriously kicking butt,
as long as you just left it in the market in an Index Fund! Hopefully the
readers here didn’t panic in Dec 2018 and sell their stocks.
I’ve been an index investor for most of my investing life. Whenever I
have dabbled in individual stock pickings, I mostly got my head handed to me.
So here I stay. My allocations tend to be broader than just your typical “dump
it all into the S&P 500”
Remember, my allocation for these is:
30% Bond Index Fund
17.5% S&P500 Index Fund
17.5% International Index Fund
17.5% Small Cap Index Fund
17.5% REIT Index Fund
My company 401K/Deferred account doesn’t have a REIT option, so I’m 25%
for the other 4 categories.
I set up my father’s inherited IRA to see how it would perform if it
was concentrated on creating income (i.e. dividends). My allocation for that
Dividend Income Account:
25% Dividend Stocks
50% Bond Index Funds
Finally, my “fun money” post-tax account is primarily setup for value
investing, with a mix of USAA and Vanguard index accounts.
12% PAWZ ETF (it invests in pet related
companies, a vanity play on my part)
44% USAA Market Index (my brokerage is
44% in Vanguard Value Index fund
So how did they perform for the year? Here are all my portfolio items (not weighted)
TRowe Price S&P 500
Extended Equity Market Index
International Equity Index
US Bond Enhanced Index
Vanguard Bond Index Fund
Vanguard 500 Index Fund
Vanguard REIT Index Fund
Vanguard Small-Cap Index Fund
Vanguard Int’l Index Fund
Vanguad Welesley Income Fund
Eagle Small Cap growth
Vanguard 500 Index Fund
Vanguard Total International Index
Vanguard total bond Mkt
Eagle Small Cap growth
Vanguard 500 Index Fund
Vanguard Total International Index
Lord Abbot Total Return
Healthcare Realty Trust
Realty Income Corp
Service Properties TR
UMH Properties Inc
Vanguard Total Bond Index
Vanguard Int-term Bond index
USAA Extended Market Index
Vanguard Value Index
As you can see, no real negative items in the bunch. While the bonds
and REITs didn’t light the world on fire, the other stocks really jumped off.
The bonds and REITs will help balance
the portfolio out when the stocks have a correction (and we all know a
correction is long overdue here).
Overall, I was up 20.1% for the year, which definitely exceeded my
expectations. Even with all the bonds and REITs, the overall performance was
For some who have been following, you will remember that I did a Roth conversion of $100K at the end of 2018, and it screwed me up a bit. It basically pushed me into a tax bracket where I could not do our annual contribution of $7K each to our Roth IRA. So I managed to switch $100K to Roth, but lost out on the ability to put the normal $14K into it. Sad face, and a kick on me for not knowing what I was doing, here.
Fast forward to the end of 2019,, and I’m studiously looking at the
income levels of Mrs. 39 Months and myself, and it looks like we’ll be about
$45K under the limit for contributing to our Roth 401K for 2019. So today, I
took the opportunity to shift $40K in my Vanguard IRA to my Vanguard Roth IRA.
Note that this is a taxable event. Going from an IRA that I contributed in
pre-tax and moving it to Roth, where it is supposedly post-tax and non-taxable
in the future means having to pay the government their taxes.
Luckily I have other money set aside to pay the taxes on this item. If
I didn’t, then I’d have to take out more from the IRA to pay the taxes, and
potentially pay a penalty on that money being withdrawn before I hit 59-1/2. It’s
a real accounting nightmare, so better to pay the taxes from another account
(like a savings account) rather than going through the hassle.
So now we currently have more in our Roth IRAs than in our normal IRAs.
The 401Ks we have continue to grow, but both of these are Roth 401Ks, so in
essence we should continue to enhance our future tax-free investments.
Its kinda sad that retirement is such a complicated numbers game, but
for those of us in the FIRE community, its part of the fun – finding new ways
to squirrel away more money and better prepare for the good life.
As many of you have been following, Mrs. 39 Months and I have been seeing a financial advisor for the last 2 months, reviewing our finances and getting a second opinion on when we’ll have reached FI. There has been some give & take on expenses, investments, inflation rates, etc. Overall, I’ve been pleased, especially as it has helped get Mrs. 39 Months and myself on the same page.
One of the big “bones of contention” between myself and the advisor has
been the subject of investment returns. We’re already being somewhat
conservative on inflation (setting it at 3.25%, and 6% for medical inflation).
Then the advisor is using very low (in my opinion) estimates on investment
returns for the next 40 years. Here is what he is using before inflation is
taken out (i.e. the real returns will be lower than this):
Large Cap Growth Equity
Large Cap Value Equity
Mid Cap Equity
Small Cap Equity
Emerging Markets Equity
Long Term Bonds
Intermediate Term Bonds
Short Term Bonds
High Yield Bonds
Thus, after inflation of 3.25%, you can only expect to get around 2.5%
– 2.75% after investing in the S&P 500. What the…? Based on my current
allocation strategy, this would give me a 5.75% return per year. Minus the
3.25% inflation, I’m looking at a 2.5% return. That is going to make it very
difficult to make it to 99, even if I don’t retire early!
S&P 500: 9.7% (4.7% more than the
advisor is using)
Large-Cap value: 11.2% (5.1% more than the
Small Cap: 12.70% (5.5% more than the
advisor is using)
Small Cap Value: 14.40% (7.2% more than
advisor is using)
If you go from 1925, the returns from the CRSP report shows the following
US Stocks: 9.8%
International stocks: 7.8%
I actually found a good site, the portfolio visualizer, which shows the returns each year, for a wide variety of asset classes, all the way back to 1972 (almost 50 years of data). While I would like to go back to the mid-1960s (right before the 1968 market, when it started to tank), this is good stuff. It has the inflation rates as well, so you really can dig into the numbers and do some analysis.
Based on this information, my average return for my allocation would be
15.1% vs. a 3.9% inflation, so 11.2% returns. Much better than 2.5%! Much
better chance of lasting to 99!
Still, we have had a tremendous
run over the last 40 years of stocks. In the early 80s, the Reagan revolution
and the Volker defeat of inflation launched a tremendous stock market surge
that we have been living with for our adult lives. Most folks don’t remember
how much “in the doldrums” the market was from 1968 – 1981. Now we have several
knowleadgeable people saying those heady days of returns may be in for a pause
of several decades.
Even Jack Bogle, the Vanguard mastermind, was predicting lower returns back in 2018 before he died. He estimated returns of around 4% annually for growth and 2% for dividend (total of 6%). He based this on expected economic growth and the historic P/E ratio versus current levels. He also estimated bond returns of 3.1% annually.
Since returns play such a vital role in all our plans to achieve FI,
its critical that we look at them with an experienced eye, and make good
estimates for our lives going forward.
OK, a lot of folks have done postings on their net worth (and how much it took a hit in 2018). I figure I’d join the crew and open up the windows to the folks outside. I know this is a topic of some controversy within the FI community, as some folk’s post their net worth, and some folks are loathe to do it. I believe that the more information folks have, the better they can judge my writings and decisions versus their own.
Overall, net worth dipped about 1.9% for 2018, and this after pumping
in around $87K of money during the year. Needless to say, it wasn’t a “banner
year.” However, it’s the first dip in my Net Worth since the 2008 crash, so a
good ten year run. Since my growth plans are based on my long term growth rate
of 6% (what I’ve averaged over the last 22 years, including the 2000 and 2008
stock dips), I’m still in the ballpark.
Key lessons learned for Net Worth in 2018?
Real estate not really jumping up in my
area (Southern NJ). My value hasn’t moved much since 2009.
Cars have depreciated a lot – but they
continue to run well (regular maintenance) so no need to replace anytime
soon. Slowly saving up for new ones at some point of time in the future.
Roth IRA conversions altered the makeup of
my retirement accounts. Will probably due one more $50K conversion, and
then let it ride from there. Used money from investment account to pay
taxes, so it dipped a lot there.
Put aside 25% of paycheck and 100% of
bonus to deferred account, so that jumped up significantly over Jan 1,
2018. No taxes paid until I leave work (when it gets paid out as a lump
sum). This will end up being a good portion of my year 1 & 2 of FIRE
Credit card bill was from one of our Pet’s
emergency medical costs (ouch!). We have the money to pay it off, so no
Overall, while our Net Worth took a slight dip, we will continue with
the plan. I believe we are still on track to retire in 18 Months (if we want),
or we could retire now if we felt confident in US Social Security.
Wow, you go away for
a week and the market goes nuts. Down an unprecedented 600 points the day
before Christmas? Up 1,000 points the day after Christmas? What is going on?
In my opinion, the
market is still unsure of where the economy is going to go in 2019, and there
are a lot of scared people running out of the market right now, trying to find
safety. This is forcing mutual funds to sell at a prodigious rate, often times
having to sell their winners in order to generate sufficient funds. It’s almost
a self-perpetuating drop, as each new drop pulls the next group after it. The
overall drop was around 20% from the market high, which brought us into “bear”
territory. Time to panic and sell?
The problem is, as
was just demonstrated with today’s 1,000 point jump, you not only have to get
out before it drops and you have to get back in before it starts going back up
again! Or you can do what so many good investors do, and don’t worry about it.
Stick to your plan. Invest regularly. Dollar Cost Average. Diversify. Take advantage when folks panic and sell at bargain basement prices to pick up some deals. The mutual funds that folks have shed will be there, ready to jump back up again shortly.
In a previous posting, I talked about the P/E ratio. The P/E ratio had dropped down on Dec 24th to 18.03 – still higher than its mean of 15.73. This was back below its Jan 2014 number. Still higher than its mean though, so we could have more to go before we get back to an average market.
I still have over 18
months to go before I hit my FIRE date. The typical market downturn is 12-24
months, which is why they tell you to have 1-2 years in savings bucket, to
weather that storm. So I intend to stay with the plan, and keep investing.