I’ve included several posts about our recent meetings with a financial advisor
- Financial Advisor Meeting #1
- Financial Advisor Meeting #2
- Financial Advisor Meeting #3
- Financial Advisor Meeting #4
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 date)
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 us.
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 advisor
- 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.
Mr. 39 Months