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April 12, 2012

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canadianmdinvestor

I am curious how many hours per week, the "part-time gig" entailed. Did you to to an "office" or was it home at a computer? Was this like the real work you used to do, or much less.

I, like many, am finding which equation is me. Now, it is equal, but leaning to retire. But there is fear...these posts help on realize that one still has some control. Some options.

deegee

Syd, I was wondering where one's commute to a job would fit into your equation. I might place it "value of remuneration from job" but as a negative in the category because the commute is linked to the job IMHO.

My own equation might be a variation of your second one.

When (positive value of working) < (negative value of working, including the commute), then retire.

Once I realized that I did not need the income from working to survive and maintain my lifestyle (i.e. could become financially independent), then the positive value of working took a big hit, and I retired.

Retired Syd

@canadianMD: So here's what I have learned: The equation is not fixed forever--each variable changes in value to you all the time, even in retirement!!! If you are going to be retired for several decades, your values, interests, and moods change. You gotta go with it!

The good thing about my consulting gig is that I could do it from wherever, home, Australia, Hawaii or in the office. But part of the fun for me is working with the other people, so I pop in a day or two most weeks. In the summer there would be weeks I wouldn't go to the office at all, and during tax season there would be weeks I was there every day, so hugely variable. For me that flexibility is a MUST for a "retirement job".

deegee: I think commute is a huge input (negative value) in the working side of the equation. I guess it can also be put that you value your own time more than you value commuting, so you would be yearning to own your own time.

For some people, even though the negatives of their jobs outweigh the positives of their jobs, that doesn't necessarily mean they should retire (like in your formula). They might not care about having extra time for themselves (of course I can't really relate to that!) Then the answer in your formula could be instead, "get new job".

Bridget

I think it's awesome that you have a choice: to work or not to work! This, in my opinion, helps to make retirement worthwhile.

Carole

It makes sense that how you think/feel now will likely change over the years, and so can your plans. I think that remembering this will help me over the next 2 years as I gingerly approach retirement. So many conflicting feelings. But the desire for more of my own time just gets stronger. I will try to balance that with the reassurance that financially I am ready. My head knows that I am, but my emotions need to catch up! Congrats on moving forward with what you know is the right thing to do.

Retired Syd

@Bridget: You are so right, it is a wonderful place to be!

@Carole: As I like to say, there is a word for what you are going through. It's called "normal."

And that desire to own your own time is certainly a powerful force, isn't it?

New at this

Maybe a bit of a tangent, but speaking of retirement forumulas, I'm still really hung up on the retirement planning formula that seems ubiquitously applied, wherever you look:

"Set your budget in year 1, inflation adjust. And stick to this plan for the next 50 years"

The issue is what do you do in year 2 if the market has dramatically changed the value of your assets. Do you "reset" your budget based on the new value of your assets; or do you stick to the math from year 1?. What makes year 1's calculation more correct than year 2's?

If I could just get this resolved in my mind, I could happily move on to talk about other things....

Retired Syd

@New: I agree with you that when all of these guidelines are presented (including in my blog), it conveys a senses that this is a precise calculation and you must follow it precisely. It's a shame that it comes out that way.

These things (like the 4% rule, the set your budget in year 1, etc.) are guidelines. You will find similar guidelines with other retirement decisions: what age someone should take Social Security benefits, whether or not someone should pay off their mortgage before they retire, whether you should be contributing to a Roth IRA or a deductible IRA. There are various inputs into weighing the risks of your specific situation. The guidelines get you in the ballpark. And the same answer will not apply to everyone. You have to take your own circumstances into consideration after you've done the homework of understanding the options and possible outcomes.

I think of them as training wheels. If you are trying to decide whether to retire and the expenses you are trying to cover from your nest egg equal 15% of your nest egg, I'd say you probably aren't there yet. If, on the converse, your expenses equal 1% of your nest egg, I'd say you are way good to go. But you may have other factors, perhaps the prospect of a significant inheritance, or conversely a divorce, that swing you in another direction from the standard advice.

So with regard to your specific question about whether you stay with the math or change, you have to take off the training wheels at that point and make some educated choices. Not everyone is going to come up with the same answer, and that doesn't necessarily mean someone is right and someone else is wrong.

In my case, over the 4 years of my retirement, I have not done the standard "increase your expenses for inflation" because I haven't needed too. I suppose I could have, but I haven't needed to, our particular basket of goods stayed the same from year to year, largely because our property taxes have decreased and offset the increases on things like gas and health insurance. My facts look different than other people's, I'm more comfortable trying to keep the expenses down in the early years. That's me riding without the training wheels.

As I said in another post, I still maintain the big, complicated spreadsheet, so I am monitoring the situation regularly. I respond to those circumstances as I feel the need to.

This is probably not the answer you wanted. I view it more as an art than a science and I think you are looking for more concrete guarantees. We only have guidelines, that we can take or leave as we see fit.

Like I said before, plenty of people are retired and not eating cat food and they haven't even heard of the 4% rule.

New at this

Thanks for the comprehensive response, Syd....So on more follow-up on this...,

In your own case, when you had the excitement of retiring into one of the worst bear markets on record, I assume at some point in the depths of the downturn you must have "rerun" your numbers...Did you ever reach a point where your updated asset values no longer supported your earlier decision to retire?

Assuming we'll see another crash or two over the next 50 years, I'm trying to get myself mentally prepared ahead of time....

So far, within my own version of a mega spread sheet, I've written the following message to my future self:

"Trust that when volatility changes your original budget calculation, the LT regression base used for your year 1 calculation should still hold. So keep your head down, Rebalance and stay the course…)"

The only problem with this cool-as-a-cucumber statement, is that I don't know if I'll still believe it when the actual crash comes....

Retired Syd

@New: Excellent question! As I said, I rerun my numbers all the time, even now. I retired on March 1, 2008, and by October of that year the market had tanked, by 12/31/08 my nest egg had dropped by 25% (yes the S&P 500 dropped even more, but not all my $$$ are in equities, and the equity portion is allocated across international, small, mid large, and a couple other asset classes, so that was how it hit my portfolio.)

This meant that my 3% (my expense % of my original nest egg) was now 4%. Scary, but not catastrophic in my analysis. As you might recall, over history, even a 4% withdrawal rates (while not the absolutely safe rate), was still pretty safe--carried a hypothetical retiree through most (but not all) 50-year periods. So I just stuck, what else could I do?

I had 3 years of cash, so I did not touch my portfolio. Over the last 2 years I've had lots of opportunities to sell some of my equities and replenish the cash/bonds. In fact, during that downturn, I used some of the cash to buy MORE equities. Not because I'm a risk taker but because I rebalance my portfolio regularly (at least annually, but even quarterly when there are such dramatic swings). So when the equity portion went down significantly from it's original target allocation %, I put more in to bring up the balance. I was rewarded for that over the last couple years, and then I did the reverse, rebalanced back toward cash, as the market is climbing.

I agree that there will be several more rocky periods over the next 50 years. I hope that I will remember that I came out of this one ok, so to behave the same the next time.

Here's what my mind-frame was in September 2008:

http://retiredsyd.typepad.com/retirement_a_fulltime_job/2008/09/retiring-into-a-down-market--part-iii-or-armageddon.html

New at this

Great perspective! You need to post a hard copy of this on your fridge for next time....Seems so obvious now, but it certainly didn't feel that way at the time....

I also had an "investment advisor" during that period who actually advised me to sell some of my equities in March 2009, as she explained that I had fallen to a point where I no longer had "enough" to support myself if proceeded with retiring.....

Well, instead of selling I fired her, (not in a dramatic sensse, just never talked to her again....) but I still haven't retired....though I do have a pact with my wife that our date is Dec 15, 2012. No turning back this time, even if we get a crash. (I know, its much easier to be John Wayne-like when the Dow is flirting with 13,000).

Let's make a date to rehash this conversation when the next catrastophe is upon us.....

All the best,

Retired Syd

@New: Aaaah, so you are a cool as a cucumber too! Your secret is out.

Don't even get me started on investment advisors . . . you did the right thing in my opinion.

You are right, we will need to remind each other at the next market tumble (and there will be one!) that the best plan of attack is to stay calm.

Canadianmdinvestor

I think the diversification that Syd references is paramount, for setting your nerves, in unsettling times.

Besides your portfolio diversification, I plan to have about 3 years of "cash", at all times. The cash, is short-term, liquid, capital preserving investments.

If recent history prevails, the "crash" will not last nearly 3 years. You should not need to sell anything at a loss.

Great discussion...

New at this

So in thinking about above conversation a little more, maybe the anxiety would go away for me (and suspect others), if we made a little tweak to the standard industry jargon.

Instead of saying, "Set your budget in year 1, inflation adjust, and stick to this plan for the next 50 years"

Change to, "Set your budget in year 1, (but only at a moment when the market is behaving normally), inflation adjust, and stick to this plan for the next 50 years"

This way, as long as you know (or think) you didn't set your budget at an all-time market high, maybe you'll be able to say in the midst of the next crash, hey, the only reason my original math doesn't work at this new moment is because the market is no longer "behaving normally". So buy more stock and get back to the hammock.

Not sure if others get as obsessed with this as I do, but have really been thinking a lot about the March 2009 crash as I prepare to leap off without a parchute....!

Retired Syd

@New: Well that would be a neat trick to figure out when the market is "behaving normally". I was saving and investing for retirement since about 1990. Go look at a chart of the S&P from 1990 to 2012 and tell me which part of that was "normal."

I don't think it's such a bad idea to be mindful of the recent market's crash though, while contemplating retirement. I call that healthy.

New at this

To your point, I've actually spent more time than probably should have (while at work of course) staring at a 100 year chart. Which is actually really intersting if you never partake in this, admittedly geeky, activity.

What it reveals is a pattern of 10 to 20 year periods where things tend to trade within a broad range followed by other multi year periods of impressive growth.

Try it for yourself but it sure looks to me at the moment, that if you can make your budget work at valuations that correlate to around 11,000, then you probably know where you stand in the current definition of a "normal" market. But in contrast, if the dow rocketed up to say 15000 next week, I wouldn't trust that as a good moment in time to set my budget for the next 50 years.

Retirement Villages

I work in the retirement industry and indeed!!!...retirement is a full time job.

New at this

So I broke down and bought Bengen's book written in 2006, (Cost $80 on Amazon, expensive!). And the good news is that he covers covers my concern about setting your budget at a temporary high, extensively. He shares data from people who retired in 1929 and the early 70's just before the cataclysmic crashes that followed....And while the CWR (Current Withdrawal Rates) got uncomfortably high for several years (7%, 8%, 9% Yikes!), the bull markets that inevitably followed brought the rates back down eventually....So his published conclusion is that even if you have the misfortune of retiring into a bear market (Syd, any examples?), if you stick to your original plan, the markets have historically bailed people out.....

Now, he also covers the flip side topic, retiring into a bull market...And he formally recognizes the "independent" events that each year of your retirement represents. There is no "memory", just like a coin toss. So this implies that once you commit to a plan, you are always mathematically safe to start a new one if market conditions provide for a bigger budget....So yes, in fact, according to his book you can "poll" the market as you go, and increase your budget at opportunistic moments if the "market gods" smile upon you....

P.S. Despite the price, I recommend reading Bengen's book to anyone who is relying on the research for their plans...He says it is written for "financial planners", who in turn use the data to instruct their clients but I prefer to cut out the middle man (but I'll also warn you, that at least in my case, I had to read multiple times to really grasp all the implications...)

Let me know if anyone else has any confirming/disconfirming data/perspective on the above because I'm banking on it for the next 50 years!

Retired Syd

@New: 80 bucks for peace-of-mind? Sounds cheap to me.

New at this

P.S. The key that unlocked the roadjam we were having in our earlier conversation about not handling "conditional probabilities" correctly is to recognize that all all his research was performed "deterministically".

What this implies is that, in the event of a crash, the subsequent returns are not "independent" events. (e.g. no longer like a coin toss). In other words, the probability of the market going, "dramatically", after a crash is much higher than the probability that the market will go up dramatically on just any random day.

For a probability guy, this is a huge assumption, but given the emperical data, I accept it....But it really needs to be communicated carefully....

Getting the hammock ready now....

Retired Syd

@New. Yep. Happy countdown to December 15th!

New at this

So here's a different, but related, topic for you. Guess what the average life expectancy of a 65 year old "executive" retiring from GM is...

Give up...?

19 mos.

Sightings

I'm reminded of the answer my ex brother-in-law, an early retiree from IBM, always gave when asked what his secret was to a financially secure retirement: A working spouse!

Retired Syd

@New: Are you kidding me?????? That's awful! Where did you get that? Is it just GM?

Retired Syd

@Sightings: Very funny. Now I've just got to figure out how to get the working spouse to be the other one!

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