Don't let bad math ruin your retirement

[scorpions 6]

Don't let bad math ruin your retirement

 

 

Interesting read:

 

" Be your own money manager

Preparing for retirement can be a complicated business -- even for great investors -- if you don't put together a proper plan. Running the numbers and experimenting with different withdrawal scenarios will take the guesswork out of your future and help you avoid that dangerous scenario where you run out of cash.

 

No matter how complicated it gets, always remember that you are the best manager of your own money. You have your own best interests at heart, you won't charge yourself fees, and you're willing to devote every minute of your time to your future. These put you ahead of most "professional" money managers from the get-go."

 

Edit:

No I'm not working @ The Motley Fool - Educate, Amuse, and Enrich

Edited December 27, 2006 by scorpions

[Owen` 2]

Here's the deal:

 

This comment above is pretty solid.

 

The problem with it is not all people want to, or have the aptitude to, manage their own money. That's a big % of the population. Not over 50%, but a big % -- and no I have no idea what -- I'll guess 30%.

 

Think about the woman born in 1920. She's 86 now. She is from an era when women got married and kept house, watched the kids and cooked for her family. Her husband died 3 years ago. She never managed the money, knows nothing about it, has no chance to figure any of it out at her age. But the one thing she does know is her son, who is clamoring to take on the money management task, is an outright crook.

 

So what does she do?

 

Hopefully she goes to the bank, puts all of her money in there earning a few % of interest and lives out her life -- passing along the remainder to her heirs. But she may be inclined to think she can do better and then she has to find someone to do the work. Choosing who will be a result of word of mouth referral. She'll park money with some advisor who hopefully will only charge her an hourly fee -- but more probably he'll charge her an hourly fee for money he advises her to keep in the bank and a standard 1.5% for money from which he tries to squeeze better performance.

 

He'll manage to squeeze that better performance. Sometimes.

 

The two additional things he will do for her that makes him worth his pay is he'll take care of her tax filings and making sure she has enough money in her checking account for paying the bills. If he does just those two things -- and never steals a penny -- then he's providing a decent service and is maybe worth what he charges.

Edited December 28, 2006 by Owen`

[scorpions 6]

Here's the deal:

 

This comment above is pretty solid.

 

The problem with it is not all people want to, or have the aptitude to, manage their own money. That's a big % of the population. Not over 50%, but a big % -- and no I have no idea what -- I'll guess 30%.

 

 

100% agreed with you also if I would guess that the percentage is even lower @ least here in Europe. One of my objectives for 2007 will be to get heavily involved in my investment/retirement planning. By the way your comments in the various threads were very helpful for me. I carried out all the possible retirement scenarios calculation forwards and backwards and have now a clear understanding of my magic numbers, timing and my goals. Working now my off when I'm not in holidays ...

 

Hope to meet you one day in the LOS. Would like to offer a Owen! Already insert in the calendar my next 4 trips in 07 have a look and send me a PM if a date match

 

[Owen` 2]

Glad the threads are helpful, but let's note that a "thread" is only a thread if there are a lot of posts and most of those came from others who are solidly helpful as well. I shudder to think of the guys who don't hang out on the boards and just decide to swashbuckle and wing it and quit their jobs and move without any idea if they have enough.

 

Think about it. If you reach adulthood at age 18, and live to age 80ish, then age 50 is only about the 1/2way point of your adult life. Trying to retire at age 50 . . . it's a full half of your entire adult life at issue. Guys need to be analytical about this, even if that's not their nature. The word "retirement" has screwed up attitudes. People are thinking they are winding down and they are almost dead. This is absurd.

[Emil 0]

Think about it. If you reach adulthood at age 18, and live to age 80ish, then age 50 is only about the 1/2way point of your adult life. Trying to retire at age 50 . . . it's a full half of your entire adult life at issue. Guys need to be analytical about this, even if that's not their nature. The word "retirement" has screwed up attitudes. People are thinking they are winding down and they are almost dead. This is absurd.

 

When it comes to shagging you are winding down. I'm 60 now and in no way am I as sexually active now as when I was in my 20's. So what ones needs now for a budget to live in Pattaya, excluding inflation, will be alot less when your over 65 than when you were in your 30s or 40s.

[Owen` 2]

When it comes to shagging you are winding down. I'm 60 now and in no way am I as sexually active now as when I was in my 20's. So what ones needs now for a budget to live in Pattaya, excluding inflation, will be alot less when your over 65 than when you were in your 30s or 40s.

 

This is just excellent input.

 

Okay, here's the situation on this. "Early Retirement" in a broad sense involves projecting inflation adjustments onto your expected cost of living for all the years of the rest of your life. That's the standard procedure for all calculations.

 

There is a significant school of thought on this matter, in a broad and non-Pattaya specific sense, that says exactly what emil says, but for a different reason. It says that it is not correct to take your current living expenses and project inflation on them for the future. There is a lot of debate on this. Here are the two sides.

 

1) Yes, data show that people spend less in later years -- but that is because they mismanaged their numbers and overspent in their first few years of retirement and in their later years they do indeed spend less, but NOT BY CHOICE. They spend less because they are out of money.

 

2) Yes, data shows they spend less because they become infirm and can't be active and travel or drive fast cars or anything else expensive.

 

Now we have Emil pointing out that for a Pattaya specific discussion the costs of sex drops because the frequency of desire drops.

 

Well, one can get immersed in a discussion of preference -- or one can just deal with numbers.

 

The numbers perspective points to a simple matter in the whole issue: What percent of your expenditure budget is discretionary?

 

If you don't have much of a budget for barfining to begin with, then getting old is not going to reduce it. If someone is keeping a live-in then he is getting free maid service, cooking ( more meals in vs out) and some generic contributions she makes negotiating prices with Thais who would otherwise rip you off and if you toss her out you do not save all of the money you were paying her because you're going to have to find a maid service and eat out more.

 

If you are doing bar hopping and bar fines, then yes, you have discretionary expenditures that can reduce in your old age.

 

So that's what it comes down to. Inflation IS going to apply to your non-discretionary expenditures and there is no escaping that. The issue of getting old will apply to a segment of your budget, and possibly a very big one -- but not all of it. Inflation is the only factor that hits all of it.

Edited December 30, 2006 by Owen`

[monsterman 0]

I dont trust money managers anymore they have ripped me off for years with high fees and poor or even negative returns, in the regulated UK , trouble is I can make money in business but i dont understand the stock markets at all, i understand all themechanisms but it all seems like gambling so i invest only in gold , bonds, and property,

 

monsterman

[Sailfast 503]

Funny thing for me is that I seem to be less involved with my investments than I used to be.

 

I had my own stocks that I would trade and belonged to an investment club that met monthly and had over 100K invested.

 

As the market slowed a few years ago and "day trading" did not look so profitable I have decided to just leave my assets in mutual funds.

 

I'm 41 and now have my 401K (110K invested so far) and my house as my major assets. I simply put it in fairly agressive funds and try to forget about it.

 

I've thought of investing in some more real estate, as the market here in the US is going through a correction, but not sure if I want the responsibility.

 

I could invest more, retire earlier OR invest less and continue with my lifestyle....I think I'll continue having fun

 

Sailfast

[wacmedia 277]

I dont trust money managers anymore they have ripped me off for years with high fees and poor or even negative returns, in the regulated UK , trouble is I can make money in business but i dont understand the stock markets at all, i understand all themechanisms but it all seems like gambling so i invest only in gold , bonds, and property,

 

Hi,

 

I agree. I can't understand how you can have a 10 year savings account linked to the Stockmarket and get no more out than you put in. Especially when it's a Bull Market. I would deal on my own account if I had the cash to spare but many people in England get second properties to rent out in lieu of pensions and cash/shares. Very few people trust the investment/insurance companies and I have found that people I know who have been successful in creating wealth for themselves have followed your route. The pensions for Public Sector employees seem fair enough, but private pensions seem a complete scam and should not be touched with a bargepole.

[scorpions 6]

This is just excellent input.

 

1) Yes, data show that people spend less in later years -- but that is because they mismanaged their numbers and overspent in their first few years of retirement and in their later years they do indeed spend less, but NOT BY CHOICE. They spend less because they are out of money.

 

After having carried out the various scenarios calculation the items which scare me most besides the general inflation increase are:

 

1. Health cover / insurance is an unpredictable beast

2. Any kind of state pension are impossible to forecast

3. Rental cost (might be significant above my forecast inflation scenarios 2-5%)

4. Currency exchange rate

5. Interest rate on my nest egg

 

I really want to exclude the option to be forced to spend less therefore:

 

1. Will keep the private and state insurance in my home country. Assuming that the cost will increase 4-10%

2. Forecast 0! I know this is very pessimistic but due to early retirement it's impossible to predict what will happen keeping in mind we are talking about a huge time span. I'm an optimist but don't want to create

any kind of income expectation which are not under my control. My pension will be the rent of my real estate here from my home country.

3. Like in 1. I assumed that the inflation of renting will increase twice (4-10%). An option would be to invest the end of service fund in my own real estate in the LOS. But as long the whole legal situation isn't clear

(like ownership, visa etc.) I feel this might be to risky.

4. Currency exchange rate see now $ vs. Bath. Lucky wise the €uro exchange rate vs. Bath is stable since years but I predicted also here a reduction in line with the actual losses of the $ 15%. No way I'll transfer

funds of the nest egg besides the needed yearly one for the retirement Visa to the LOS.

5. I calculated all kind of net interest scenarios from 2-5%

It's easy to improve your lifestyle but it will be very difficult to reduce it. Therefore I will try to collect funds until I will reach my magic number. This keeps me also motivated to speed up the process as the

retirement age will follow once the goal is reached (working the opposite way around). If I reach the retirement age first something went wrong. The magic number is an impressing one but better save then sorry!!!

 

Happy Nest Egg collection Happy Nest Egg

Edited December 29, 2006 by scorpions

[bob2005 0]

If you start work at 20 (+- 2 years depending on uni/college) and retire at 65 then halfway is 20+22 = 42.

 

Of course if you're any good at your job you get promoted a few times and the last 22 years gives much more money than the first 22.

[Owen` 2]

Sometimes it's as important to have a focus on the BIG PICTURE as on the nitty gritty details of the bark on the individual trees of the forest.

 

Have a look at this link:

 

http://finance.yahoo.com/q/bc?s=%5EN225&t=my

 

Guys, that is the 2nd largest economy in the world. It has been 16 f*cking years and anyone who bought and held in 1990 is still down over 50%. Think carefully about that. They had a market crash, and in 16 years it has not recovered. No, anyone who bought in 1990 and held for 16 years is NOT stupid. This is true because no one EVER knows what is going to happen next. Suppose someone finally got fed up in 2003 and sold then, after 13 years. But if they had held on they would have doubled their money (that they still had left) from 2003 to 2006.

 

That chart, gentlemen, would destroy the most bulletproof plan you could put together. Some poor schmuck took early retirement at age 50 and had 1/2 his money in Japan stocks and 1/2 in bonds (Japanese interest rates are about 0%, still) and I guarantee you that schmuck -- who did everything right -- saw his life's savings wiped out by living expenses, market drops and (modest in Japan) inflation and he went back to work and will work until the day he dies.

 

That's not what we have in mind for BMs here.

 

Is there an answer? Nope. No guarantees. All you can do is try to optimize the probabilities.

 

The probabilities are that the US and UK markets are not preparing to start a 16 year decline. The probabilities are that inflation is not preparing to go to 0 or negative, thereby reducing interest rates on savings to 0%. Odds are that you can pick a mixture of places to put your money and have a positive real return. (terminology: "real return" means return after inflation. A 5% bank savings account in a year with 3% inflation has a 2% real return (before taxes grrrrrr))

 

Real estate? We know from all sorts of threads that the UK guys have a mindset about property that is different from the US mindset -- because their recent personal history with real estate defines their perspective. That's exactly what you would expect.

 

So, can owning property do what that chart above did? Yes. If you're in the US and live near the west coast near the Pacific ocean, it's an earthquake zone. Far less than 50% of property owners have earthquake insurance. If one hits and destroys a house . . . then that's a crash. Or let's not even be that extreme. How about demographics? The UK population growth is being fueled entirely by immigration, yes? Suppose politicians shut that off. These things can happen and they are probably a lot more likely than an earthquake. Then what is going to drive the price of property higher? Or let's get even more likely . . . suppose the UK turns into France and riots start in various Muslim suburbs? If there are nightly fires being set, do you think property owned in that area is going to go up in price?

 

About the only thing one can be assured of as making sense is that no matter how much you want to just put your money somewhere and forget it, you better not. Things change too fast. You have to stay focused and aware at all times. That property you bought 3 years ago that has generated rent income for you needs to be re-profiled often -- to see if a mosque was built 100 meters down the road that wasn't there when you bought.

Edited December 29, 2006 by Owen`

[Eneukman 1]

I spent 25 years dealing with the administration of estates of people who have just died. As Owen points out, there are many elderly widows who have no idea about how to manage their money, not because they're stupid or anything but simply because it was something their husband's always did.

 

On many occasions, we've helped them get direct debits set up to pay their electric, gas, telephone bills etc.

 

As for "thieving" sons, we had a case where the widow received the income from her husband's estate during her liftime and on her death it passed to her their son. The bank for whom I worked held a power of attorney for the widow but the son persuaded her to revoke it and sign one in her favour.

 

On her death, the value of her estate had to be added to the value of her husband's trusy for Inheritance Tax purposes and my colleagues dealing with the trust wer somewhat surprised by the low value put on her estate when they knew that it should have been maybe £200,000 or so higher.

 

I've no idea what happened in the end but I suspect the son may have either have had to come clean or would have ended up in Court on charges of fraud.

 

One thing I always did when I got my bank statement was to reconcile it against what I had entered in to Microsoft Money. As my bank statements go to my brother now, I do this on-line instead. However, it always surprised me the amount of people in my own office who didn't seem to have a clue as to whether or not their bank statement was correct or not.

 

When I retired, I elected to invest most of my funds in the Stock Exchange and to manage them myself with the help of Investors Chronicle magazine. This year has been a very good year for the Stock Markets and 3 of my investments are showing gains of between 37% and 42%. One of these has also only been held since the end of June this year. I don't expect anything near the same kind of return next year and I would not be too concerned if the market was to fall back over the coming months.

 

When I buy and sell shares, I try to ensure that the net outcome will be an increase in the dividends produced by the new holdings. During the course of this year, my dividend income has increased by about 4 1/2%. That is a figure I'm comfortable with even though inflation in Thailand is slightly higher.

 

Also, when I sell shares, I'm quite happy to take a loss (at the moment only one share is showing a loss with one other showing a very small gain) though before doing so, I ensure that it is not about to go "xd". If a share is sold "xd", it means that the seller gets to keep the dividend even though it may the payment date may still be a few weeks away.

 

The other thing I try to do when investing on the stock market is not to get overweight in any one sector. At the moment, I am seriously overweight in the banking sector (mainly due to shares received as profit sharing and through stock options). This will be reduced gradually over the next year or two. The shares have preformed extremely well and I am therefore a little reluctant to sell a large percentage of them in the short term. Investing in the stock market should, in any event, be for the long term. It is not the place to put money you're going to need in 3 months time.

 

Alan

[scorpions 6]

The other thing I try to do when investing on the stock market is not to get overweight in any one sector.

 

Alan

 

Not only to overweight one sector but also one currency, one market, stocks, funds, ETF etc. The best solution as Nobel Price winner William F. Sharpe (CAPM model, sharpe-ratio etc.) stated is:

- Diversification, Diversification, Diversification

 

My best performer this year which beets Alan's best ones slightly was my investment in a BRIC fund. Is an emerging market fund incl. Brazil, Russia, India and China. Keeping in mind that this countries alone represent 40% of the world economy and will pass ahead of the G6 (USA, Japan, Germany, Great Britain, France and Italy) around 2040 the return this year was 43,7%. Sure a risky one but on the long run I feel more than comfortable if you analyze the potential of this 4 countries in detail. The applied diversification of the geographic area, currency as well as the various sector within the fund is a good example for me to optimize the risk exposure. Sure I'll keep them for the years to come !!! Let's see in 2040 ...

Edited December 30, 2006 by scorpions

[Owen` 2]

Keeping in mind that this countries alone represent 40% of the world economy and will pass ahead of the G6 (USA, Japan, Germany, Great Britain, France and Italy) around 2040 the return this year was 43,7%. Sure a risky one but on the long run I feel more than comfortable if you analyze the potential of this 4 countries in detail. The applied diversification of the geographic area, currency as well as the various sector within the fund is a good example for me to optimize the risk exposure. Sure I'll keep them for the years to come !!! Let's see in 2040 ...

 

 

Congrats on that good performance. The US market finished the year up 13ish% and the UK market was up about 10ish%. Japan was flat. A rising tide lifts all boats.

 

Here's the math for you. 44% compounded out to 2040 would be . . . yes, you can take your present investment in that vehicle and multiply it by 242283.

 

So if you have $100,000 in it that will be 2.4 X 10^10, or I think 2.4 trillion. You will be a rich man.

[Eneukman 1]

Not only to overweight one sector but also one currency, one market, stocks, funds, ETF etc. The best solution as Nobel Price winner William F. Sharpe (CAPM model, sharpe-ratio etc.) stated is:

- Diversification, Diversification, Diversification

 

My best performer this year which beets Alan's best ones slightly was my investment in a BRIC fund. Is an emerging market fund incl. Brazil, Russia, India and China. Keeping in mind that this countries alone represent 40% of the world economy and will pass ahead of the G6 (USA, Japan, Germany, Great Britain, France and Italy) around 2040 the return this year was 43,7%. Sure a risky one but on the long run I feel more than comfortable if you analyze the potential of this 4 countries in detail. The applied diversification of the geographic area, currency as well as the various sector within the fund is a good example for me to optimize the risk exposure. Sure I'll keep them for the years to come !!! Let's see in 2040 ...

 

I know absolutely nothing about markets other than the UK so I'm going to stick with it.

 

Alan

[Odense 489]

I know absolutely nothing about markets other than the UK so I'm going to stick with it.

 

Alan

 

I know very little about stocks, mutual fonds and in general personal investments. Do any of the knowledgeable members have recommendations for websites to read for a newbie ?

[scorpions 6]

I know very little about stocks, mutual fonds and in general personal investments. Do any of the knowledgeable members have recommendations for websites to read for a newbie ?

 

There are to many "gurus" out there claiming how, where and when to invest. They all fail sooner or later to beat the market (see study Campbell and Harvey (1996). Therefore I recommend to start from stretch and defining your own investment philosophies first.

 

Here is my original starting bible called Investment Philosophies from Aswath Damodaran ( Prof @ Stern School of Business - New York University) actually you are lucky as his latest review of the book is online before it goes in print (pdf files of each chapter what do you want more? Sure if you like the book it's still worth to buy it!):

 

http://pages.stern.nyu.edu/~adamodar/

 

The only thing he requests:

"If you find any mistakes - mathematical or grammatical - could you please let me know? It would help me ensure that the typos do not find their way into the final version."

 

He's homepage www.damodaran.com have a lot of great stuff for free. Once overcome the initial hurdle you will see that the time you invest is worthwhile. Be you own money Manager and don't let bad math ruin your investment. Objective for 07?

 

Edit:

My Objective of 06 was to define my retirement strategy. In 07 I'll continue taking the road less traveled to put this strategy now in practice. The board was and is a great help for me!

Edited December 31, 2006 by scorpions

[scorpions 6]

Congrats on that good performance. The US market finished the year up 13ish% and the UK market was up about 10ish%. Japan was flat. A rising tide lifts all boats.

 

Here's the math for you. 44% compounded out to 2040 would be . . . yes, you can take your present investment in that vehicle and multiply it by 242283.

 

So if you have $100,000 in it that will be 2.4 X 10^10, or I think 2.4 trillion. You will be a rich man.

 

Confirm after 2 years it's the double now (44% compouded)! Will let you know @ the end of next year. The initial investment was only 1/10 but I should achieve the $ 100,000 within 6.5 years ... and here comes my

flat

 

but then you need to deduct entrance fee, management fee and I guess taxes if you are living in a not tax free country like the UAE ...

 

I know absolutely nothing about markets other than the UK so I'm going to stick with it.

 

Alan

 

My investment strategy will change over time once I shall retire sure it will be more conservative investing in absolute return obligation assuming that the yearly generated interests/dividends/rent are sufficient.

 

As defined from the Chinese symbol of risk:

Risk is a mix of danger and opportunity

 

Edit:

In your case focusing on market I would at least try to diversify in different industries from my POV (assuming that you have also no currency diversification £,$,€,CHF etc.): Besides the bank sector also in others like utilities, REIT etc.

2006 was a great year for the stock market let's see what 2007 will brings

Edited December 31, 2006 by scorpions

[Eneukman 1]

I use www.investorschronicle.com for my information. It's a subscription site though you do get some titbits free of charge. There are plenty other sites out there though I think you can look at too many sites and end up gettting conflicting opinions on individual shares. The downside with Investors Chronicle is that they only give their opinion on a particular company once it's issued its half yearly or annual reuslts.

 

They do, however, give a guide to what brokers are recommending on each company though this can be confusing unless you know how each broker reached their opinion. One broker may say buy whilst another will say sell.

 

Scorpions' point that you need to invest in different industries is absolutely correct. Vodafone is a buy according to Investors Chronicle magazine but I am reluctant to do so at present purely because I already own BT shares. (one of my best performers over the last 12 months or so).

 

Alan

[bob2005 0]

Brazil, Russia, India and China. Keeping in mind that this countries alone represent 40% of the world economy and will pass ahead of the G6 (USA, Japan, Germany, Great Britain, France and Italy) around 2040

 

IMF (2005):

 

World 44,433,002 Million US$

 

Brazil 792,683

Russia 766,180

India 775,410

China 2,224,811

 

BRIC total about 4,400,000 ie 10% of world economy.

[don_dadda 0]

IMF (2005):

 

World 44,433,002 Million US$

 

Brazil 792,683

Russia 766,180

India 775,410

China 2,224,811

 

BRIC total about 4,400,000 ie 10% of world economy.

Russia is a G8 country

[scorpions 6]

IMF (2005):

 

BRIC total about 4,400,000 ie 10% of world economy.

The figure was a forecast of year 2040: "BRIC's will be about 40% of world economy". This are the main markets with major growth potential from my POV.

[bob2005 0]

The actual word was 'represent' not 'will represent'. But what the heck!

[scorpions 6]

"Ten worst-performing newsletters of 2006

Commentary: All of them finished well into negative numbers"

 

No surprise to me:

 

Ten worst-performing newsletter 2006

 

10x

 

 

Edit:

Alan's one is not included !!!

 

 

Investorschronicle

Edited January 2, 2007 by scorpions