Don't let bad math ruin your retirement

[kafkaesque 0]

Haven't seen this posted here:

 

http://www.retireearlyhomepage.com/softlist.html

 

 

I think the The Generation-X Retirement Planner is excellent as it allows one to factor in inflation

and safe withdrawl rates.

 

 

The only thing that troubles me with these types of calculators is the "expected rate of return"

 

Should I use the historical rate of return for the SP 500 :) or a more conservative bond index .

 

Forgive me if this page has been posted but I think this page has some excellent advice.

[Owen` 2]

Haven't seen this posted here:

 

http://www.retireearlyhomepage.com/softlist.html

 

 

I think the The Generation-X Retirement Planner is excellent as it allows one to factor in inflation

and safe withdrawl rates.

 

 

The only thing that troubles me with these types of calculators is the "expected rate of return"

 

Should I use the historical rate of return for the SP 500 :) or a more conservative bond index

 

Okay, listen up. This is important. That website is indeed a great depository of information. It derives from a larger very sophisticated community at early-retirement.org.

 

The calculator you're looking at there is at best a 1st order solution to the problem. It's a VERY GOOD 1st order solution, but it's only a first order solution.

 

The more sophisticated calculators are . . . we can call them higher order solutions. The key difference is the unfortunate tendency of folks, young and old, to want to embrace the concept of average return on portfolio.

 

Average returns are the wrong way to perform the analysis. If you have a series of maybe 6 years of returns like 8%, 25%, 15%, -30%, -15% and 20%, your average return is about 4%. You could plug that 4% in and project all you want, but it would be the wrong way to do the calculation. The problem is that if you are retired and living on the proceeds of these returns, you are going to be taking money out of the portfolio to pay your living expenses in years 4 and 5, and then that money is not still in the portfolio to grow 20% in year 6. An increase of 4% on zero dollars left in the portfolio is zero. An increase of 20% on zero dollars left in the portfolio is zero.

 

I know this calculator you're looking at above is to help compute the accumulation rate for younger guys and as I said, it's a VERY GOOD 1st order tool for that purpose. But the above problem I described leaves you with an unknown target. That calculator will not tell you what YOUR NUMBER should be to accumulate before you pull the trigger and get on the plane to Pattaya more or less permanently.

 

firecalc is a higher order tool, and it's from the same family of websites you are looking at. The UK guys have to translate some definitions on it, but it should be useful for everyone. firecalc.com and click advanced. Study it. Then go to early-retirement.org and read the firecalc Q&A forum. Don't ask questions there. You'll be wasting your time and theirs. You have to do the reading and study and use search. Demographics are leading a great many guys to this particular interest at this particular time and all your questions have already been asked.

 

I'll end this post here and babble about other things in the next.

[Owen` 2]

Concerning advisory services and publications.

 

They will be right, sometimes.

 

Never confuse wisdom with a bull market.

 

Guys, we just uncorked a double digit year in 2006. We are all feeling really smart right now, having seen our net worth numbers surge very nicely. We are all financial geniuses after such a year.

 

eneukman/alan has always kept his head level on his shoulders per:

 

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.

 

None of us expect great returns next year. None of us expect horrible returns either. None Of Us Has A Clue What Is Going To Happen -- and that includes the advisory service publication writers who are rushing to get their material filed for deadline. If they knew what was going to happen, why would they be telling us?

 

Another thing -- and this is important. The demographics of the western world are leading a lot of guys to reach early retirement age at the same time. As the more sophisticated of them read websites and get educated, fewer and fewer of them are entrusting their money to money managers. Make No Mistake About This -- The Financial World Hates This.

 

All of us looking to early retire . . . we're not working to keep the state pension plans (Soc Sec) funded. We're not working to have withdrawls taken from our paychecks and sent to 401Ks (or whatever the UK vehicle is called for defined contribution retirement plans). We are not going to be in the workforce to fund a lot of things that used to rely on our funding.

 

The governments will start to feel this soon and companies already are feeling it. Watch out for yourself and be aware of what is going on. Never ever forget that the structure of the financial aspects of society is greatly threatened by having the above average guys in smarts with above average net worth drop out and stop funding that structure.

 

(/conspiracy)

[kafkaesque 0]

Owen

 

 

I always enjoy your posts. I am a newbie here and my only connection to Pattaya is that I use it to threaten my GF.

 

About real estate, someone I know did well in real estate but this was only by working an extra

20 or 30 hours a week. A water heater costs $200. Hire someone to install it and raise it to $500. He wouldn't listen when I told him his net would be the same if he sold and bought TIPS and I BONDS.

 

I don't believe in the "average rate of return". Some say just dump your money in

S&P 500 and forget it until you retire. One does have to be carefull. Should I spend the same

20- 30 hours a week studying the market as my friend spent changing water heaters? My hands would be cleaner:).

 

 

Smokers and Illegal Aliens are the best things for Social Security. Never buy an Annunity!

 

 

My Allocation

 

70% SPY

30 % EEM

 

I like to keep it simple.

[Owen` 2]

About real estate, someone I know did well in real estate but this was only by working an extra

20 or 30 hours a week. A water heater costs $200. Hire someone to install it and raise it to $500. He wouldn't listen when I told him his net would be the same if he sold and bought TIPS and I BONDS.

 

The UK guys on the board have a different perspective, kafka. We Americans know the US real estate boomed, but the boom was very regional. Areas of the US went insane. Other areas did not. The UK is much smaller geographically and the degree to which their real estate explosion was regional was far more constrained -- and so their perspective is that real estate by its very nature is going to explode and make the owners of such, very very rich.

 

So they will not have a good instinctive read on your paragraph above. And for good reason. THEIR net would be very much superior to TIPS and IBONDS if they bought 10 years ago.

 

Well, if it can happen in the UK, it can happen in the US too. Maybe real estate in your area over the next 10 years is going to net 10X what TIPS will. I don't know. Neither does anyone else.

 

I don't believe in the "average rate of return". Some say just dump your money in

S&P 500 and forget it until you retire. One does have to be carefull. Should I spend the same

20- 30 hours a week studying the market as my friend spent changing water heaters? My hands would be cleaner:).

 

It's so hard to get my next concept credible and conveyed. Billions of dollars are spent on Wall Street to pay people for their expertise. How can that be so if my next concept makes any sense?

 

It is . . . 20-30 hrs a week, or the 30 years I've spent, studying a largely random process has little or no value.

 

You learn nothing whatsoever about the future results of a coin toss by studying it for 30 years. Now, you can learn something about how far it will bounce on different surfaces when it hits the floor (the friction of tax laws). You can learn something about how many bounces are likely before it comes to rest and yields its result (dividend payouts). You can note with amusement that a surprising number of heads or tails occur in a row before a change occurs, but you won't know when. And even sometimes you can note that the coin has a tiny dent on one edge that has changed the randomness a little bit, but the definition of "little bit" will always be so little that placing a big bet on the result is insane.

 

70% SPY

30 % EEM

 

If those are index funds, you are minimizing Annual Expense Ratio (another source of friction on the floor you're flipping the coin onto) and this is a good thing.

 

Most advisors would think and say that you don't have any fixed income allocation (bonds) and frown at this portfolio structure as a result -- depending on your age. It doesn't matter what I think so I won't say anything.

[kafkaesque 0]

HeyOwen

 

 

Would you be Irish by any chance. If so, let me buy you a Guiness.

 

At one time I claimed I was 29 until it was obvious it wouldn't work anymore. Now I claim to be 39 and it might work for a little while longer. If I have no Bonds it is only because in my heart I am still in my 20's (with a COLA'd pension if I last another 14 years).

 

 

I agree with you about Expense Ratios. One percent on a million/ year will pay the lease on a new Lexus. I live In the Boston area and I want nothing to do with RE. At my age I prefer to keep my hands somewhat clean.

 

 

I have a 23 YO Chula MA canidate willing to marry me. I guess I say "willing" because I am lucky she still talks to me after 4 years. She might divorce me and take half my fortune. I'm not sure: buy sell or hold?

 

Please share your assest allocation.

 

Slaughta

[Owen` 2]

At one time I claimed I was 29 until it was obvious it wouldn't work anymore. Now I claim to be 39 and it might work for a little while longer. If I have no Bonds it is only because in my heart I am still in my 20's (with a COLA'd pension if I last another 14 years).

 

Okay, babble time.

 

1) 14 years is too long for something to go wrong. Personally, I'd assess your odds to be > 50% that the pension you refer to is going to be reduced by the time you start collecting it. If you're talking about Soc. Sec. the odds are lower for that, and if you manage to purposely have little reportable income at that time, then you won't be one of "the rich" and your odds are even better. But if that's a company pension, it's going to get hit.

 

2) Asset allocation and bonds. Okay, important item. The purpose of AA diversification is NOT to raise return. This is a subtle reality that confuses a lot of people. Adding bonds to a portfolio is not going to increase its long term overall return. The purpose of bonds is to reduce volatility while simultaneously having an almost insignificant impact on long term return. If a 100% equity portfolio gets you 8%/yr on average long term, it will also get you -25% in some years. And +25% in some years. Long term, 8%/yr. If you add bonds to the portfolio, then the idea is to still get just about 8%/yr long term, but do so with no one year being 25% in either direction. This matters a great deal in retirement . . . when you decide some year that you want to buy a condo and need $150K and need it in a year when the market was down 25%.

 

I agree with you about Expense Ratios. One percent on a million/ year will pay the lease on a new Lexus.

 

Very good. Expense ratios pay people to manage a mutual fund, and if they do not outperform an index, then why are you paying them? (Sometimes you are paying them to have a 20% bond allocation, and you'll have to think about that because that means you have money managers who actually know what they are doing -- even if they know they can't beat the index)

 

FYI, look real close at the costs in funds within 401Ks. They hide their AERs. If you're very lucky your company pays them for you, but that's going away. If you change jobs, NEVER leave your 401K alone. ALWAYS move it to a traditional IRA, where there are no such fees.

 

I have a 23 YO Chula MA canidate willing to marry me. I guess I say "willing" because I am lucky she still talks to me after 4 years. She might divorce me and take half my fortune. I'm not sure: buy sell or hold?

 

Rule of thumb in the US. If you're married and very rich, stay married. It's usually cheaper to keep her. If you're single and very rich, stay single. If you're not very rich, there is no rule of thumb.

 

Please share your assest allocation.

 

No one here will benefit from that.

 

Heads up, guys. There are new security threats to online brokerage accts. I don't want to outline them for fear of informing a greater number of people how it is being done, but right about now -- if you have an online brokerage account and do trading -- Check It Every Day. Check to see that what is in it is how you left it -- and not just the total dollar amount. Check that the specific stocks or mutual funds you own are what you last specified. If not, scream immediately.