Owen’s nest egg approach to retirement

[bart 0]

Forgetting issues like exchange rates, taxes, other income sources and what-the-fuck-you-actually invest-in, I have a few questions concerning Owen’s basic model. Can Owen or other investment-minded BMs help?

 

If we use the example of a 500,000 USD nest egg, have I got this right………?

 

EXAMPLE

Nest egg on Jan 1st 2008: 500,000 US dollars in bank

 

On Jan 1st 2008 this entire nest egg is invested in some 50/50 mix. (Bonds, equities, fixed income, stocks)

 

Whatever the investment return is over the 12 months of 2008, 4 percent of 500,000 can be withdrawn/spent over the next 12 months ie 20,000 US dollars gross.

 

Using the 3 percent inflation rule, the second year you can increase your money withdrawn by 3 percent of 20,000 ie 600 US dollars – again, whatever the investment return. So during the 12 months of 2009, 20,600 US dollars can be withdrawn/spent ie 20,000 + 600.

 

In the third year, you can withdraw 20,600 + 3 percent (618) = 21,218 gross.

 

In the fourth year, 21,218 + 3 percent (636.54) = 21,854.54 gross.

 

Etc etc

 

And there’s a 95 percent certainty you can keep this up for 30 years.

 

TWO QUESTIONS

Does the above example accurately illustrate the basic model?

 

If there are dividends from your investments, what happens to those dividends? Re-invest? Can spend?

 

 

Cheers - have more questions but will wait and see if I get shouted at for being dumb first.

[Owen` 2]

Owen’s basic model

 

I didn't invent it. I'd rather my name not be on it. Call it . . . The 4% SWR (Safe Withdrawl Rate) Model.

 

Does the above example accurately illustrate the basic model?

 

Yes.

 

If there are dividends from your investments, what happens to those dividends? Re-invest? Can spend?

 

There are some additional studies that get into that question, and others. The basic 4% SWR approach rebalances your portfolio every year. This would need to take place if the equity portion rose sharply or sank sharply in order to stay at 50/50. In general, it is presumed the dividends are reinvested -- but there can be tax questions about that. It is generally not a matter that will confuse you. It will be clear what is best to do. You can't compound if you don't reinvest and the whole model depends on reinvestment.

 

There are studies that suggest it may be wiser to extract the 4% at the start of each year in a manner that depends on what happened the previous year. One of the core issues of the entire theory is that if you sell stocks to raise cash for living expenses in January right after a year when stocks declined in price, you are "selling at the bottom" and that is the primary mechanism for running out of money. You sell at the bottom and a subsequent rise in stocks doesn't apply to the cash you extracted. Multiply that over maybe 5 or 6 bear markets in the 30 year period and yup, you can run out of money.

 

So the Guyton variation is simply to never sell stocks for living expenses after a down year. Sell bonds for living expenses, and hope there are not 5 down years in a row that run you out of bonds. Historically, that has not happened. According to Guyton, if you do this kind of thing you start to gain fractional percentage on the 4% number, and when you add some of his other maneuvers he claims to get up to 5% -- or 5.5% with Social Security.

 

Shrug. The community really really really doesn't like this, but his math is pure. It is inate conservatism (fear) that keeps people from embracing it. Note that on 1 million the difference between 4% and 5.5% is $15K of life spending a year. Quite a few bar fines.

Edited January 13, 2008 by Owen`

[som nam na 0]

Owen's SWR model is an excellent basis for retirement planning, add in factors like:

 

1. How much you will actually need to draw down per month / year

2. Inflation in the home and spend country(ies)

3. Spend / investment currencies and exchange rates

4. Investment / property growth rates

5. Pensions and other income

6. Taxation

 

Put the above into a spreadsheet forecast (using the SWR approach) for say 15 years or longer depending on your circumstances, plug in the drawdown amount you will need per month / year, do a backward pass and and it can give an idea of how much nest egg you really will need to retire. A surprise for me was the impact of exchange rates and inflation on the "nest egg" amount.

Edited January 8, 2008 by som nam na

[Owen` 2]

4. Investment / property growth rates

 

A surprise for me was the impact of exchange rates and inflation on the "nest egg" amount.

 

I would suggest that inflation can generally be presumed to remain positive and never negative. There are no guarantees so maybe someday we will all look at amazement at prices dropping for . . . whatever. But if it is always positive you can pick an average number for it. Currency exchange . . . to do the same thing is to presume that pound/baht ratios or dollar/baht ratios will erode continuously forever. This is not supported by history. But if you want to model things that way, add it to the inflation number you choose.

 

The study that all of this is based on uses historical stock market moves since 1880. The "portfolio management" stuff is just "asset allocation" -- and for the guys new to this world that just means the categories into which you divide your nest egg. You allocate some of it to bank savings accounts and some of it to stocks. There is nothing in the study to address what happens if some of that allocation is a house or raw land. I doubt there are solid records for a constant index of real property from 1880.

 

I know . . . I KNOW . . . the UK has created a whole generation of 50ish year olds whose entire life experience tells them that owning "property" (meaning houses) is the path to nirvana and to not own property is foolish. I do not try to change their minds. All I can say is that the study did not include that. That doesn't mean it doesn't work. It means there is no evidence that it will, over 30 yrs.

[dacah 0]

We in Ireland also like the "property"....and I can give you 30 +year figures,

 

My mother bought a commercial property in 1953 for £3000

 

She recieved rent ...with all rates and maintaince paid by the rentee...of £400 a year...average income

 

The average income here now is Euro 37000 a year....

 

The property brings in these days....over 50years later...Euro 37000 a year!!!!

[Gary 4,119]

Like most everyone else, I wanted to retire at 50 years old. I didn't quite make it but did manage at age 52. Unfortunately that didn't work out either. Two years of living in Bangkok and a really bad investment made me realize that I couldn't make it. Close but too close for comfort. I have always been pretty conservative. I went back and worked for three more years and saved every bit I possibly could. Finally at about 58 I figured I had enough. My savings would carry me until my small company pension started at age 60. I had overestimated my living expenses here and bought a condo with the surplus. That lowered my cost of living even further. I am now collecting Social Security besides my company pension. I had a 401K plan if all else failed but fortunately never had to use it. Last year is the first I took anything out of it and that was the 800,000 baht for my retirement visa. The Thai government has made the income statement route more difficult and I just didn't want the hassle. I am comfortable at this point with Social Security, a pension, dividends from my 401K and rent from my condo. Speaking from experience, I would NEVER count on the stock market for income. I took a couple of SERIOUS hits that devastated my 401K. A good friend of mine keeps all his money in CD's. I used to laugh at him while I counted my profits. I'm no longer laughing because he is further ahead than I am.

 

Thailand is a great place to retire but I sure wouldn't enjoy worrying about a tight budget living here.

[sinbinjack 251]

Thailand is a great place to retire but I sure wouldn't enjoy worrying about a tight budget living here.

I also don't want to be in a position where my budget is too tight,but ,I do know that what some consider tight I consider rich.I have read with interest ,and not a little envy some of the figures that some retirees on the board have ,I look at these people with awe as I never in my work, earned in my 60 to 70 hours a week as a truck driver, as much as these guys have to retire on.I take with a pinch of salt a lot of the advice given in this and similar threads by people who seem to live a different kind of life to mine, but, give advice only from a "Rich"perspective.

PS this is in no way a dig or a flame of anyone ,just a view from someone who has lived on very little money, but ,still thought myself well off on much less than you.

Edited January 12, 2008 by sinbinjack

[Gary 4,119]

I also don't want to be in a position where my budget is too tight,but ,I do know that what some consider tight I consider rich.I have read with interest ,and not a little envy some of the figures that some retirees on the board have ,I look at these people with awe as I never in my work, earned in my 60 to 70 hours a week as a truck driver, as much as these guys have to retire on.I take with a pinch of salt a lot of the advice given in this and similar threads by people who seem to live a different kind of life to mine, but, give advice only from a "Rich"perspective.

PS this is in no way a dig or a flame of anyone ,just a view from someone who has lived on very little money, but ,still thought myself well off on much less than you.

 

 

By no means would anyone consider me as being wealthy. In fact living in the US would be difficult if I had any luxuries at all.

 

I have posted before that since my Social Security started I have increased my wife's housekeeping budget from 20,000 to 25,000 baht per month. She pays for everything including our clothes and my cigarettes. I pay the insurance premiums and for big ticket items. She has at least 5,000 baht left at the end of the month to put in her savings account. I live exactly as I choose and if I want to buy something, I buy it. I do like my toys.

[Owen` 2]

You know what, sinbinjack? You're right.

 

The concepts we talk about are supposed to have value to everyone, but when I glibly say . . . take 1/2 your money and put it in stocks, and 1/2 in bonds -- that is of zero value to guys who worked for a living their whole lives at maybe a low income job. Hey, they made the choice to do that rather than suck at . . . I think y'all call it DOLE. That means they earned some help.

 

What those guys need is a little crash course from the guys here on how to get their money into 1/2 stocks and 1/2 bonds.

 

For Americans, it is index funds at Vanguard They have the lowest costs of just about anyone. You go to vanguard.com and get some phone numbers, call them, talk to a human and get them to lead you through the process of getting the paperwork. You do have to file a few forms to get your signature on file. Eventually you mail them a check and a few days later the numbers will appear in your account online at their website.

 

That's pretty much it. Nothing more complex than that.

 

You know . . . for you guys who have not done this before, take it easy on yourselves. Just send some small amount of money at first so you avoid stressing yourself out while you learn how it works. If you send a big check right at first, you will scare yourself. Send a small check and learn how it works first. When you are confident, you can arrange the entire amount.

 

For Brits, someone step up and describe the easiest path to doing this for guys who know NOTHING about it.

 

 

For pension retirees, it's just direct deposit of your checks into your bank accounts. If it's not enough for comfort, do some part time work and sock some away in those same accounts I just described. Let the proceeds add to your pension.

Edited January 12, 2008 by Owen`

[bart 0]

For Brits, someone step up and describe the easiest path to doing this for guys who know NOTHING about it.

And there was me too shy to ask

 

Cheers Owen, you're a star

[sinbinjack 251]

What I'm really saying Owen is that there are some like me who dont have any money to invest,I live on ,I lve on a small compensation pension +some disablity money,luckily I own my home but It is not an invetment as I need to live somewhere so If I sell it I have to pay rent and that would suck up any profit I made from selling the house.I was referring to all those who like me have to live on a small income with little or no extra cash that they can "invest".Guys like me live on small money in the UK but the same money in Thailand is enough for a life with extras I could not dream of in the UK,that is why some guys take the plunge even if they are not 100% certain that they can manage on what cash they have.The advice I really need is where can I get some money to invest.

[meow 0]

The advice I really need is where can I get some money to invest.

 

I think if we knew that answer we would all be rich, Why not sell the house if you gonna live in Thailand and invets that money, Thats my plan in about 10 years (ill be 53 then) and if UK house prices can average/ rise by 5% a year over the next 10 years ill have over £500,000 or $1,000,000 btw I also dont have any savings worth mentioning.

Edited January 12, 2008 by meow

[BigusDicus 9,878]

I think if we knew that answer we would all be rich, Why not sell the house if you gonna live in Thailand and invets that money, Thats my plan in about 10 years (ill be 53 then) and if UK house prices can average/ rise by 5% a year over the next 10 years ill have over £500,000 or $1,000,000 btw I also dont have any savings worth mentioning.

 

 

Are prices in the UK still rising? Have gone flat or are dropping here in S California.

[Owen` 2]

I think if we knew that answer we would all be rich, Why not sell the house if you gonna live in Thailand and invets that money, Thats my plan in about 10 years (ill be 53 then) and if UK house prices can average/ rise by 5% a year over the next 10 years ill have over £500,000 or $1,000,000 btw I also dont have any savings worth mentioning.

 

See, there is no point in me typing what I'm about to type. But when was that not true of all of our posts haha.

 

Let's ignore inflation that will take 3% per year out of that hoped for 5%, because it takes 3% per year out of everything else, too.

 

The magic formula guys . . . 1.05 ^ (which means raised to the power of) N where N is number of years.

 

You say 5% per year for 10 years is going to get you to 500 pounds? Cool. Here's what that means:

 

1.05 ^ 10 = 1.629. 750K (picking a number between 500 and 1 million) is your expectation in 10 years.

Well, that means as of today your house is worth 460K pounds. Yes? It can be much less if you have a mortgage because a mortgage gives you favorable financial leverage (amplification) on that 5%, but since we don't know how much you owe I won't go into it. In general, without amplification, you seem to have a 460K pounds net worth now. If you don't, maybe 750K is farther out than 10 yrs.

 

Out of curiosity I WILL ask, what are you paying in interest on the mortgage, what are the annual house repair costs, what is your annual homeowner's insurance costs, what is your annual property tax (UK calls it council tax? Not sure) and have you ever computed the depreciation cost per year on all the appliances in the house? All those, to some extent, deduct from the 5%.

Edited January 13, 2008 by Owen`

[js007 795]

And for what it's worth, don't forget to ask yourself what your house will be worth when the real estate bubble finally deflates. You really can't count on prices going up forever.

[sinbinjack 251]

I think if we knew that answer we would all be rich, Why not sell the house if you gonna live in Thailand and invets that money, Thats my plan in about 10 years (ill be 53 then) and if UK house prices can average/ rise by 5% a year over the next 10 years ill have over £500,000 or $1,000,000 btw I also dont have any savings worth mentioning.

I have no interest in living in LOS full time so selling the house is a non starter because of that and I have a son who is still living at home and threatens to stay there until I die and he gets the house.My plan for the future is that when I reach retirement age I will spend 6 months of the year in LOS and 6 In UK I can rent out 2 rooms for approx £75-£80 each (todays prices) a week and that will more than fund my stay in LOS when added to my pension.Even taking Tax into consideration ,there is a £90 a week disregard for renting a room in your own house and I would also pro rate any other house charges ie , gas , electric , rates , insurance , cleaning products , et al. I would then be in a very good position no matter what happened to house prices as rents for rooms have never gone down ,even at the height of the last property slump.

Edited January 13, 2008 by sinbinjack

[meow 0]

Im not too worried about the current crisis and house prices perhaps dropping abit in the short term, where I live in the south east outside of London UK house prices remain solid and in the long term (10 years) I think the only way is up.