Sanity Check: Do my assumptions about retirement planning make sense

Current income is only a starting point for the discussion. That thread contained many posts, (you may recall I cited a Barron's story which offered one view and a WSJ story which leaned the other way), you can adjust for expenses that will end, such as current retirement savings, mortgage, college savings. But be sure to adjust for some expenses that may rise.

With over $1M in savings and a savings rate of 20%+ you are well on track. The fact that your annual expenses are nowhere near current income means you do not fit the "80%" rule for retirement needs. Working part time till the mortgage is paid means you will have those extra years of growth to your savings with little need to withdraw. Looks good to me. At final retirement, your cash/bond position needs to be a bit higher, I believe the MC simulations note an optimum mix is 60/40 Stocks/Bonds. I find your sector choices interesting, but not an issue. You keep this on an excel sheet? It's a great tool to forecast numbers based on your assumptions.

JOE

Joetaxpayer, Thanks for the feedback. Your contributions to the newsgroup have always been very helpful. So, i am glad you took the time to respond. Some follow-up:

I have added 10k/yr for individual health insureance Also, 10k/yr for additional travel/leisure expense, we already spend about

I have started considering this. My new investments are more aimed toward cash and bonds. I have so far refrained from selling equity funds to increase the bond balance to avoid the associated taxes. Does it make sense to slowly increase cash/bond holding to close to 30-40% over time through new investments, or should i consider more drastic re-balancing?

I would like to hear your take on what you find interesting.

I have not done that yet (may try it). I use Quicken to keep track of everything. I have found (advanced) Firecalc

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The problem I've had with using new contributions to shift my asset allocation is that, now that I'm getting closer to retirement, the new contributions are but a small fraction of the overall pot, and with stocks having been on a tear for years now, even putting 100% of my new money into bonds wasn't enough to keep up with the growth of the equity part of my portfolio. I guess that's good :-) but I was starting to get close to my minimum retirement savings goal I decided it was time to start paying serious attention to reducing risk.

Anyway, if you want to increase your bond holdings, the obvious place to start is in the 401(k) account, where you don't take a tax hit from selling your existing investments. Personally, I've decided the optimal mix is regular bonds in 401(k) and munis in my taxable account while keeping my Roth IRA 100% in equities.

-Sandra the cynic

read this article and access all the links, inside you will find the minutes to the bogleheads meetings with more details on the discussions with jack

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You are doing really well. Congratulations!

Of course people want ot look at the problems in their strategy.

It is important to figure out the age you retire, your annual expenses and nest egg.

I became unemployed at 48, so I am familiar with longer than average retirment periods. At age 53, you have a long, long way to go.

If I understand correctly you essentially have a $100,000 a year lifestyle ($80,000 + $20,000) that you wish to continue. Assume 3% infllation. 20% Federal tax rate and 9.2% state tax rate. This will be $151,000 a year expenses at age 53. It will be $367,000 a year at age 83.

I've simplified things a bit, but you may be interested in the results, none the less.

Let's say you now have $300,000 at 5% and $1,000,000 at 9%. At 53 you have $515,000 at 5% and $2,200,000 at 9%.

You are a bit ahead of breaking even. At age 58 your expenses and income are equal. ($175,000/yr). After this you are spending down. You go broke at age 81.

If you only get 7% on your investments, you have $1,900,000 at age

1. Don't even ask about 4% inflation.

You are doing really well. You will need to adjust to the fact that you don't have a quarter million dollar income anymore and anything you do to reduce expenses pays off in spades in future nest egg.

It's perfectly sensible and something we've talked about here before. Other things which used to be part of the computations which may or may not be reasonable assumptions now: mortgage payments - it used to be more common for folks to actually pay off their house over the years and by the time they retired, their monthly expenses also went down by the amount of their mortgage payment. Similarly, if you assume your kids will have finished college by then, you may not need to budget for collee savings/payments as part of your retirement expense projections. Of course, these days, folks don't seem to be paying off their houses and kids seem to stay in school/return home longer and to greater ages than they used to, so these things may need to be considered differently now.

In addition to thinking about saving enough to cover what your expenses are now, bear in mind that depending on how and when you retire (or "retire") you may get

College in 9 and 12 years, at least one year likely of overlap (ie. more than one kid in school - maybe more if you count grad school, too), theoretically done by the time you folks are in your mid 50s.

Fully paying off that mortgage (I wouldn't acccelerate it - that's some cheap borrowing!) will lower your cost of living a *lot* when that hits. (I'm estimate your principal and interest payments at about $1500/mo, noting that your insurance and taxes don't go away - that's $18000 (okay, after-tax equivalent, since after it's paid off, you don't get that deduction anymore, is probably closer to $16,000 "expense"). That's a huge part of your $80/yr living expenses.

That's a great plan. Between reasonable growth of your current $1.3MM to approx $2MM over 6-7 yrs at about 8%/yr, and the additional $80k or so you'll be adding (if we forget the growth of that part, that may be as much as another $600k. You end up with a mix of both after-tax and pre-tax assets worth approx $2.6MM - which may well be enough to throw off enough income to support you in your current lifestyle without necessarily even needing to continue to work - at least it'll do that pretty comfortably after you pay off that mortgage a few years after your targetted date.

I'm sadly afraid that that may be a *low* estimate on that health insurance, but that part-time income makes up for a lot - a hell of a lot.

Bear in mind in the above I've not segmented out your kids college savings, nor considered the vast *increase* in your spending during those college years. If we assume that the savings we've projected above supports your current lifestyle without the additional work (part time or whatever), then that part-time work may well pay for the college costs directly and when the kids are finished, that part-time work money is more like found money.

Between the travel and the insurance, your expenses go up by more than you'll save by having paid off that house.

Well, again, that may need to wait until the kids finish school.

I haven't looked at your actual portfolio details - I just don't have the time at the moment, but something to consider, just becuase I find it interesting: Take a look at the long (*long*) record of the Vanguard Wellington fund. It's roughly 65/35 stocks/bonds and has had a return since inception (in 1929 - that's almost 80yr record!) of a bit over 8%/yr - with less volatility than a stock index and a fairly conservative management style. I find that a very impressive and reassuring record. You certainly can't afford to be any more conservative than that if you really want to hit those goals you've laid out, but you also don't have to swing for the fences - you've built a very respectable savings and are on a good track.

This is usually not the optimal asset location. Most of the time it is more optimal to fill up tax deferred accounts with bonds and after-tax accounts with tax efficient equities.

Medical/Travel/Leisure covers it, I think.

I would adjust slowly as you approach (final) retirement. (Unless you are clairvoyant and can switch to the right mix just as the market reaches its next top).

Only that I happen to own only two sectors funds and they are the two you have, VGHCX and FSELX. I don't know the odds of this, but I'm sure it's small. I think healthcare has more growth potential at this point than electronics. There are some walls technology seems to be hitting and the market (consumer) is always expecting price decreases. The SOX index hasn't recovered from the bubble, not even close.

I have a sheet posted at

You are doing quite well. But you fail to mention how you are protecting your money. It takes a life time to earn but only a moment to lose it.

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Thanks for the links, i will check these out. I am always looking for opportunities to become better informed.

Best regards, Marco Polo

I definitely do not believe I am that good, or that lucky.

That is quite a coincidence! I got into VGHCX quite a while ago, and it has been very good to me. With the aging bay boomers, i agree with you that Healthcare is probably a pretty good place to be going forward as well. I got into FSELX shortly after the tech debacle in 2000-2002. I figured it had to bounce back strong after that kind drop, still waiting... At least, i missed the worst of it. I got worried when there were three companies trying to sell 50lb. bags of dog food over the internet.

Thanks for the link, i will try playing around with it.

Best regards, Marco Polo

I have been noticing the same thing. As you said, it is a good problem to have. I am not real happy with the bond fund choices in my 401K. So, what i am thinking about doing (in addition to directing more of my new contributions into bonds) is having all distributions (dividend and CG) put into my core account, rather then being re-invested. I can then move this money that has already been taxed into bond finds to help ba;ance it out a bit more.

Thanks, Marco Polo

I appreciate the fact that this can leave a very long time in retirement where the investments must provide adequate income for a long time. That is why i am trying to use relatively conservative estimate in my plan, and trying to build in quite a bit of cushion on top of that. Only time will tell how well i accomplished that.

The effective federal and state tax rate seems a bit high, I have been using a combined effective rate of 20% I live in a fairly low income tax state.

I am not sure i fully understand how you arrived at these numbers. At 9% (i use 8% in my planning), over 12 years, invest grows by factor of 2.81 (1.09^12). This would turn the 1M into 2.8M. I may need to withdraw some from that in years 5 or 7-12, but i am also adding $120k/yr for years 1-5 or

1. Could you elaborate a bit, in case i missed something?

It is more of a mental adjustment rather then a financial one. Out of that

Thanks for the feedback.

Best regards, Marco Polo

I will assume you mean insurance?

I have quite a signficant life insurance policy on myself, and a reasonable one on my wife.

Disability Insurance and Health Insurance through work currently

We have a Umbrella Liability Policy about 2x our investments.

Will likely add Long Term care policies as we get a bit older.

Anything additional you think we should be doing to protect our assets?

Thanks, Marco Polo

Thank you for the well considered reply, appreciate the time.

Healthcare is probably the one thing that has me the most concerned about retiring early. The inflation rate for healthcare seems very high, and somewhat unpredictable.

We are actually adding about $120K/yr of new money into investments. So, hopefully we will get closer to about $3M, when the time comes.

This does have me concerned. Any thoughts on ways to hedge the inflation in health insurance?

Best regards, Marco Polo

My model pays taxes every year. This doesn't compound perfectly for long term capital gains over multiple years, but it is close. I belieive those pesky dividends get taxed every year even if you re- invest them.

As an aside, a lot of the "hot" investments like energy and internationals were bought and sold in less than a year, and could have paid upto mid 30% federal tax short term capital gains. Sometimes you have to get in and out when the gettin's good and waiting a year won't cut it.

Let's assume the new case of $1,000,000, 9% return and a one time capital gains tax of 20% (federal and state). After 12 years the $1,000,000 does grow to $2,812,664 pre-tax. After a 20% tax on profits you are left with $2,450,131.

You seem to be pretty good with numbers, so I don't think this will come as any surprise.

Good Luck

Um, overweight investment in healthcare stocks?

(not really kidding, either...)

(And like a couple of other folks here, I, too, have some VGHCX in my mix.)

I've noticed that open market health care doubles in cost every five years since I started tracking it in the 90s. This includes what you actually pay in addition to premiums. Some years the increase is in the premiums and other years they increase the co-pays and deductables. The numbers will be astronomical in retirement years.

The scariest thing is that medicare is on the same five-year doubling curve, just starting at a lower point. Its month premiums are skyrocketing ($121 a month this year for part B & D) and means-testing is phasing in. You might find, say you reach medicare age in 2020 that your personal policy of $1500 per month falls to the medicare rate of a mere $500 a month if the trend continues.