Advice Sought on Work/Retirement Plan

[Banker1988]

Hi:

I am a new member for the savingadvice.com website and wanted to ask the experienced members about my future financial plans. First, some background details:

- I am 43 years old, single, no kids
- I own my own condo free and clear
- I have no debts excpet a $6K 0% car loan to be paid off in 1.5 years
- Current Annual Salary/Bonus: $110K
- Current Portfolio: $970K
- Portfolio Composition: 98% in CDs and Guaranteed Insurance Contracts,
and 2% in equities (As you can see, I am very conservative and
want to make sure my portfolio doesn't take a big stock market
hit)
- Current Investment Income of approximately $50K per year (all of which
is allowed to reinvest - I pay the taxes on this income from my
salary income)
- Current Additions to Savings: $45K per year (including 401-K match)
- I plan to work 3.5 more years, at which time my portfolio will be over
$1.3 million. I plan to be "Retired" at age 47 (although I may purse
other work of a less stressful nature)
- Projected 1st year in "Retirement": $65K+ in investment income,
$45K of expenses, $20K+ put into savings.
- Long term plan: Live off retirement income until age 65, at which time
I will: (A) Draw a $32K/year pension, (B) May draw social security
income if needed, and (C) Convert much of my portfolio to Single
Premium Indexed Annuities to lock in returns of approximately
8%+ per year of lifetime income (this is the rate I could get today
if I was 65).

I have tracked every dollar that has passed through my hands since
1994 using Quicken software, so I have very good information on my
expenses. I am frugal by nature, even more so given my impending
plans to quit my current job in 3.5 years.

I have put together spreadsheets to forecast out my future cash flows
which include: Paying for my own health insurance after "Retirement",
3% rate of inflation in my expenses each year, $5K of "unplanned"
expenses each year for unforseen events, etc. My spreadsheets tell
me that my future plans should be able to fully fund my living expenses
even with leaving work in 3.5 more years at age 47. But, this is a big
step to take.

Does anyone have any advice for me / see any holes in my plan?

Thanks in Advance,

Ken

[sweeps]

You should be fine, assuming your lifestyle doesn't change in retirement. But I have a few questions/comments.

1. Don't forget the effects of inflation. Even if you don't change your spending habits, your expenses will be more than double by the time you're 65.
2. Have you factored in taxes in your investment income? It looks like you've assumed a 5% return on your investments. That would be $65,000 before taxes. With $45,000 in expenses, that would leave you a lot less than $20,000 to put back into your savings. (Unless you're assuming >5% return which with ultra-conservative investments I'm not sure how you will achieve.)
3. What about benefits you're getting through your employer. Health insurance is a biggie. Is that included in your expected expenses?

EDIT: It looks like you answered #1 and #3. Disregard.

[Banker1988]

Originally Posted by sweeps

You should be fine, assuming your lifestyle doesn't change in retirement. But I have a few questions/comments.

1. Don't forget the effects of inflation. Even if you don't change your spending habits, your expenses will be more than double by the time you're 65.
2. Have you factored in taxes in your investment income? It looks like you've assumed a 5% return on your investments. That would be $65,000 before taxes. With $45,000 in expenses, that would leave you a lot less than $20,000 to put back into your savings. (Unless you're assuming >5% return which with ultra-conservative investments I'm not sure how you will achieve.)
3. What about benefits you're getting through your employer. Health insurance is a biggie. Is that included in your expected expenses?

EDIT: It looks like you answered #1 and #3. Disregard.

************************************************** ********

Thanks for the quick reply. Regarding your point #2: Of the $65K of
investment income, approximately $25K of that will be in tax-deferred
accounts (IRAs, I-Bonds) or tax-free accounts (Roth IRAs). To the extent
that I can't live off of my taxable income alone, I plan to draw down
principal from my taxable accounts and allow all of the "non-taxable"
income to reinvest. Therefore, I will still be "earning" $65K per year
in investment income but will be taxed on only about $40K per year
in income. This will greatly reduce my projected federal taxes.

[sweeps]

Ah, ok. Yeah, you should be fine if you stick to your aggressive saving schedule and frugal lifestyle. And like you said, you may pick up some less stressful work on the way which will help too. Congrats!

[disneysteve]

I think you have done phenomenally well for yourself. Congrats.

My only suggestion is that you reconsider your lack of equity exposure. If you want your money to last for 40-50 years, you need some growth in your portfolio so that you outpace inflation. If you are conservative by nature, I understand if you don't want to go 70 or 80% stocks, but building up to 10 or 15% would boost your return and actually REDUCE the risk of your current portfolio. CDs are not risk-free. You don't have principal risk but you have interest rate and inflation risk which can be just as devastating.

[Banker1988]

Originally Posted by disneysteve

I think you have done phenomenally well for yourself. Congrats.

My only suggestion is that you reconsider your lack of equity exposure. If you want your money to last for 40-50 years, you need some growth in your portfolio so that you outpace inflation. If you are conservative by nature, I understand if you don't want to go 70 or 80% stocks, but building up to 10 or 15% would boost your return and actually REDUCE the risk of your current portfolio. CDs are not risk-free. You don't have principal risk but you have interest rate and inflation risk which can be just as devastating.

************************************************** ******
Thanks for the advice. I will probably take your advice once I am in
retirement. My goal until retirement is to minimize the chances of taking
a big hit to my portfolio, thereby derailing my ability to hit my $1.3 million
portfolio target. With my current strategy, I can virtually guarantee
myself of having $1.3 million in 3.5 years when I want to leave my job.

[sweeps]

I thought the same thing, Steve, when I first started reading the original post. But I think Mr. Banker has a strong case for staying conservative and focusing purely on living off his interest. No worries about a stock market dive early into his retirement. Just living life with a guaranteed income stream.

There is always the concern about a life-changing event though. What if he finds Ms. Right and wants to get married and have children? Or what if God forbid a serious illness/disability occurred. Or what if he gets cabin fever and wants to spend his life traveling the world. I think these are valid concerns.

[disneysteve]

Or what if the 3% inflation we've been enjoying in recent years starts creeping up to 5 or 7 or 9%? What if CD interest rates drift down to 4 or 3%? How does that change the picture.

I don't think having all of your money in one asset class is a good idea no matter what that asset class happens to be. And I think a portfolio that is 85 or 90% cash and 10 or 15% stock would still qualify as quite conservative.

Heck, I'm just jealous. I'm 43 with a similar income and my portfolio is less than half of his. But I know his secret. Single and no kids. If I had never married, I have no doubt that I'd have a far larger portfolio. Not that I'm complaining, but it is far cheaper to live alone than to marry and have a family. Forget that "two can live as cheap as one" nonsense. It isn't true.

[jIM_Ohio]

This would be a good case for an annuity (immediate annuity).

Gives upside return of stock market returns
income can adjust for inflation
gives income protection/ guaranteed income for life

I think equity exposure is important. The OP has taken care of market risk to an extreme. But the trade off is clearly inflation risk, time risk, interest rate risk, and credit risk.

Risks cannot be avoided, they can be managed. principal risk (loss of principal) must be managed compared to time (risk of running out of money), inflation (risk money saved will not buy same amount of goods/services), interest rates (no guarantee 5% returns on bonds and money markets continues forever) and credit (no guarantee the US financial system can sustain itself).