goal: zero to retirement in 7 years?

[Russell]

I think he can do it. OK, a very simplistic view but worst case senario:

70k x 7 years = $490k
$490k / 30k = 16 years

So if you did nothing but saved your 70k for 7 years you should be OK *IF* your yearly expenses are $30k. Even if you put that money in a savings account paying 2%-4% on avg you at least take care of the inflation part.

You also have several options:

- You can work one additional year now for another $70k and that becomes your 'emergency fund' for unexpected medical expenses

- You can work odd jobs etc to supplement

- Say you're 13 years into it and you're running short on money you end your expedition 4 years early...big deal!

I think it's doable if you play it smart.

EDIT: My question is what's your currently yearly living expense? Are you sure you can save $70k consistently every year?

[ksluis62]

KTP, I would also consider real estate as an investment that will pay out during sailing retirement and beyond. This is part of my plan.

As an example, you could roll your $360k house into a 4-plex that you hire someone to manage. In my area, a 4-plex in this price range will bring at least $2400 a month ($600 per unit). Figuring around 30% expenses for management, maintenance, vacancy, and reserves, that gives you $1700 per month, $20k per year income, which will generally rise with inflation. It might be worth considering as a portion of your future income.

[Russell]

But at $20k per year income wouldn't it take him 18 years just to re-coup his original investment of $360k.

[jIM_Ohio]

Originally Posted by KTP

Hey, thanks for the bucket analysis. I have read about that method but had not had a clear example set out like you did.

For the cash bucket. You don't really mean cash right? Investing in 30 year inflation indexed T bonds or something would be wise for this bucket? If I understand them correctly (still researching them) they pay a fixed interest portion and a variable portion that is adjusted twice a year for inflation. So you may have say a 1.5% fixed rate plus another 4% for inflation. Thus the bond is paying 5.5% but is totally safe (well, as safe as the US government, which can always print money). So this bucket is going to grow at 1.5% if you replenish it with bucket 2 as you described. Not a lot of growth, but 1.5% of 500k compounded over 15 years is $125k.

It would almost seem as if the overflow from bucket 1 would pay for half of a house when we decide to quit sailing!

Problems: I think we can only buy 10k a year in paper and 10k a year in electronic format of the I bonds.....

If I did 9 years in cash, I might have 5 years in TIPs or I-bonds. If I did 5 years cash, nothing in TIPs and just use a CD ladder. Part of the issue here is liquidity... you may or may not be able to sell the bond you hold for face value if you need the money, so you need to hold the bonds until maturity. Can you buy 56k of bonds as an individual investor each year?

Two issues- you have "IRA" issues and "tax" issues because you will access this before age 59.5. I would probably do just a simple CD ladder for bucket 1 (3-4 years expenses), maybe 5 years in a TIPs ladder (depends on limits and taxes) then load up the bucket 2 with I-bonds in an effort to meet the 4.25% goal.

Keep in mind in your original post you suggested you can get a 5%+ return on bonds and I want those bonds which yield 5%+ right now- where are they? Over short periods of time (like now) getting more than a 2% real return on bonds would be impressive (probably 4-5% overall return, and 2% real return after inflation). Most bond funds I track yield close to 4% when times are good.

[ksluis62]

Originally Posted by Russell

But at $20k per year income wouldn't it take him 18 years just to re-coup his original investment of $360k.

I was meaning the $20k per year was just one portion of the retirement income. The accumulated $490k plus interest/earnings would make up the rest of it. This just diversifies more, including real estate in the asset portfolio, rather than just equities, bonds, interest-bearing accounts, etc.

[KTP]

Oh, I was thinking Series I bonds instead of TIPS. I know we could only buy $20000 a year of the Series I bonds, but they have a great advantage in that they are naturally tax defered (if I understand them correctly).

They seem to yeild 1% to 4% real return and the remainder matches inflation. These would seem to beat out CDs by a long shot, since they have a much smaller real return, correct? A 1 year CD paying 4% in an inflation environment of 4% nets you 0% real return.

Also, it seems that after 5 years there is no penalty for cashing in the Series I bonds, although you can hold them for 30 years? You don't pay tax on the compounded interest until you cash them in.

If we started buying $20k this year, then in 7 years we could start cashing in the first bonds with no penalty?

Obviously this would only fufill part of our need. I am willing to take some larger amount of risk with a portion of our investment with the knowledge that if things continue bad in the equity market for more than the next 5 years we may have to stretch our work out to 10 years instead of 7.

[LivingAlmostLarge]

The maximum you can save in retirement account is $21.5/per person. If above a roth you can do a non-deductible IRA.

But if you are saving right now how can you count on 9% gains this year and maybe even next year? What if gains are negative again this year, and next year 3%?

How will that eat into your 9% return planned?

[KTP]

Oh, I know, I just pulled the numbers out of my rear. Still, I think the averaged expected return on the S&P500 is at least 9%. Some years it might be zero or even negative (as in recently), some years it might be 25% or more. The real rate of return counting inflation is going to be less obviously...probably more around 4 to 6%. This still beats out most everything else in the very long run I think.

I think I will stick to the current plan of 70% into the S&P500 and 30% into Series I bonds and cross my fingers for the market to muddle around for a few years then shoot back up to 2007 levels as we approach the end of 7 years. Worst case, we continue working for another 2 to 4 years to bring us up to a liveable income. I guess 48 or 49 isn't too much different than 45 agewise

[jIM_Ohio]

KTP- instead of "pulling numbers out of rear" or "crossing fingers" you need a plan.

There is another forum to look at early-retirement.org which might help you more than the people here...

You should do the following
1) make a list of goals you want (sailing or other)
2) make a list of all the money you have invested
3) make a list of the money you can invest
4) calculate expenses right now for your lifestyle right now
5) estimate expenses for the goals listed in #1

It can all happen. My first comment is do not contrain it by time (when creating the plan). See where the plan takes you. As it becomes a short term goal, put a timeline on it (I have 7-19 years as a mid term goal).

In addition educate yourself. Taxes, withdraw rates and investing strategy would be at top of list.

It can all happen. My plan is to retire at 53- that is 17 years from now. Most of the above was the delta I needed to have a solid plan for now, immediate future, mid term and long term.

[LivingAlmostLarge]

KTP do you have kids? Will that affect the decision to retire?

[KTP]

No, we do not have kids. I probably wouldn't know how to change their litterbox or whatever anyway.

[LivingAlmostLarge]

KTP, I bonds pay fixed rate of 0.70% and inflation of 2.46%. How are you going to get 5% from them before after taxes? I don't see the fixed portion getting up anytime soon, though they are due to reset.

[snafu]

If you plan on sailing to ports outside USA you will discover your costs are considerably lower than you are accustomed to paying. For example medical insurance rates in USA are the highest world-wide.

While you are traveling, I presume you will be drawing a similar amount each month. You will not be cashing out of your entire portfolio. Likewise you will be careful to avoid Ponzi -Madoff schemes.

What is your plan after sailing, will you return to USA and perhaps a condo? How will that be funded. We are intriqued with the idea of moving to Phillipines for the winter months due to language, medical care, cost of condo etc. We've rejected a condo in USA due to the cost of medical care should it ever be needed and litigious culture.

[noppenbd]

Originally Posted by LivingAlmostLarge

KTP, I bonds pay fixed rate of 0.70% and inflation of 2.46%. How are you going to get 5% from them before after taxes? I don't see the fixed portion getting up anytime soon, though they are due to reset.

I bonds & treasuries are at or near zero right now. I would not buy I-bonds until the fixed portion gets up around 2%. It will probably happen by the end of 2010, so for 2009 and 2010 I would stick with mid-term CDs until the rate environment improves.