Any Suggestions

[VooDoo Chicken]

My Fellow Americans...

I like so many of us, worry about the future. While i have been able to save $$$ during the "Good Times" I now am feeling the pinch as my Salary has dropped from roughly $300K to $100K with huge worries that in the near future my job will like so many others be lost.
My Question to everyone today is, with approx. $750K in savings, How can i make my savings supplement my income in the event i do lose my job? I have 4 children 1 of which is set to graduate and attend college the remaining 3 are right behind.

Any Suggestions

VooDoo

[disneysteve]

I guess my first question would be this:
As your income has come down, have you cut your living expenses proportionately or have you kept spending as if you were still earning 300K?

The best way to make your savings last is to slash your spending to the absolute minimum you can. If you really have reason to think you will soon be unemployed, the time to make those cuts is now, not after the income stops. Cut cable tv, lawn service, pool service, dining out, expensive hobbies, gourmet groceries, etc. Start stockpiling cash to carry you if you lose your job. Also, you should have your resume updated and ready to go to search for a new job. In fact, you might not want to wait until this job ends before starting your search.

As for the kids, if they are all high school or college age, they are all old enough to be working and helping support themselves.

[jefffou]

Voodoo,

Rules of thumb should not be considered a good replacement for sound judgment, but here is one anyway......

When using your savings to supplement your income, a good retirement withdrawal "rule of thumb" is to keep withdrawals at no more than 4%. This withdrawal rate may be upwardly adjusted for inflation every year.

Voodoo, the 4% could be adjusted up or down depending on the volatility of the portfolio, the length of time you expect your annual earnings to be down, your tax situation, and the expenses you are left with after the expense reductions DisneySteve mentioned.

The justification for using a 4% withdrawal is that this annual withdrawal amount should be overcome by investment earnings over a long-term period.

[jIM_Ohio]

My Fellow Americans...

I like so many of us, worry about the future. While i have been able to save $$$ during the "Good Times" I now am feeling the pinch as my Salary has dropped from roughly $300K to $100K with huge worries that in the near future my job will like so many others be lost.
My Question to everyone today is, with approx. $750K in savings, How can i make my savings supplement my income in the event i do lose my job? I have 4 children 1 of which is set to graduate and attend college the remaining 3 are right behind.

Any Suggestions

VooDoo

Sure, read on retirement spending and retirement planning.

750k is enough to take 30k out each year, and see money last for 30-50 years.
Its also possible under the right market conditions that 750k could supply an income of 37,500 each year (the conditions are a strong bull market the first years of retirement).

$30k is a 4% withdraw rate
$37,500 is a 5% withdraw rate.

So part of the focus for retirement planning is know your withdraw rates.


Another aspect of the plan is expenses. You need to know your budget... dropping income from 300k to 100k hopefully means that spending was reduced with income. Are you able to set aside money on the smaller income? 100k is well above the average income in the US, and I believe its also above the median as well. Try saving 20k per year (20%) of the 100k income. If you can cut expenses down (further) then its more likely the 750k will last longer.


So part of the focus for retirement planning is on expenses control. What can be reduced, if push came to shove, could you reduce expenses more?



Another aspect to the plan is growth of investments. If you put all of the 750k in cash (CDs or money markets) you have one set of problems. If you put all 750k into stocks you have another set of problems. The 4% withdraw rate is generally tested on a 60-40 portfolio of stocks and bonds. As you learn about withdraw rates, you need to focus on how much risk you can take relative to withdraw rate.

For example if you can live on 3% withdraw rate and can handle high equity exposure, then money should last longer than 30 years. However if you can live on a 3% withdraw rate but cannot handle the high equity exposure, the portfolio will not last as long.

In general, higher equity exposure makes portfolios last longer. Meaning if you compared 2 different withdraw rates (like 4% and 5%) and one portfolio had 30% equities and one had 60% equities, what would generally be true (MOST of the time) is the one which was more conservative failed less early on, but ran out of money later, and the one with higher equity exposure might have some short term blips (which could be failures depending on how you define failure) but on average lasted longer than a portfolio with less equities.

In general, the times in history which wreak havoc on portfolios are when inflation is sustained for long periods of time. Most bear market losses are recovered within 3-4 years, but there are many documeted periods of time where inflation was 20% over a 3-4 year period, and the prices never reset to original levels. The purpose of withdraw rates is to beat inflation and have money last without losing spending power.


So if you can get the 750k to grow while you are still working, every $100,000 of growth (whether from market or contributions) is another $4000 in annual income. You have $30k in annual income now, this implies if you want 60k in income, you need $1.5 M to retire on.



My last comment is an opinion... internet is great for these LOL... I make slightly more than you do, and if someone gave me 750k now, I would be able to retire within 5-10 years no question. My expenses with a mortgage are in 70k range. Without the mortgage that drops to maybe 50k. To put myself on a 10 year plan, I would invest the 750k in a 40-60 portfolio of stocks and bonds, then focus on expenses. In 10 years the 750k would almost surely double (to $1.5 M) and in same 10 years I would hope I have my mortgage paid off, cars paid off, college funds created and any other expenses on the list I need to deal with taken care of. Its possible market doubles my money faster than 10 years, but a 40-60 portfolio should chug out semi decent returns without as much volatility as 60-40 or 80-20.

Much of what you need to do is look at expenses and see what exists until
a) kids move out
b) you pay it off (cars, houses)
c) you move (property taxes drop, utilities drop)
d) you don't need it so much (gas costs drop, clothing budget drops)


And while working focus on what gives you best bang for the buck.

For example, its probably better to pay down cars and mortgage than add money to the 750k investments (adding 10k additional per year is 1.3% of total investments) where as it might drop "expense footprint" by $300-$2000/month once debts are paid off.

At same time you want the 750k to grow, and I would probably suggest a 40-60 portfolio if you think you are LIKELY to need money within 5 years. If you can stomach the risk of 60% equities, its possible that makes sense, the more likely you are to NEED the money, the more I would lean towards a low volatile 40-60 portfolio and get expenses under control fast.

[VooDoo Chicken]

Call Me When The Markets are "Good".... I have a $1.2 Million Home which is paid for, the 1st two years of college are covered, plus the $750K.. seeing how i just turned 40 the thought of retiring on a $30-40K a year income , well is rather hard to swallow.

[jefffou]

Call Me When The Markets are "Good".... I have a $1.2 Million Home which is paid for, the 1st two years of college are covered, plus the $750K.. seeing how i just turned 40 the thought of retiring on a $30-40K a year income , well is rather hard to swallow.

Voodoo, You think you swallow hard! My home is not paid for, and I don't have anywhere near 750k.

The 30k-40k is, to answer your beginning post, to supplement income, not replace income.

[jIM_Ohio]

Call Me When The Markets are "Good".... I have a $1.2 Million Home which is paid for, the 1st two years of college are covered, plus the $750K.. seeing how i just turned 40 the thought of retiring on a $30-40K a year income , well is rather hard to swallow.

This tells us a little more about you. I was not suggesting you could retire on 750k, but I think you are closer to retirement than you think.

If you spend 80k per year, that is $2 M needed to retire at 4% withdraw rate
If you spend 60k per year, that is $1.5 M needed to retire at 4% withdraw rate.

**keep in mind taxes need to be paid out of that 80k or 60k, where as taxes now might be paid from a different source (like a paycheck).**

The question is can you cut expenses down to 80k or 60k? Depending on how you measure expenses, you might already be at this level...

Learn a little about taxes to make sure you calculate taxes owed correctly...

consider 100k gross income
2010 tax tables (assuming married filing jointly)
Reference Room
Is about $17,500 on 100k (if 100k was taxable income)

**this would imply you can only spend $82,500 of the 100k income anyway**

If you factor in $11,400 std deduction, 4 exemptions at $3650 each (assuming you have 2 kids- this is a guess) $14,600+$11,400=$26,000

so 100k-26k=74k
74k is taxable income...
That is about $11,000 taxes paid on 100k gross

If you cannot cut expenses, you need to create time for the 750k to reach the portfolio value you desire. Most of your math at this point is two fold

1) Budget now and budget for retirement (line items for retirement expenses need to include taxes and cars even if you have no car payments now, in next 30 years you will need to replace a car once or twice)

2) Investment risks and returns for a short period of time for portfolio to reach critical mass


Take expenses and multiply by 25 (or divide expenses by 4%- same thing)- that is your target. The 750k needs to grow to that target.