Time line and when to start switching

**jIM_Ohio** · 03-30-2009, 01:15 PM

You should shift assets based on your RISK not the market performance. At some point based on size, you might also switch assets to less volatile things, but this should be done once you have achieved "critical mass".

Here is how I calculate critical mass.

List your annual expenses. If you expect retirement to be drastically different, estimate the retirement expenses, otherwise use current expenses.

For example we spend 60k per year.

Multiply the expenses by 25.

In my example 25*60k= $1.5 Million

List your desired retirement age

For example, I want to retire no later than 60 years old.

List the age and the expense multiplier next to each other

Age 60 $1.5 M

Subtract 8 from the age and divide the total amount in half.

For example age 52 $750k
repeat
age 44 $375k
age 36 $182.5k
age 28 $91k

List all the age/amount groupings in a single table

age 60 $1.5 M
age 52 $750k
age 44 $375k
age 36 $182k
age 28 $91k

One of those is your goal to achieve critical mass (once you hit this number, you will likely look at retirement investing MUCH different than you do now).

For example I am 36 right now and have $182k invested. My actual goal is to retire early (at 53) so my table is off (I need $375k at age 36, not 182k). I am "on schedule" for normal retirement and about 8 years behind by "early retirement" standard. Once I hit my early retirement benchmark (either $375k at age 36 or $750k by age 44), new money will be invested more conservatively than the way it is invested now.

I lost 40%+ in markets last year. Not selling, just keep buying, because I have a goal and a process to get there.

**disneysteve** · 03-30-2009, 01:37 PM

Originally posted by jIM_Ohio View Post

Once I hit my early retirement benchmark (either $375k at age 36 or $750k by age 44), new money will be invested more conservatively than the way it is invested now.

Jim, I knew you'd post your formula so I didn't bother responding. I have one question, though.

Are you saying that if you are on track by your formula at age 44, you would change your allocation at that point? Isn't the formula based on maintaining a certain return through retirement age? If you get more conservative at 44, wouldn't you fall short of your goal for age 60?

**jIM_Ohio** · 03-30-2009, 04:08 PM

Originally posted by disneysteve View Post

Jim, I knew you'd post your formula so I didn't bother responding. I have one question, though.

Are you saying that if you are on track by your formula at age 44, you would change your allocation at that point? Isn't the formula based on maintaining a certain return through retirement age? If you get more conservative at 44, wouldn't you fall short of your goal for age 60?

I might start shifting my allocation based on deposits (not sell existing assets).

The above assumes 9% return, so in order to get that, I assume an 80-20 portfolio of stocks and bonds. As long as that original investment is 80-20, new deposits could be 100% cash, 100% bonds, 50-50, or 33-33-33 (stocks-bonds-cash) to make sure new deposits are more stable.

**m3racer** · 03-30-2009, 04:16 PM

See Suze Orman's recs.

**disneysteve** · 03-30-2009, 04:26 PM

Originally posted by jIM_Ohio View Post

The above assumes 9% return

But does it assume 9% just on the existing money or also with ongoing contributions?

**jIM_Ohio** · 03-30-2009, 05:04 PM

Originally posted by disneysteve View Post

But does it assume 9% just on the existing money or also with ongoing contributions?

9% on existing money only (because if that keeps doubling the goal will be reached). As long as new money keeps pace with inflation, the overall goal will be reached faster with new money added.

That chart ("critical mass") is my indication when I should start diversifying because the goal will be met, and met with predictable timeframe.

once a person hits critical mass with retirement savings, they should analyze short term investments with more scutiny (based on guaranteed rates of return).
once a person hits critical mass with retirement savings, they should analyze their mortgage and determine an early payoff schedule before the retirement goal is reached.
once a person hits critical mass with retirement savings, they should analyze taxes and see what taxable/tax shelters are there and make sure they have enough taxable investments in addition to tax deferred investments.
once a person hits critical mass with retirement savings, they should analyze college savings plans and see what can be done to improve them
once a person hits critical mass with retirement savings, they should analyze expenses and see if they are increasing at same rate as inflation (calculate personal inflation)- this will help with withdraw strategies and knowing if the actual goal is realistic or too low/high.

**woodie96** · 03-31-2009, 12:16 PM

hmm...looks like my critical mass wont be met until after I die....J/K....
but going to have to be on the aggressive side early...and then filter back...
thanks for the input

**jIM_Ohio** · 03-31-2009, 12:42 PM

Originally posted by woodie96 View Post

hmm...looks like my critical mass wont be met until after I die....J/K....
but going to have to be on the aggressive side early...and then filter back...
thanks for the input

Just using age to decide risk is short sighted- if you don't have enough money to retire on, or the plan is not "on track" you can be cutting your legs off in the middle of the race.

If you are "behind" in saving and contributing, I might suggest using more detailed calculations and calculators which account for new contributions more than my crude way above (above is a check point for me, not the only calculation I do).

Time line and when to start switching