Retirement

[Redbug]

I have less than 3 years before I can retire. I have been invested in Vanguard and have a 401, house paid off, maxing out the ira's etc. Besides these forums, I also keep up on the Early-Retirement forums. That's the best advise I can give...

FIRE and Money - Early Retirement & Financial Independence Community
And don't forget to look at all the other ones...
Community Forums - Early Retirement & Financial Independence Community

 

[MossRoad]

I've read that folks nearing retirement, & in retirement, should hold less & less stocks, and more & more bonds, to help avoid such drastic drops. I think the idea is that the older you get the less you can afford a huge portfolio drop since you're less & less able to go back to work.

Yup. Just don't make the mistake of going too conservative too early or you may outlive your money. It is a balancing act for sure. That was my original point.

 

[ultrarunner]

Reading the posts... I can see my family background is very conservative financially.

The Great Depressions was very real for my Grandparents and Dad... they made it real for me by never missing an opportunity to point out the value of saving and living within your means...

My Grandmother would point out homes of people that had lost everything in the Depression by risky investments and made it very real for me as a kid... then came the 70's oil shortage... the family car business went months without selling a single car... things were looking very grim but years of savings made sure the necessities were covered.

My parents and Grandparents avoided stocks like the plague... Mom and Dad never owned any ever. In high school we had a project to pick a stock and follow it... we even had the opportunity to buy through a local broker... I did and have nothing to show for my $100... one company went bankrupt because of fraud in government contracts and another old American company, Coleman.... lost just about all it's value.

Mom's side of the family lost what little money they had to horrendous inflation where it would take a wheel barrow of money to buy a grocery bag of food and then the currency became worthless... her father had sold part of the farm to a local business man taking payments for 5 years... the night before the currency collapse, the business man came to the farm and paid off the debt in full... the next banking day the money was worthless.

No one ever retired in my family and I never really see it in the cards for myself... I did go to work in Health Care with all the benefits that came with it... my parents were astounded and cautious... paid vacation, sick time, 401k, Company Match, Profit Sharing, Employee Stock Plan, Sabbaticals and excellent Health Insurance... almost none of the above exists in 2011... makes me wonder if Dad and my Grandparents distrust was well founded after all.

My eyes glaze over listening to the 401k presentations... same old song of looking out for your future while the fund takes 2% every year...

My plan is to be debt free with income property... whatever comes my way from Social Security or my 401k is extra... Restoring Antique cars as a hobby also helps since my hobby pays for itself...

(On a side note... anyone notice all the fees being attached to anything financial??? I think my Bank has sent out 3 revised fee schedules in 4 months.)

Nothing against those that have done well in the markets... I'm either not smart enough or lucky enough to expect it will work for me...

 

[tglass]

Anyone thought about medical cost? If I retire before age 65 there will be no help at all. A few years ago I would not consider this an issue as my health was better than average. Today, it is quite a different story. Is there any good and cheap medical ins. w/prescription benefits anyone has seen for senior citizens? There should be, we have paid in all these years and haven't lived off the government all these years of collected inusrance.
When you retire, how are you going to pay for the ever increasement of medical insurance and especially the cost of prescriptions?

 

[Travelover]

..........
Nothing against those that have done well in the markets... I'm either not smart enough or lucky enough to expect it will work for me...

I've never been lucky, but I am persistent. I started investing in index funds in the mid 80's and by 2000 I had enough to retire. I continued to work until I was 54 in 2007.

One thing that worked for me was to diversify - not put all my money on one stock, but spread it around in a fund. Also never market timed - just kept adding year in and year out. Worst setback was 2009, but I still kept buying and I'm more than flush now.

YMMV

 

[ultrarunner]

I've never been lucky, but I am persistent. I started investing in index funds in the mid 80's and by 2000 I had enough to retire. I continued to work until I was 54 in 2007.

One thing that worked for me was to diversify - not put all my money on one stock, but spread it around in a fund. Also never market timed - just kept adding year in and year out. Worst setback was 2009, but I still kept buying and I'm more than flush now.

YMMV

I opened a SCHWAB account in 1980... Charles Schwab was a regular where my brother worked and mentioned to my brother the benefits of his new Schwab 1 account... still have the account, have not traded in years.

Here's how my original retirement plan started:

In 1982, I started investing in rental properties... I bought my first while still in school... just couldn't see paying money in rent... I had been working paying into Social Security since age 12 and had money for a down payment... had zero chance of getting a loan.

At that time, lenders wanted 3 years in the same line of work, 2 years on the same job, living expenses of 6 months in the bank, 20% down plus closing costs, meet credit requirements, property had to appraise and have a clear structural pest control report... in short, there was no way I was qualifying because working 3 part-time jobs and going to school wasn't going to cut it.

I started looking around and found a home for $30k in the Oakland CA... I went to look at it and it was in the condemnation process and still occupied... utilities were still on.

Home was real bad... I told the agent I was not interested just needed too much work... I could see daylight in the back bedroom from years of leaking roof, the bathroom floor had rotted through and you had to either step on joists or the dirt.

Agent was persistent... finally I said it's not worth more than $11,000 to $12,000 dollars... she said is that your CASH offer? I said what's the point since it was listed for 30k... she wrote up the offer for $11,500 cash with no contingencies and called my later that day to congratulate me on buying my first home...

Family was in shock... step-grandfather came down to take a look and told my grandmother he didn't have the heart to tell me I should just walk away because I was so excited at being a home owner and paying CASH for my house at 21/22

Anyway, I moved in and spent the better part of a year fixing the place up as I could afford... after a year, I was able to get a loan on it and bought my next property and kept house number 1 as a rental... it has been rented ever since...

Back in 2006/07 my net worth on paper was unreal... of course that all changed now... that 11,500 home was up to $250k and now is closer to $85k... property in some areas fell by 80% from peek.

Unlike my mutual funds... my rents have remained constant... I did not raise them in the boom years and some of my tenants have been with me more than 20 years...

I think it is the peasant/farmer stock in me that inspired me to own land... friends have done quite well in stocks, most have lost a bundle and our totally out... especially those that quit work and became day traders...

My Father's and Grandparent's happiest day was the day I went to work for the Hospital... they said I can finally use my degree and have a REAL job with medical and great retirement... something they never had being self-employed.

In retrospect... there have been some good things working for a company... I do believe I would be much farther ahead had I stayed with my original plan to buying and renovating income property...

 

[Travelover]

..........
In retrospect... there have been some good things working for a company... I do believe I would be much farther ahead had I stayed with my original plan to buying and renovating income property...

You have certainly been a go-getter. I never had the stomach to be a landlord after being a renter and seeing the shenanigans fellow renters pulled on the landlords. :confused2:

Sounds like you have done well in the end, and that's all that counts.

 

[ultrarunner]

You have certainly been a go-getter. I never had the stomach to be a landlord after being a renter and seeing the shenanigans fellow renters pulled on the landlords. :confused2:

Sounds like you have done well in the end, and that's all that counts.

Like everything else... rental property has changed dramatically in the last few years... at least for residential rentals.

My entire rental agreement started as a single page plus one signed condition and inventory page. Today, it is 28 pages.... 25 of which are government mandated... anything from lead, asbestos, child molesters, rent board, rent control, city smoking ordinance, etc...

Never thought about being old enough to wax nostalgic about the good old days...

My original plan was law enforcement... 12 of my buddies went right in from the Junior College... I read applicants with a 4 year degree started with a 4% pay increase from day one... in the 2 extra years it took to get my degree... the entire economy was in the dumps and cities here were letting people go...

Fast forward 30 years and almost all the guys are quite happy enjoying their retirements... none under a 100k... still boggles my mind...

 

[CurlyDave]

I've read that folks nearing retirement, & in retirement, should hold less & less stocks, and more & more bonds, to help avoid such drastic drops. I think the idea is that the older you get the less you can afford a huge portfolio drop since you're less & less able to go back to work.

There are a couple of ways to look at this.

If you are getting any kind of pension or SS benefits, advanced retirement and/or financial planners will frequently treat these as "phantom" bonds. I.e. you consider yourself as having fixed income bonds which would produce the same income as your pension or SS, possibly with a discount for the non-reliability of pensions.

In the case of myself and DW, who both get SS and who both get pensions the amount of these phantom bonds is very large. Large enough that we can't possibly hold enough stocks (not enough money) to get too much in stocks in our asset allocation.

One of the ways I interview financial planners is to ask them about phantom bonds. If they haven't heard of them, go somewhere else. If they have heard of them, but don't use them in their asset allocation models ask "why not".

It seems to me that a pension which produces $1000 per year income is very much the same as a bond which produces the same income. Oh, you can't sell the pension and use all the money at once in an emergency, but no one can swindle you out of future pension payments, the way they can swindle you out of a bond.

Anyway, the part of our portfolio that we can control is 100% invested in stocks or real estate.

 

[dmccarty]

Just throwing this out since what Curly said made it pop into my head....

There is a rule or maybe guideline is a better term, that you should subtract your age from 100. The result is the percentage you should have invested in stock. So if you are 20, 40, or 60 years old you be 80, 60, 40 percent invested in stock. The other investments should be in less risky investments.

You want some money in stock later in life to cover inflation.

You can use a larger number if one does not like risk or a lower number if risk is ok.

Later,
Dan

 

[Travelover]

There are a couple of ways to look at this.

If you are getting any kind of pension or SS benefits, advanced retirement and/or financial planners will frequently treat these as "phantom" bonds. I.e. you consider yourself as having fixed income bonds which would produce the same income as your pension or SS, possibly with a discount for the non-reliability of pensions.
.........

This is a valid point and one that is argued endlessly on financial forums. Factors to consider:

How secure is your pension provider? Although the Pension Benefit Guaranty Corporation backs pensions, it is not like FDIC. If you are an early retiree you don't necessarily get all your pension and even if 65 years old, there are caps on the total. Airline pilots of failed airlines and more recently, Delphi employees got a stark reminder of this. The PBGC also does not cover health care benefits (and is nearly broke).

A second factor is your psychological reaction of a sudden market drop. If you are prone to freak out and sell your stocks, you may get wiped out. Bonds can lose value if interest rates rise suddenly, but not nearly so dramatically and they continue to payout the same income.

So, the crux of the argument is why take any more risk than you absolutely need to, to satisfy your retirement needs?

That said, I have a pension and hold 30% bonds, which seems to be a sweet spot with respect to total returns over time, and risk. If my pension fails and the market has crashed, bonds give me 5 or more years to sit out a bad market.

 

[ultrarunner]

This is a valid point and one that is argued endlessly on financial forums. Factors to consider:

How secure is your pension provider? Although the Pension Benefit Guaranty Corporation backs pensions, it is not like FDIC. If you are an early retiree you don't necessarily get all your pension and even if 65 years old, there are caps on the total. Airline pilots of failed airlines and more recently, Delphi employees got a stark reminder of this. The PBGC also does not cover health care benefits (and is nearly broke).

A second factor is your psychological reaction of a sudden market drop. If you are prone to freak out and sell your stocks, you may get wiped out. Bonds can lose value if interest rates rise suddenly, but not nearly so dramatically and they continue to payout the same income.

So, the crux of the argument is why take any more risk than you absolutely need to, to satisfy your retirement needs?

That said, I have a pension and hold 30% bonds, which seems to be a sweet spot with respect to total returns over time, and risk. If my pension fails and the market has crashed, bonds give me 5 or more years to sit out a bad market.

My employer had a lot of money held in muni bonds and suffered a tremendous loss when Orange County went under... part of the problem was extra stress when interest rates started to rise. Several million dollars earmarked for Hospital expansion were affected.

Several of the Physicians also were heavy in these bonds as they were set to retires...

Whenever I hear bonds I think of what happened around me...

Orange County's financial disaster was the result of unauthorised trading activity by a man called Bob Citron. He ran the county's funds on an extremely leveraged basis to achieve higher returns. Indeed he had a very good track record and consistently produced, over his peers, on average 2% more returns for his investors, namely schools, special districts and the county itself.

In December 1994, Orange County revealed that its investment pool had suffered a loss of $1.6 billion. This was due to increasing interest rates courtesy of the Federal Reserve and resulted in the County going bankrupt.

 

[Travelover]

..........Whenever I hear bonds I think of what happened around me...........

Good point - I wasn't clear. When I say bonds, I mean a bond fund, like Vanguard Total Bond. It holds corporate, municipal and government bonds and is extremely diversified. So, if any single bond issue defaults, the loss is spread out over thousands of others.

 

[Transit]

You can bad mouth muni bonds, how ever I have done well with them in the past when interest rates were hi and going up, for me it was a license to steal. It is a mater of timing, most people do not understand how the bound market works.

You go and buy a XYZ $1,000 bound due in ten years paying 5%., that is $50 a year for 10 years and at the end of ten years you get your $1,000 back. You have a $500 return on your investment at the end of 10 years. That 5% interest is called the CUPON rate and never changes.

A week after you buy the XYZ bounds the interest rates go to 10%. Now you are getting a 5% return in a 10% world. What happens to your bonds?

A] The value of the XYZ bounds had dropped. How much? Paying 5% in a 10% world, 5/10 = 1/2, therefore the XYZ bounds are worth $500 on the open market. Have you had a loss? Maybe yes, maybe no, it all depends on what you do. Yes, there is a PAPER loss of $500. As long as you hang on to the bounds for the ten years you will get the $500 in interest and your original $1,000 back.

B] You must sell the XYZ bounds and have a $500 loss because of the market value.

C] You wish to buy bounds in the 10% world. You may find a sale that needs to unload the XYZ bounds or you may buy a new issue ABC bound paying 10%. Both the XYZ and the ABC bounds will pay the same amount of interest for the money you invest. ABC pays 10% on $1,000 = $100. The XYZ bounds pay 5% on the market price of $500 = $50, buy two XYZ units for $1,000 and you get a return of $100.

Which would I buy, ABC or XYZ, both pay the same?

My choice would be the XYZ because at some time, say a year later interest rates go to 7%. Why would anyone pay 10% in a 7% world, the ABC bounds are paid off, you get the $1,000 investment back and all the interest to that date.
However the XYZ bounds are still paying you 10% on the $500 you invested and that is in a 7% world. You may wish to hold the XYZ bounds for their 10 year life. You get all the interest for those years, $500 and the original face value of each bound of $1,000. You have a capital gain of $500 for each bound at the end of 10 years, taxable.

Now that is an over simplification but it should give you an idea of how things work.

Now as bad as a city default is they must pay on the bounds or they will never, never be able to issue bounds in the future. They may not be able to meet the yearly obligations but the interest meter is running and if you can wait it could be a good deal. That is what I did with NYC Mac bounds, bought them at a big discount and put them in a safty deposit box for years. Lots of $$$ on the payoff.

 

[beppington]

I use Vanguard's Short-Term Bond Index Fund (VMMXX). The book I posted about above states something along the lines of short-term bonds having historically had the poorest correlation to stocks. Which is just what I want.

 

[SPYDERLK]

You can bad mouth muni bonds, how ever I have done well with them in the past when interest rates were hi and going up, for me it was a license to steal. It is a mater of timing, most people do not understand how the bound market works.

You go and buy a XYZ $1,000 bound due in ten years paying 5%., that is $50 a year for 10 years and at the end of ten years you get your $1,000 back. You have a $500 return on your investment at the end of 10 years. That 5% interest is called the CUPON rate and never changes.

A week after you buy the XYZ bounds the interest rates go to 10%. Now you are getting a 5% return in a 10% world. What happens to your bonds?

A] The value of the XYZ bounds had dropped. How much? Paying 5% in a 10% world, 5/10 = 1/2, therefore the XYZ bounds are worth $500 on the open market. Have you had a loss? Maybe yes, maybe no, it all depends on what you do. Yes, there is a PAPER loss of $500. As long as you hang on to the bounds for the ten years you will get the $500 in interest and your original $1,000 back.

B] You must sell the XYZ bounds and have a $500 loss because of the market value.

C] You wish to buy bounds in the 10% world. You may find a sale that needs to unload the XYZ bounds or you may buy a new issue ABC bound paying 10%. Both the XYZ and the ABC bounds will pay the same amount of interest for the money you invest.[[[ ABC pays 10% on $1,000 = $100. The XYZ bounds pay 5% on the market price of $500 = $50, buy two XYZ units for $1,000 and you get a return of $100.]]]

Which would I buy, ABC or XYZ, both pay the same?

My choice would be the XYZ because at some time, say a year later interest rates go to 7%. Why would anyone pay 10% in a 7% world, the ABC bounds are paid off, you get the $1,000 investment back and all the interest to that date.
However the XYZ bounds are still paying you 10% on the $500 you invested and that is in a 7% world. You may wish to hold the XYZ bounds for their 10 year life. You get all the interest for those years, $500 and the original face value of each bound of $1,000. You have a capital gain of $500 for each bound at the end of 10 years, taxable.

Now that is an over simplification but it should give you an idea of how things work.

Now as bad as a city default is they must pay on the bounds or they will never, never be able to issue bounds in the future. They may not be able to meet the yearly obligations but the interest meter is running and if you can wait it could be a good deal. That is what I did with NYC Mac bounds, bought them at a big discount and put them in a safty deposit box for years. Lots of $$$ on the payoff.

Looks like a math error?