Retirement Planning: Reducing Return Target and Risk?

[gzz]

Returns have been high in the past few decades because of rapid technological progress and growth in the skilled working-age population.

Tech progress is slowing however. Not in every field, but in most of them. And one by one, the working age population in developed countries has stopped growing and is now in reverse. The main exception are those with high levels of immigration, however those nations are either importing people with lower skill levels than the shrinking native population and cannibalizing the skilled population from other low-growth nations (eg., China to USA, Slovakia to Germany).

Another factor that led to strong returns in the recent past was the “great moderation” where returns became more predictable and with lower and lower inflation and market interest rates. This made long-lived assets like real estate more valuable. That trend isn’t done yet, put it’s in its fourth quarter.

[scaredyclassic]

[quote=gzz]Returns have been high in the past few decades because of rapid technological progress and growth in the skilled working-age population.

Tech progress is slowing however. Not in every field, but in most of them. And one by one, the working age population in developed countries has stopped growing and is now in reverse. The main exception are those with high levels of immigration, however those nations are either importing people with lower skill levels than the shrinking native population and cannibalizing the skilled population from other low-growth nations (eg., China to USA, Slovakia to Germany).

Another factor that led to strong returns in the recent past was the “great moderation” where returns became more predictable and with lower and lower inflation and market interest rates. This made long-lived assets like real estate more valuable. That trend isn’t done yet, put it’s in its fourth quarter.[/quote]

I’m in the 4th quarter myself

[ucodegen]

[quote=gzz][quote=scaredyclassic]Inflation adjusted?[/quote]

No. But expected inflation is very low too.[/quote]
Here is a historical graph.
https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi

Plot the 2% line through the graph.

[ucodegen]

[quote=gzz]ucodegen, using long term US stock market returns has serious survivorship bias issues.

How did Russian stocks do from 1871? Farmland in Poland? Confederate and Third Reich bonds?
[/quote]
It looks like you didn’t read what I referenced in the FIRE group simulation using historical data. You set a choice of investment selection categories and run a historical regression on how those choices would pan out over time.

[quote=gzz]To put it another way, any asset class we have long term historical data on is cherry-picked and better than average, simply because so many asset classes had drastically negative, -100% returns.
[/quote]
Incorrect, only cherry picked asset classes have had -100% returns. Index funds are using large groups that are averaged together. Again, on the ref I had for FIRE and the sim, take a look at what type of asset classes. You can also change inputs and run against multiple simultaneous scenarios.

[quote=gzz]
What number to use then?

In my view, it is mistaken and often hubris to assume one’s investments will do better than treasuries. So about 2%.[/quote]
You should have lead with this. That said, realize that one of the more conservative and yet successful investors is still primarily in stock, less than 15% bonds. The way I look at it is that I am buying part of a business with stock. With bonds – you are buying someone’s debt. You need to make sure that they have means to pay off debt from earnings and not inflate it away(in the case of governments). In the case of corporate debt, it gets paid back from revenue generated by the business and I prefer having the business. The only advantage in having corp bonds would be if the business goes T-U. In that case you have ‘almost’ first order of picking over the bones of that business.

[ucodegen]

[quote=Coronita]I am looking at one of my Vanguard accounts I had since 2002. I think it’s the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%…But there were years that it looked awful, like a deep downturn.
[/quote]
I ran a series on S&P 500 returns from 2000 (because that was a group of 3 really bad years 2000-2002) with data from https://www.macrotrends.net/2526/sp-500-historical-annual-returns and got 5.25% annual – not including dividends received from index during that time. If I eliminate the 3 bad years and go from 2003 to 2021 I get 9.00%
[quote=Coronita]
Personally, that’s what I’m trying to avoid. Those deep downturns don’t matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn.
[/quote]
Looking at the recent data, recovery from 2000-2002 occurred in 2007, but there was a bad downturn in 2008.. but again recovered in early 2013. This does not take into effect dividends from S&P 500 companies.
[quote=Coronita]
I’ve been talking a lot more with people who are seriously considering early retirement. just thinking….

I guess it’s part of the ongoing The Great Resignation….lol…[/quote]
Resignation to ones fate?? Anyway, I was laid off in 2008, found I was getting seriously low-balled on job offers and then family issues came up. I ended up living off of investment proceeds. When family issues eased, I found that I was making more on my investments than any wage being offered… so I guess I could say I officially Retired with Resignation.. I liked the work, but management tends to drive me nuts. I think I have experienced too many pointy haired bosses (one of them even looked the part)

[ltsddd]

[quote=Coronita]
The is considerations to retiring early. Like soon.
[/quote]

If that’s the case. I highly recommend you start budgeting as if you’re already retired. If you think you’ll need $100K to live in retirement then $100K should be your budget for the next few years. This “dry-run” will give you more clarity.

I personally have been doing this for the last few years and the numbers have been significantly smaller than I originally thought (I kept adjusting it downward).

[quote=Coronita]
Passive income of $120k/year. Imho, it’s going to be tight, but assuming early retirement, doable to live off of the passive income.
[/quote]

I assume the passive income you mentioned is primarily from your rentals. Here’s the question for you. How do you plan to spend your time in retirement? Do you still plan to dedicate the same amount of your time to the management and upkeep your rentals?

My views about rentals have changed drastically over the last few years as I think ahead towards my own retirement. I plan to spend more time travelling and being on the road and having to deal with rentals doesn’t seem to be compatible with that plan. More importantly, I am not as thrilled or gung-ho about fixing house problems as I did 10 years ago.

[quote=Coronita]
But the question is, what about the the retirement accounts. Assuming early retirement, they can be touched after 59 1/2 years, which would be 13 years away, instead of 19. So maybe bank that at 4% with a 50/50% split between equity and some income/dividend/fixed income basket in case things go sour for the next 10 years, and there’s maybe 9 more years after that to recover.
[/quote]

Do you need to tap into your retirement accounts to finance your retirement? If you don’t then why change your investment style? If your portfolio has been working fine for you the last 20 years, it should be expected to be working, more or less, the same way in the next 20 years. Nevertheless, I would ask the same question as I did with the rentals – what do you plan to do in your retirement? Do you still want to spend the same amount of time reading up on stocks and mutual funds, etc..?

In retirement I don’t want to have to worry about growing my wealth as much or anymore. Of the many strategies I read on how to invest safely during your retirement, I like the bucket of money (or a variation of it) the best. Just put it on auto-pilot by splitting your $ into 3 buckets and rebalance once a year and not worry about it.

FInally, congratulations on being financially independent.

[Coronita]

[quote=ucodegen][quote=Coronita]I am looking at one of my Vanguard accounts I had since 2002. I think it’s the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%…But there were years that it looked awful, like a deep downturn.
[/quote]
I ran a series on S&P 500 returns from 2000 (because that was a group of 3 really bad years 2000-2002) with data from https://www.macrotrends.net/2526/sp-500-historical-annual-returns and got 5.25% annual – not including dividends received from index during that time. If I eliminate the 3 bad years and go from 2003 to 2021 I get 9.00%
[quote=Coronita]
Personally, that’s what I’m trying to avoid. Those deep downturns don’t matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn.
[/quote]
Looking at the recent data, recovery from 2000-2002 occurred in 2007, but there was a bad downturn in 2008.. but again recovered in early 2013. This does not take into effect dividends from S&P 500 companies.
[quote=Coronita]
I’ve been talking a lot more with people who are seriously considering early retirement. just thinking….

I guess it’s part of the ongoing The Great Resignation….lol…[/quote]
Resignation to ones fate?? Anyway, I was laid off in 2008, found I was getting seriously low-balled on job offers and then family issues came up. I ended up living off of investment proceeds. When family issues eased, I found that I was making more on my investments than any wage being offered… so I guess I could say I officially Retired with Resignation.. I liked the work, but management tends to drive me nuts. I think I have experienced too many pointy haired bosses (one of them even looked the part)[/quote]

I appreciate you sharing this. Quick question. Given how in demand tech workers are these days, have you considered re-entering the workforce as a contractor? Seems like the barrier to entry is pretty low and the numbers are looking really good. If all else on your own terms. Or do you hate bureaucracy that much ? 🙂

[Coronita]

[quote=ltsddd]

Do you need to tap into your retirement accounts to finance your retirement? If you don’t then why change your investment style? If your portfolio has been working fine for you the last 20 years, it should be expected to be working, more or less, the same way in the next 20 years. Nevertheless, I would ask the same question as I did with the rentals – what do you plan to do in your retirement? Do you still want to spend the same amount of time reading up on stocks and mutual funds, etc..?

In retirement I don’t want to have to worry about growing my wealth as much or anymore. Of the many strategies I read on how to invest safely during your retirement, I like the bucket of money (or a variation of it) the best. Just put it on auto-pilot by splitting your $ into 3 buckets and rebalance once a year and not worry about it.

FInally, congratulations on being financially independent.[/quote]

You know, you got a good point. I think I’m playing it too safe for my retirement accounts and since I can’t touch it for at least 12 years, I should go back in… Thanks.

[gzz]

Curious why you need 120k in retirement with no mortgage on your primary.

25k for medical, 10k for cars is pretty rich, 5k on average for for home improvements.

That leaves 80k a year or $219/day. Easy to spend that while traveling in first world areas. $250/day of lux travel times 100 days a year comes to 25k. first class flights, 5k a year.

That then leaves 50k a year.

Your passive income likely will increase over time, even by my pessimistic assumptions for long term returns. Your medical expense will drop when you hit 65 and get medicare, and you will start getting I assume about 25k a year in social security, plus whatever your spouse gets.

I think both you and escoguy are making up reasons to delay retirement and continue working. The 120k requirement for you, the “let me deduct 30% from the value of my primary assets” for him.

I don’t mean to be judgmental with this observation, early retirement when you’re fit and have something to contribute is at least slightly immoral, so I see it as you all as inventing reasons that don’t seem to hold up to scrutiny to do the right thing morally.

[flyer]

Even though we continue to generate passive income from many sources, we made these decisions in our 40’s, and had planned for far more than we thought we would ever need from all income sources. I can tell you, if you believe you will live into your 90’s, and want to live well, without concern or restriction, under all possible economic conditions, and not depending on government assistance, I feel it would be wise to overestimate your financial needs in “retirement,” early or otherwise, by a long shot.

[Coronita]

[quote=gzz]Curious why you need 120k in retirement with no mortgage on your primary.

25k for medical, 10k for cars is pretty rich, 5k on average for for home improvements.

That leaves 80k a year or $219/day. Easy to spend that while traveling in first world areas. $250/day of lux travel times 100 days a year comes to 25k. first class flights, 5k a year.

That then leaves 50k a year.

Your passive income likely will increase over time, even by my pessimistic assumptions for long term returns. Your medical expense will drop when you hit 65 and get medicare, and you will start getting I assume about 25k a year in social security, plus whatever your spouse gets.

I think both you and escoguy are making up reasons to delay retirement and continue working. The 120k requirement for you, the “let me deduct 30% from the value of my primary assets” for him.

I don’t mean to be judgmental with this observation, early retirement when you’re fit and have something to contribute is at least slightly immoral, so I see it as you all as inventing reasons that don’t seem to hold up to scrutiny to do the right thing morally.[/quote]

25k for medical is conservative if you actually have health issues. Also, what if your kid has the same health issues?

And no my medical expenses will not be dropping. My baseline medical expenditures are annually is
1. 1 abdomen MRI annually
2. 1 Upper endoscopy (camera down the throat)
3. 1 Lower endoscopy (camera up the ass)
4. 1 Capsule Endoscopy (camera in a pill that goes through small intestines)
5. 1 Ultrasound for thyroid
6. 1 trip to the ER probably every 2 years to clear random bowel obstructions that seem to happen any time.

MRI is around $15k if not covered by insurance
Endoscopies 2-4 is around $30k if not covered by insurance
Ultrasound is around $4-5k if not covered by insurance
ER visit depends on length, but last time 1 day stay was around $25k.

Don’t even get me started with dental… Fortunately, my teeth are decent. But do you folks have any idea how expensive dental is if you actually need major work done? Look up the prices for a root canal, tooth extraction, oral surgery, crown, or implant. Implants are around $5000 at least, and most dental plan have a cap at $2000-3000/year.

You will not get that much for social security if you retire early. And unless they fix the medicare fund, that might be depleted in 15 years.

Early retirement doesn’t mean sitting on your ass all day rubbing it in people’s face that you were born with money, like some people do *cough* high altitude piggington handle person *cough*. Early retirement means, being able to do what you want to do more under your terms and or maybe spending more time doing like teaching stem class to kids…

I think a lot of people fear losing their job because of the financial loss and not making ends meet. Me? Financial loss from job loss never worried me… I’m fearful of losing my job, because I would take that as an insult that I had to leave under their terms not mine and not having been able to give the last word, middle finger to an ahole boss…

As far as me being fit… I had my fair share of health crisis when I was in my 30ies. Some of it was career ending in some regards, and some that took my life down different paths. I never skipped a beat on working, earning, building even when I was in the hospital. I already paid my health concerns due. Which is also why covid doesn’t really scare me. If it’s your time, it’s your time. Doesnt mean if you want to live, you can be totally irresponsible. But there’s a point when you do what you can and let the cards fall however the fall.

Covid should be an eye opener for folks. Some easily get it, even with a vaccine. Doesn’t matter what financial background, race, religion, intelligence, etc. Some that get it, it’s no big deal. Others, have bad luck and get screwed over by it. I’m not surprised some people are re-evaluating what’s important in life ….

[sdrealtor]

Oh to be a healthy single 30 something lifelong bachelor

[flyer]

Another interesting thing to do in “retirement” is to help fund other people’s dreams. There are a lot of people who don’t make the cut on Shark Tank, or with major film studios, etc., but still have products and intellectual properties with great potential in the global marketplace, and it’s an exciting venture to partner with them to bring their ideas to fruition. We’ve been involved in these type of projects for quite awhile, and it’s something you can continue to do indefinitely. Definitely keeps life interesting.

[Coronita]

uh huh

[an]

[quote=flyer]Another interesting thing to do in “retirement” is to help fund other people’s dreams. There are a lot of people who don’t make the cut on Shark Tank, or with major film studios, etc., but still have products and intellectual properties with great potential in the global marketplace, and it’s an exciting venture to partner with them to bring their ideas to fruition. We’ve been involved in these type of projects for quite awhile, and it’s something you can continue to do indefinitely. Definitely keeps life interesting.[/quote]Great idea… Now, I just need to find someone to give me $10m so I can start doing this.

Wait, I think that’s too small, maybe $50-100m?

[Author]

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