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Critique my financial retirement plan

Discussion in 'Business, Investment and Economics' started by retirenow, Nov 8, 2014.

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  1. retirenow

    retirenow

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    Hello,

    I am 52 and considering early retirement.
    I would be grateful is some of the gurus on this forum could comment on my plan. It is based on investment in the markets (well, Super anyway).

    My financial plan is here:

    http://retirenowau.wordpress.com/2014/11/02/7/

    A warning - I am quite numerate/numbers focused!

    Thanks in advance!
     
  2. tech/a

    tech/a No Ordinary Duck

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    Wow
    Lot of work into that.
    You seem to have covered everything on a financial front.

    A couple of things most budding retirees overlook and it's got nothing to do with money.

    Boredom and self/community worth.
    Throw into that the loss of your partner or health in capacity and it becomes a genuine issue.

    You touched briefly on an issue that will become a big one for 90% of people and that's employability as we get older.
    A friend had a marriage breakdown at 60 SHE is left with barely enough to purchase a home.
    Well half of one. Retirement is not on the cards and employment while ok now ---- would be a problem if she lost her job.

    But great job.
    The sort of thoroughness you'd expect from a financial planner
    But you won't get it-----nothing in it for them!
     
  3. Habakkuk

    Habakkuk

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    This is most impressive for a financial plan. As tech/a said, you wouldn't get anything like that from a professional planner, no matter how much commission he makes.

    You have thoroughly covered every contingency.
    Maybe TOO thoroughly.
    Well, you wanted critiques from the gurus here. Tech/a certainly qualifies for that title. I don't, but I'll comment anyway.
    However, this will only cover a few superficial points.

    1) There are far too many assumptions in this plan. Projecting past performance 40 years into the future?
    Looking at US market returns since 1927 or something? What's the point?

    2) I think you should not count on getting the old age pension either. At best you will only qualify for a small part pension, because of the assets test. I can elaborate if necessary.

    3) I don't think you will have any financial worries if you live as modestly as you have indicated.
    The only thing you have not taken into account, unless I have missed it, is the possibility that you will have JUST too many assets to NOT qualify for the pension and therefore miss out on health cards and other useful extra benefits. I'm not sure of the details here, but they are apparently valuable. In other words, if your assets add up to 1.4 mil and the assets test limit is 1.35 mil, bad luck, no help from Centrelink. This might be a point to research.

    But more important than all the analysis and calculations, impressive as they are, is your actual future LIFE !
    Are you really saying that you're going to live in a cheap country (for < 6 years, mind you, to avoid capital gains tax on your home) just so that you can save some money?

    Have you really mapped out your life, the next 40 years no less, in every detail, exactly where you're going to live, how much you are going to spend, what you're going to do if this or that happens?
    You just follow your flowchart and everything will run like the post office? Surely not!

    As I said, I shouldn't give advice here, but I have a suggestion for you.
    You could next use your energy and talents to research a plan to put your $610K cash to work. I don't know if that is literally cash, probably not. But it would be VERY beneficial to make the most of it.
    I don't mean you should now develop the perfect diversified, balanced or growth portfolio that covers all the asset classes, geographically diversified, rebalanced every x months, etc., like some people here have done.
    On the contrary.
    But I shall leave it at that. This can be your next project.


    I'm only posting this now because no other guru apart from tech/a has responded.
     
  4. Pager

    Pager

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    That’s very impressive work, it’s also of great interest to me and a subject I have been investigating too as im about at the same stage as you and looking to wind down.

    My only real concern is about what you do once retired, going travelling and having the freedom to do what you want is great but its an area I think many overlook, I actually work with a guy who is 74, he doesn’t need to work he’s a millionaire by his own admission several times over and has retired twice only to come back a year or 2 later and has said to me time and again, think before you jump into retirement, if you can become financially secure before 55 then odds on you wont retire in the conventional way anyway.

    He does as much as any retiree I know and is always planning the next trip for him and his wife, I think he has a point when he says work keeps him alive and healthy both in body and mind.

    My only comment is maybe don’t count on the government pension in 15/20 years time, I may well be wrong but think by then it will only really be available to those with no assets, even the family home maybe a factor if its worth over a certain dollar amount, in all my calculations for semi retirement I assume I will never get a government pension, that way im covered and it’s a bonus if I do.


    Thanks for sharing though, brilliant work and very useful and informative for many others who post here im sure :xyxthumbs
     
  5. Julia

    Julia In Memoriam

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    As others have said, there's a lot of thought and work gone into that. I'm not sure, really, how necessary it is to get that sophisticated with planning.

    I'm not going to quote my own actual numbers, but 'retired' considerably before any so called retirement age (which really should be renamed "eligibility for government pension age". My calculations were much more simple and really just based on best likelihood and worst, ie assuming I was capable of generating from existing capital sufficient to live on even during market downturns.

    I wouldn't have the same confidence if my funds were in the hands of a public super organisation. I will never hand over the control of my capital to anyone. No one has your best interests as much at heart as you do yourself.
    Plenty of people who were ready to retire before the GFC are now back at work, reluctantly, having allowed their Super organisations to let their funds fall the 50% that the market dropped. Manage it yourself and you can have complete control over when to be in or out of the market.

    When you say you are 'planning to use cash to finance our living expenses until it runs out', do you mean exactly that? ie it reads as though you are simply planning to have cash in the bank at going rate and use up the capital to supply your living expenses.
    Surely you'd be better off investing that cash in , say, high yield shares where you'll generate around 7.5% grossed up yield and possibly capital gain as well?
    I might be quite misunderstanding what you mean about the 'cash'.

    I don't know that I'd be making such an assumption. What you're perhaps not considering is the likelihood of increased medical expenses/pharmaceuticals as you age. Do you have private health insurance? Even if you do, the gap payments are considerable.
    You might also need to allow for paid assistance as mobility and general capacity is reduced.

    I don't want to comment on your other assumptions, because my own initial premise is different from yours in that I anticipate always generating enough income from my capital to live on in such a way that the capital does not get used up.

    From a philosophical point of view, I'm ambivalent about this. I'm happy to be financially independent and not reliant on any taxpayer funded pension, but do get irritated at being declined the side benefits that go with that pension, viz reduction in council rates etc.

    It is what it is, but there's something off about those who have saved and invested, rather than spent everything they earned, being denied some 'reward' such as discounted rates.

    Tech makes a sound point about the need to be involved as we age. However, it doesn't have to be paid work. Lots of quite interesting voluntary options if you find leisure is not all it's cracked up to be.

    I admire your diligence. Hope when life inevitably doesn't fall into line with your extremely detailed expectations, you can cope with that too.
     
  6. herzy

    herzy

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    I agree with what others have said - for example, you're not worried you'll get bored if you spend years in Chiang Mai? It's a lovely place, but if you're used to travelling I imagine you'd get itchy feet fairly soon.

    Obviously you would know best, but it seems that your spending is extremely low. Factor in an extra flight to Europe and your costs will increase by 10%. I would probably factor in a higher cost of living/buffer.

    Like Julia, I think it's a bit of a shame to rely on the cash rate for 1/3 of your assets. Provided you conserve your capital, you could be getting much larger returns, which could help make you less vulnerable to changes in prices, pension schemes, or you spending more than anticipated.
     
  7. minwa

    minwa

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    Where you guys drawing this conclusion that he's going to live (not travel) in another (cheap) country ?

    From what I am understanding he writes "•Neither does living in a cheap country for a few years." and that he plans to live in Australia after travelling for 6 months at the house near the sea.



    Telling him to take the cash that was planned for retirement and invest in the market is pretty dangerous advice, no offence. If he is confident and experienced enough to generate a consistent return from the market he would've planned that in already. From his writing he does not have any experience actively managing shares before. To start this with capital planned for retirement is insanity in my books.

    Average stock market capital gains for past 100 years is 6.7%. Dividends and inflation cancels out. That's after many roaring bull markets factored in. Do you think right now the chances of a bull market is higher than a stagnant or bear market ? Even if you do, would you bet a big chunk of your retirement on it ?

    A rule that's often quoted for all beginners is "don't invest what you can't afford to lose". Now what would you to say to a beginner (sorry I am making assumptions but you have no market investment plan in your planso I am making this assumption) that's about to RETIRE as well ?
     
  8. Habakkuk

    Habakkuk

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    I'm drawing that conclusion after reading his blog.

    >>> Lastly I looked at living in a cheap country for x number of years prior to fully retiring in Australia. Living in somewhere like Chiang Mai would be fun, and would allow for some additional savings. You have to watch out here for capital gains tax to your property so should plan to be out no longer than 6 years. I assumed that we can live on $20K per year (+ rent from our property in Australia). This should finance quite a nice lifestyle. You can see the expense per year doesn’t really go up much as a consequence.



    Your other point about taking risks with his $650k is very valid. I should have thought of that.
     
  9. tech/a

    tech/a No Ordinary Duck

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    There will be more to this guy than meets the eyes.

    1 post directed to a thorough blog.

    Call me a skeptic.
     
  10. Wysiwyg

    Wysiwyg Everyone wants money

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    I thought there was a catch at first too but after seeing how much work they put into a future retirement path, I think it is unusual to see such detail and think it is highly presumptuous of what circumstances will be in the medium to distant future. "Life is what happens while you are busy making other plans".
     
  11. DeepState

    DeepState Multi-Strategy, Quant and Fundamental

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    Hi

    This was impressive. Well done indeed.

    Some suggestions and comments per your request:

    The expenditure reduction pattern that you have proposed broadly matches the data. Please note that you do not have principal payments on your home. Hence the figures you have used are actually a bit optimistic. That is, you're going to be spending more than assumed, all else equal.

    2014-11-08 21_52_00-https___www.jpmorganfunds.com_blobcontent_911_519_1323374581715_RI_Lifecycle.jpg

    You are planning on a trajectory on deterministic assumptions that will see your household move onto pension plus nominal (no disrespect) rental income at age 90. I do not know if the rental is adjusted for upkeep, vacancy... I'll just take it on face value. Your likelihood of living that long if you are the average male is 25%. Your wife, on the assumption that she is about 52 has a 53% chance of being alive when you (should) turn 90. The chances that at least one of you are alive at that age is 65%.

    Further, pension benefit design has downside skew for obvious reasons. The real value of pensions is going to creep downwards along with those of much of the western world.

    First, given you are smart and can contemplate early and healthy retirement, your life expectancy will vastly exceed the general population. Pump these figures up by around 10% or more to give you a rough idea. Also, as a married male, it is more likely that you will enjoy an extended lifespan beyond what I have suggested.

    You do not want to be planning on exhausting resources and essentially moving to what is officially termed 'permanent income poverty' if you can avoid it. You are far too optimistic on this assumption and need to make further allowance for the happy possibility that at least one of you will make it past 90 and do not want to be categorized as experiencing effective permanent income poverty or anything even remotely like it.

    You assume that your expenditure will essentially mirror that of the performance of your investments from year to year. This may be aggressive. Expenditure for most people is sticky, particularly if it relates to reducing it. Are you and your wife going to cancel your golf membership for a year with no idea when it is going to be reinstated, after playing for five years and getting a decent handicap? Are you not going to have dinner with friends who you used to see every fortnight? Are you going to starve your cat which you bought when times were better? You can't downgrade a lumpy purchase like a new car when the markets turn weak...what if the house needs repairs etc... expenditure may not effectively be as flexible as you imagine it will be.

    Allowance for these matters makes a very big difference to your financial pathway in the presence of investment volatility. This will have the greatest impact as you age and are less flexible in your expenditure for many reasons and have less assets to hand. You can do the modeling and feel the impact. It's not small.

    24% of elderly couples live in permanent income poverty. The figure is 34% for single males and 37% for single females. You do not want to be in this position, no matter how frugal or mathematically inclined you may be.

    As for long term planning, every plan is a basis for change. PPPPPP. Well done on considering the issues. We all know it won't turn out like this. I'm still seriously impressed.
     
  12. Julia

    Julia In Memoriam

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    Already answered.

    No offence taken. But with respect to his having not already planned a market return indicating he feels incompetent to do that, not necessarily. Lots of people, involved in their careers etc, simply do not realise how simple it is to gain sufficient market understanding to invest in solid stocks which have a multiple year track record of increasing profits, increasing dividends, low debt etc. Examples are the banks and everyday consumables, ie WOW, WES for Coles supermarkets, both having interests in other market sectors such as liquor, entertainment, now into banking etc.

    Your point is well made for the average retiree. But, given the attention to detail, the extraordinary level of research and presentation, I don't think the OP is the average retiree by any means.

    Managing your own funds means taking decisions on when to be in or out of the market. Absolutely not to whack all your capital into the market and leave it for ever. Good returns depend on active management.
    Anyone managing their own money who has only achieved your quoted 6.7% shouldn't be looking after their own money.
    If you were to assess average returns on SMSFs I'd be very surprised if most didn't achieve more than double that.

    Tech, your thoughts mirror what mine were after I thought about this for a while. I would not want to be doing anyone an injustice, but someone who so very clearly knows what he is doing, yet puts his plan up in minute and very sophisticated detail on a forum where he has never appeared before, asking for approval etc, is somewhat unusual.

    One of the people responding suggested the work was far superior to what would be offered by most financial planners (and presumably at considerable cost). That's probably true.
    People can draw their own conclusions.
     
  13. retirenow

    retirenow

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    Thanks for the comments and thanks for the compliments.

    Habakkuk - You are spot on. This is a "What if" analysis. i.e. I don't necessarily intend to retire early, go and live in Chiang Mai for 6 years, go on the pension early etc. It's more of an analysis of what would happen if I did do these things. If I did live in Asia for a while, I'd probably travel around the region. At the moment, I don't really know what I will be doing (hopefully something more interesting than working in an office for the next 10 years!).

    Yes, I am an amateur when it comes to investing. At the moment, I would not like to keep this money in case I have to involuntary retire to get me to 60+.

    Nope, 100% genuine. Only 1 post to protect my anonymity.
    Obviously some of you think I am a financial planner posing as an amateur. I am very flattered by this!!!! Especially since I have no financial planning experience and I whipped up the graphs in a day!


    Next year I am budgeting 40K. But after that, assuming I do retire, I have an average of about 89K per year to 70 if the markets perform as expected.

    Your probably right. But I am a bit of a maths geek and enjoy it!

    Maybe you are right, but I don't have the expertise at the moment to do personal super.

    Yes. Maybe I could look at putting some of it in more risky investments.
    I don't know. I've read elsewhere that as you age your expenses do go down, not withstanding increase medical expenses. I hope to do travel etc in my "younger" years.

    Expectations are not detailed at this stage. Purely a what if analysis. I really don't know what I will be doing in a couple of years from now. However, barring any cataclysmic events or health problems, on the basis of the blog, I think I will be reasonably well funded.

    Good points. I was looking at the financial side in the blog, but all the comments about non-financial side are probably more important.

    Good point. Maybe I could model that one as well :).

    Yes, unfortunately cannot get away from assumptions in order to do the modelling. The point of look at historical returns is to look at worst case historical performance. It is the basis of firecalc.

    Eventually I will be when assets run low.
     
  14. retirenow

    retirenow

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    Thanks DeepState,

    Good to know. Thanks for the info. I took a guess at this.


    I guess i have to draw the line somewhere on how long we will live? 90 seemed to be a reasonably conservative estimate given the average lifespans of Australians. I actually expect we will be spending less than I am budgeting given our past spending record so this might not be such an issue.

    Yes, I take your point. But, we normally don't have too many ongoing expenses and I imagine that we will be cutting back on travel if anything, which is easy to do. I guess I could include a minimum spend in the model i.e. we never spend less that $x. But in this case, we may run out of funds before 90. From the other point of view, I thought about including in the model a feature whereby you never spend more the $y no matter what the size of your financial assets. In this case, we may have excess funds at 90.

    Anyway, thanks for your intelligent comments!
     
  15. minwa

    minwa

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    Those level of research and presentation are great for retirement planning, yes. But they have absolutely no impact and no indication on investing/trading abilities. He is not an average retiree, correct, but he is an average trader/investor until proven otherwise, and average trader/investor loses money - fact.

    You'd be surprised how many people do not achive the market averages. You seem to have a overly positive outlook on most peoples investing abilities. Check out some facts, there is a resarch somewhere that examined millions of trading accounts over like 10 years and 85% of people lose money. I think the researcher's name was Odin or something like that. Most do not get anywhere near the average. Most can NOT get near the average as returns are SKEWED like income levels - top few % get the MAJORITY of return. Zero sum.

    You are probably beating the averages - well done but does not mean most people (and the inexperienced OP) are likely to do it.

    "Taking fees into account, SMSFs produced a return of 6.8 per cent over the eight years compared to 4.1 per cent for the rest of the superannuation industry."
    http://www.investordaily.com.au/35723-smsf-returns-raise-eyebrows

    SMSF slightly better than managed super, as expected, but nothing extraodinary. The people who CHOOSE to do SMSF are most likely experienced investors, which is NOT the case in OP. Simply choosing to go SMSF does not automatically mean you will generate market-beating returns.
     
  16. McLovin

    McLovin

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    That return is capital + income. I agree with you, I don't really believe that the average SMSF is doing much above whatever benchmark is used for that asset class . Also there are different rates of taxation at play in those stats. Also SMSF's are (iirc) more heavily weighted toward Australian equities than the super industry more broadly so a direct comparison is not really meaningful.

    The SMSF sector has become so large that it's extremely unlikely, even mathematically impossible, that on the whole it can generate returns 10%+ above the benchmark. For most people a cheap index fund is still best.:2twocents
     
  17. TPI

    TPI

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    Do you plan to take it all with you when you pass?

    ie. no plans to leave any inheritance to family or charitable organisations?

    If so, a strategy of gradually consuming all available capital rather than living off the income generated maybe ok, depending of course on how long you and your wife live.

    And on when another GFC-like event hits, potentially halving your super investment balance.
     
  18. Julia

    Julia In Memoriam

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    Minwa: OK, I'm probably wrong in crediting people with more ability than they demonstrate.
    Still just don't believe it's hard to learn to invest reasonably successfully. It must be more apathy and lack of interest than actual lack of capacity.

    And when I think about how gullible some people are in, e.g., being talked into setting up a SMSF for the purpose of borrowing for something silly, then you'd be right about that also. I'm very surprised, however, at that low return you quote for SMSFs as an average.

    And, back to my original suggestion, there would be nothing radical or particularly dangerous in the OP putting some at least of the cash that he plans to just use up on day to day living into solid stocks where the yield will be about double the interest rate at the bank. Probably some of the same stocks that he already has included in the public super a/c anyway, without the fees. It just seems counter-intuitive to me to use up capital for day to day stuff when it could be generating income that at least will more than cover inflation. Also, if in retirement this were to be done via an allocated pension, no tax is payable, the franking credit refunded in cash.
     
  19. qldfrog

    qldfrog

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    as many here, impressed by the owk done;
    not sure about the following points:
    expenses expectation are IMHO too low as a
    * lot of current reduced/subsidized costs (medical especially but also insurance cover etc ) will increase well above inflation figures
    I actually doubt your yearly expense will reduce that much as yopu get older, the average quoted are probably simply the result of older people not able to afford what they would like to do (and i am not talking extravagant european cruise here)
    * I would not expect receiving a cent in pension with your assets so that would tweak your results quite strongly
    * you might end up being taxed heavily, something I did not see highlighted much
    what if your dividends incomes get taxed at 35 or 50% as you will belong to this filthy ricjh class of people who have assets vs these poor battlers/immigrants/etc/...
    just follow the european rethoric at work and you will se what can happen in 20 y

    But bloody good work!!!
     
  20. keithj

    keithj

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    My view is that while a plan such as yours is great, there are 1000's of black swans out there.

    I'd supplement it with some contingencies for reducing outgoings, increasing income and consequently take on a little more risk.

    You investment property is giving a fairly poor return - maybe consider selling & put the proceeds into higher yielding assets ?
    As others have mentioned - the cash is a wasting asset - make it work harder.
    Are you prepared to house swap for holidays (you have a desirable beach house), grow veggies, take in a boarder, do a bit of mentoring/consulting/gardening/market stall or ebay for your hobby ?
    And (probably most important) get some education about how investing works.
    If the SHTF, then it's likely that your friends & golf buddies will be in a similar boat, so I wouldn't be especially concerned about downsizing your lifestyle in such an event.
     
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