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I suspect you didn't read the circumstance description correctly, nor my follow up posts clarifying it.
The Smiths are not looking to get 5%/yr net return on their capital after taxes and inflation, they are looking to get 5%/yr gross return from which they will pay their taxes and allow for inflation and add to their savings. So 5% gross not net. As I stated a couple of posts above, they have zero debt and already own their 'cute little house' outright, they have no children other than their 75 pound English Bulldog. They spend about $160,000/yr so way bellow the $350,000 they would get per year at 5% gross return, even after taxes and inflation ... I'm not sure what universe $160K constitutes the yearly living budget of 'the rich and famous.'
Just tell them to buy those properties or any similar property and they can retire on Hawaii for good.
Also if you check real estate graph from last recession you will see that Hawaii hold price.
The resolution to what you are describing is to perform a stochastic calculation of returns on investment. That is done using a technique called Monte Carlo modeling. It is very standard in any retirement planning exercise done by a financial adviser. If you use the planning tool on Fidelity's web site, it does a stochastic calculation.
A stochastic calculation uses historical variability in returns and inflation. All possible "sequences" are cycled through using those historical values. The end result is a probability of success for meeting one's retirement goals. That is why a planning calculator always requires as input a budget and a project end date (basically, when you die) - it will then tell you the likelihood that you will be able to live that long on that budget.
That is hugely important here - likelihood. Nothing is guaranteed, but if there is a 90+% probability of meeting the retirement goals, that is usually good enough for most people to proceed.
So there is no need to agonize over sequences, etc, if you use the planning tool and understand that what it gives you is a confidence level (or likelihood) of meeting your goals.
OP - if the Smiths go to a financial planner (or wealth manager), he/she will provide this service for them.
most real financial calcultors either run monte carlo simulations or use actual data as it happened.
the whole idea of bringing it up is people either use those simpole how long will my money last calculators where you input some average return or you put it in your excell sheet and you couldn't be more wrong.
according to new data by the university of texas and david blanchard new studies show that unlike the 96% chance a 50/50 mix had of surviving 30 years today the projection is 48%.
low interest rates and high stock valuations have us in a territory we have never had before.
in fact david seems to think the new 4% is actually a tad under 3% .
I suspect that the best advice for Mr and Mrs Smith is that, if they wish to retire right now, that they reduce their lifestyle significantly. They are young to be retiring and have a lot of years for their investments to support them. They will have better luck by moving to a cute little house in a desirable area to live and to forget about the lifestyles of the rich and famous.
If anyone comes up with a safe investment that yields 5% after taxes, and adjusts for inflation, please let me know. I generate about 10%, but it is work and high stress with mid level risk involved. I'm tired and would like to get out and retire and sun on the beach, but can't do it on the 2% that is much more likely than 5%.
The government is claiming 1% inflation? I call a huge BS on that one. Groceries have doubled in the past 2 years. Gasoline was up over 10% just this month. Electric bills are going up 10-15% every year. Houses went up 35% this year in my area, rent is up 20% this year. Property taxes and insurance are going up a heck of a lot more than 1%. That's the inflation that eats up your capital. Those are the prices that your investments must pay for.
you can call bs on inflation all you want but it is not your personal cost of living indicator . it is a weighted index that applys to america at large and may not reflect you at all.
housing costs consume the biggest weighting . many many areas are either still down or barley went up . that heavy weight in the index easily surpases the increases in other items that do not consume anywhere near as many dollars . housing costs make up over 20% of the index. gas is 5% . gas can soar and food can go up but if housing and debt service is low there are huge dollars pulling things back down .
The Smith's for the sake of argument, are hoping to achieve 5% fixed income with minimal risk without adjusting for inflation. Meaning that they have calculated their expenses with inflation (barring an extraordinary inflation event) built into them, thus the 5% doesn't need to be adjusted for inflation.
Thank you for your (and everyone else's) input btw, it is very much appreciated.
Even so, 5% returns from fixed income are unrealistic. Your typical "high yield" aka "junk" bond is currently paying 5.06%. Junk bonds are anything but low risk. And since most people should buy these types of bonds from a junk bond fund, you won't even get a 5.06% yield after subtracting the fund's expense ratio.
Just to give you an example--Vanguard High Yield Corporate (super cheap Admiral share class, .13% expense ratio), one of the more conservative, lower cost, junk bond funds out there, currently yields 4.0%. It lost just over 21% in 2008, and it was in the 21st percentile for performance that year (meaning it beat 79% of other junk bond funds for 2008).
Oh I read it, but it sounded like you were nevertheless making a case for junk bonds. I mean you went on for 2 paragraphs and provided 2 links about them.
if you can live on 2% withdrawals inflation adjusted why play the game if you already won.
if i had enough dough to live off 2% withdrawals inflation adjusted i would ladder some bonds , get some tips , and turn off all the financial news.
but i need about 3% so i need equities but i want the lowest volatility portffolio that could meet my income goals now that i am toning things down for retirement.
if i had a pension and this was mostly play money i may go more aggressive but basically i have to support us off our portfolio at least early on .
there is an aspect no one will understand unless they have that kind of money and live it.
the more you have the more the big drops can really take their toll mentally. having 7 figures invested in 2008-2009 and feeling those drops even though we wouldn't bail nor were retired yet it was no picnic . even today we have 20k swings in one session which while we know are short term you always feel in your gut and we are only 40% equities today since we are retiring . i couldn't imagine 40k swings in a day anymore if i was fully in.
yes the percentages are the same but what does not change is seeing your portfolio swing in one afternoon more than my wife makes in a year. that feeling until you go through it is something even the most aggressive investors pucker up over.
i have been an investor since 1987 and at times have been more aggressive than most . i have done some ballsey things including going out on a limb and borrowing a ton of dough to come up with 500k to buy in to a real estate venture with an unpredictable outcome.
but i would be lying if i said i don't feel those big downturns in the pit of my stomach .
there is a big difference between risk and volatility. few if any have lost money over 15-20 years in the markets if they just held diversified funds so they can be one of the lowest risk investments historically. but volatility is another thing and that is something even the most aggressive never stop feeling mentally as the swings become more and more in dollars as their net worth grows..
Last edited by mathjak107; 05-01-2014 at 04:01 AM..
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