 |
Retirement Planning WarsPosted by Randy on: 2005-12-09 18:47:48 in category:
Retirement Planning [ Print | Permalink / 0 Comment(s) ] Retirement Planning Wars Copyright ) 2005 Lyle Wilkinson DIY Portfolio Management http://www.diyportfoliomanagement.com Through our working lifetime, saving forces battle the live life forces. In our family sometimes saving won and sometimes spending won. As retirement approached we had equity in our home, a small nest egg, and no consumer debt. Through our working lifetime, the conservative asset allocation forces battled the aggressive asset allocation forces. In our family, we mostly allocated and diversified with random financial transactions. There was no written or even spoken plan. Individual transactions were analyzed as discrete events loomed, not as part of a total plan. Thankfully we werent living beyond our means or wildly aggressive investors. As retirement approached our nest egg was split 50/50 between common stock and money market funds. Finally, I retired and only then began studying our financial life from a big picture point of view. Most of my early reading reinforced the common perception that asset allocation between asset classes reduces risk. The theory is that prices in different asset classes inflate and deflate at different rates. Rising bond prices might offset falling stock prices. Rising real estate prices might offset falling commodity prices. One of the champions of asset allocation is Burton G. Malkiel, PhD. In A Random Walk Down Wall Street he popularized a life-cycle approach to asset allocation. He proposed that retirees should shift more of their nest egg into bonds or other fixed income securities. The theory is that when salaries/wages stop and projected years to live decrease we can tolerate less risk. Along the way I started looking at ways to access the equity in our home. I looked at reverse mortgages and discovered what reverses is the mortgage balance. In a conventional mortgage the balance decreases with each payment you make to the bank. With a reverse mortgage the balance increases with each payment the bank makes to you. The balance grows, but at some point the bank has to be paid off. Often cash is raised to pay the bank by selling the home. Jeremy Siegel, PhD. studied more than 200 years of US stock market data. He determined on average the stock market returns a real return of 6.8% per year. He found that on average the stock market out yields other equity classes, and says stocks remain the best bet in the long run for US investors. In mid 2002, these ideas were swirling around in my retired head. Diversifying asset classes reduces risk. Stock market has greatest average return. Interest rates, mortgage rates are at a fifty year low. I also knew from financial theory that pursuit of greater return requires acceptance of more risk. Conversely, avoidance of risk limits return. Some Excel spreadsheets with random number generators convinced me that the average annual draw from a retirement nestegg 100% in equities would exceed that of any mix of bonds and equities. Average draw would be more, but in individual years the draws possible for a bond portfolio are sometimes greater. In July of 2002, we refinanced our mortgage and invested the proceeds in the stock market. The account is also my checking account. The plan was to keep the account balance at about the mortgage balance. The balance would be maintained by spending less if the account fell below the mortgage, and spending more if the account climbed above the mortgage. The account started with $128,175.86. Since then Ive withdrawn $34,921.17 more than I have deposited, the investment value has grown by $35,782.19 and the account is at $129,036.87. The withdrawals include all interest and principle payments and closing cost for the first refinance and for a second refinance along the way. The mortgage balance is $127,766.97. This strategy is working for us. I like the idea of staying flexible, slowing spending when the market is down and spending more when the market is up. Last year I spent $10,000 on reflooring and painting our condo. This year Im spending the same on a 1990 Mustang Convertible. These are flexible projects. The market gave a little extra so we spent it. This strategy is probably not appropriate for everyone. There is always the chance that a bad year in the market will coincide with large inflexible expense. In retrospect, I wish I had figured out at the start of my working life that diligent investment into a diversified equity portfolio would have made me wealthy. I wish Id figured out borrowing for an investment was probably a better use of credit than borrowing for a new car. But, when you are in your twenties, who thinks deferred consumption is good. Im happy now with more than 100% of my equity in the stock market. In a future article Ill discuss my Excel retirement draw models, and point out a website that goes far beyond. The website lets you play with asset allocation, funding amounts, and your expected longevity to see what your monthly withdrawal will be. Lyle Wilkinson, investor, trader, author, MBA Helps individuals learn to self direct their stock portfolios. Book, e-book, PowerPoint "DIY Portfolio Management http://www.diyportfoliomanagement.com mailto:joe@diyportfoliomanagement.com |
|
Related Stories Retirement Planning ProgramsPlan Today for Retirement Tomorrow Don't Wait to Plan Your RetirementIs Your Retirement Plan Safe?Retirement Calculators - Before and After RetirementFinancial Planning Strategy for Early RetirementDon't Forget About Your RetirementRetirement Planning Starts Before You RetireEarly Social Security Retirement: Is It Worth It? |
|
Post new CommentThis site does not allow anonymous comments. Registered members can login to participate. Registration is free and takes only a few seconds |
|