Saturday, February 09, 2008
Last week my post about retirement issues garnered a lot of comments.
I had a follow up thought about the best time to retire, or more correctly start to tap your portfolio for income. The best time is right after the market goes up 25 or 30% in a year. If you just capture most of that effect you will have a lot more money than you did 12 months prior.
An $800,000 portfolio can generate about $32000, safely. If that is what you have right now and you are planning on retiring soon you might be reasonably expecting to take about $32000 out (or more precisely $35,200), you might be gearing up and planning for that amount. Then if you get only a 20% pop in the next 30% year you would have $960,000. Since you planned to take out $35000 but could safely take $42,240 you now have a cushion of safety, in a manner of speaking.
There is obviously an element of tongue and cheek in this idea but there is some truth too. Up 25% years do come along once or twice in a decade. Even if we enter a period of below average stock market growth (which I believe will be the case) there will be the occasional up-a-lot years.
The idea does not have to be wait-to-retire-until-the-next-one but figuring a way to take less from your portfolio until there is an up a lot year would take some ingenuity or thinking outside the lines and anyone pulling this off would clearly be much better off.
Retirement expertise is more of a financial planning thing than a portfolio management thing but figuring out how and when to retire (if ever) requires a lot of pre-planning. You stand to benefit from smart decisions and will have to live with the consequences of any bad decisions. It makes sense that in any one retirement plan there will be both good and bad decisions.
The best way to mitigate bad decisions or unintended consequences is probably to use conservative assumptions for everything (market returns, your returns and how much you can take out).
As a matter of philosophy being conservative will give you more options in the future; being under mortgaged (better yet no mortgage), only having one car payment instead of two, not having a balance on credit cards, living below your means and so on.
This line of thought is intellectually appealing to a lot of people but I can tell you first hand getting people to actually live this way is much tougher than getting them to think of living that way as being a good idea.