A Journey of Mindfulness--the Remaking of Life in Midstream.

[Gilberto de Piento]

In January I got the prized second comma in my stash, which was a fun accomplishment.

Wow, that's awesome! Congratulations!

[IlliniDave]

Thoughts on Asset Deployment for Early Retirement

So, heading into what I hope is the home stretch I decided I needed to decide on a target portfolio strategy for the early years of ER. For giggles I thought I'd lay it out here. As usual for me (financially) I'm staying pretty vanilla/conservative.

I've considered a variety of relatively common solutions to arranging assets for withdrawal phase. The idea I always seem to come back to is a liability matching portfolio (LMP) strategy. It requires an estimate of "liability" which is basically just an estimate of total future portfolio withdrawals. The basic idea is that an amount of the portfolio sufficient to cover the liability is dedicated to stable assets, and the balance of the portfolio can then be invested in a variety of ways to meet other considerations/goals a person might have.

I maintain a spreadsheet that among other things calculates my total expected withdrawals under a variety of situations/conditions. It's fluid in the sense that I update it regularly (and play different scenarios) so things change. But under the conditions I feel I'm most likely to encounter total withdrawals range between about 17% and 22% of my (estimated) portfolio total on the day of retirement.

My wrinkle to the LMP is that I want to dedicate 2X my anticipated total withdrawals to my stable asset liability match, so something around 35% to 45% of my portfolio at retirement. I chose 2X somewhat arbitrarily to pad the number in case I wind up with a little more growth in lifestyle spending than what I am already planning on, or inflation runs a little higher (devalues pension faster), etc. It also has the appeal of giving me an overall asset allocation (AA) that would be limited on the aggressive side to 65/35 even if all my non-liability-covering assets were sunk into stocks.

I'm planning to go with intermediate-term bonds for the lion's share of the liability match. There is some interest rate and inflation sensitivity with them, but barring Armageddon, with 2X the liability invested, it should work out okay. Some people like TIPS and/or I-bonds for this, but I'll likely just go with a broad aggregate index. That's in good measure due to convenience because it matches what I have available in my 401k plan.

So what about the rest of the portfolio? The uses I've contemplated are:

1. a giant emergency fund,
   2. resources for any YOLO splurges that might become attractive in the future
   3. legacy for heirs

I like all three. Since I expect there will be a pretty significant amount in this pile (probably > $500K, maybe significantly so), and my basic needs and entertainment are covered by the liability match, I don't see a strong argument against investing this remainder for medium-/long-term growth in stocks.

Therefore, depending on how things go over the next couple years, I'll be working towards shifting my AA to something between 55/45 and 65/35. That puts me in the heart of the Trinity Study AA-space so one might ask why bother with the LMP view. It's a fair question and my only answer is that to me it just feels right to start where the rubber meets the road (how much I spend on an ongoing basis and how that projects looking forward in time) and use that to arrive at an AA.

I do not plan on any sophisticated or formulaic withdrawal strategies. I'll start with whatever distributions my taxable account throws off, and when necessary I'll sell assets based on what seems to make sense at the time. Tax ramifications, recent market performance, my age, AA drift, and RMDs will all factor into the decision at times. If things go benignly I’ll have an average withdrawal rate under 2%, so I don’t believe the how of the withdrawals to be critical.

[suomalainen]

The insurance company approach. I like it! Invest your "surplus" in gold!

[SavingWithBabies]

Congratulations on the second comma. I hope it persisted.

Reading about your plans is interesting as you're so far along. I haven't thought too much about portfolio strategy when I get to your point. I like yours too though and the conservative 2x on liability makes sense to me. It's also great you have enough surplus that you can let it ride and see where it goes!

[IlliniDave]

Congratulations ... I hope it persisted.

It did not, but that's how it goes sometimes. Now I get to (hopefully) "celebrate" the achievement twice!

[IlliniDave]

Plan Failed

We lost my mom on Good Friday. It's likely she outlasted the cancer itself, but I think the strength required to fight it (her choice) exceeded her reservoir, depleted as it was by the four year battle. From the outside she appeared to be doing pretty well (all things considered) through the beginning of March, but that seemed to collapse rather suddenly over the last two weeks prior to her passing.

One of my primary ER goals was to make it back home while both my parents were still with us. In that I failed. I had neither the courage or faith in myself to pull the plug at the first arguably viable opportunity. I feel disappointment, of course, but only time will tell if regret enters the picture.

My finances are a bit of a mess compared to their usual state. By that I mean I've gotten behind in keeping the bookkeeping current. That will sort itself out in time. I don't really have the heart right now to sit down in tackle it all in one sitting even though it would be a manageable task. So I don't have any metrics to report. Due to market gyrations I'd surrendered my second comma in the invested assets tally, got it back a time or two, then lost it again. I haven't looked in a couple weeks but I doubt I have it back yet. Spending has been high. I've sunk about $6,000 into home improvements, shouldered part of my mom's funeral/burial costs, and bought a new vehicle.

My trusty old 224,000+ mile vehicle had been giving me trouble so when it became clear I had to get up there urgently, I made an semi-impulsive decision to buy a new one and set out for home the next morning. When pressed I sometimes reach for the big-hammer-in-the-toolbox approach. The first few days I was there were irreplacable, so not losing a couple days to a breakdown in Nowheresville, S. Illinois means I'm okay with the move. I just pulled the inevitable purchase up a 2-3 years due to circumstances (and spent somewhat more than I might had the process been leisurely). I still think the odds were better than 50% the old vehicle would have made the trip w/out incident; and that there were other travel options. But what's done is done and it's unlikely I'll have significant regrets. But it's an ERE fail. I still have the old one and now that I'm back home I'm using it to eat the grind of day-to-day commuter miles, something I plan on doing as long as it is up for the task.

Keeping tabs on my dad is my new priority. Being on his own for the first time in 54 years will be a challenging transition for him. In the background I'm still grinding away with my plan, but I have to admit that right now it feels below trivial, and it is definitely a back burner item. Fortunately much of it is suitable for autopilot. Looks like this summer at work will be extraordinarily (in context of the recent past) so maybe I'll have an opportunity to accumulate a nice dash of overtime to lessen the impact of the one-off expenses.

[EdithKeeler]

I’m very sorry about your mom.

[Clarice]

I am sorry about your mom. I can relate. My mom has an end-stage Parkinson's disease, and it's a constant worry and pain for me. Your expenses seem reasonable overall. Old houses cost money to maintain. Pitching in for mom's funeral is the right thing to do. That's what money is for. A new car bought with cash if the old one has 224000 miles on it is unlikely to turn out to be a huge mistake. Are you sure you want to keep the old one? Is it worth it if you take insurance, registration, and oil change into account? Have you done the math? I am curious. Going back to your mom's passing... Are you doing something to keep yourself in good spirits and good health? Watching old movies? Going for long walks?

[SavingWithBabies]

My condolences on the passing of your mother.

[McTrex]

My condolences, Dave.

Keep a close eye on your father, mine had a tough time after losing my mother two years ago after a similar time together.

Kind regards,
McTrex

[LiberateMind]

Sorry about your mom. Please concentrate on how to help your dad, instead of thinking of the past. I would not chart it as fail, even though you might not get enough time to spend with your mom. Your dad was there to support her.

[7Wannabe5]

Very sorry to hear about your mother. This is a major life event, take care of yourself, and don't be surprised if your own perspective and plans shift somewhat from your current center.

[Jason]

Sorry about your mother. I hope you find peace during this time.

My mother currently has stage five cancer. We don't get along. But I should probably call her. What Good Friday is to your mother, tax day is to mine.

[IlliniDave]

Thanks for the kind words, everyone.

[IlliniDave]

Are you sure you want to keep the old one? Is it worth it if you take insurance, registration, and oil change into account? Have you done the math? I am curious. Going back to your mom's passing... Are you doing something to keep yourself in good spirits and good health? Watching old movies? Going for long walks?

Hi Clarice, sorry to hear of your mom's condition. I don't have a numerical/financial analysis but my thought process is that it is better to accumulate the miles on the older vehicle. It only costs about $400 to keep it on the road (registration + insurance) and it isn't worth much (16 years old, $224K miles, maybe $500-$700 blue book). I like the old vehicle and think it better in the long run to rack up the 30,000 miles or so I expect to commute over the next ~2-2.5 years on it rather than the newer one and thereby extend the latter's life down the road. Not sure if that works out financially, not even sure how I'd go about trying to put a number on it, so to speak.

No, I'm not doing much presently to inflate my spirits. In the typical male fashion, I've limped into my cave to lick my wounds for now.

[IlliniDave]

Very sorry to hear about your mother. This is a major life event, take care of yourself, and don't be surprised if your own perspective and plans shift somewhat from your current center.

I think you are correct. I dunno where it's all headed, but I feel the beginning of some shifting. It's certainly one of those events that divides time into before and after, and makes you realize how unimportant a lot of things are that I invest time in, and how important many things are that seem to perpetually simmer on the back burner.

[IlliniDave]

Interesting day at work yesterday. A senior manager from the company who's facility I work in (due to a long-standing contractual relationship with my employer) approached me with the idea of me "switching sides" after I retire. I am eligible to officially retire when I hit age 55 in a little more than a year. That gets me into a substantially better tier pension-wise. I've been planning to work about 7 mos beyond that to round out the calendar year, and after absorbing a chunk of my mom's funeral/burial costs, obtaining a new vehicle a couple years before I'd planned to, and taking a harder look at possible future medical liabilities, I've even been kicking around the idea of adding 12 mos to that to get me back on track.

This new scenario would have me "retiring" at 55, deferring my pension for a time, then taking the position with the new company for 7-19 mos. I told her what it would take in terms of work assignment (a slight variation on what I do currently) and she immediately replied, "Sold!" We agreed to speak more about it later. In the interim I'll have to determine what it would take financially to incentivize me to make the switch (versus staying in my present job for the same duration). The only thing I'd lose is 0.5-1.5 years of service credit to my pension, which isn't much, maybe ~$1000/yr, or say $25K-$30K total before inflation out to my actuarial life expectancy. So I'd have to decide how much more than that to accept. And to save the hassle of having to "apply" for a job, be interviewed, receive an "standard" offer, then start negotiating, I thought I'd cut out the dance and just toss out a number while it's in the informal stage and see what she says wrt the viability.

Off the top of my head I'm thinking it will take enough that I come out $50-60K ahead after taxes over the time in question. That will cover the lost pension dollars and the vehicle I just bought, or most of it. That seems like a lot to ask for for the mid-level Megacorp world. A naked money grab like that is a little outside my core personality, but at the same time, what the heck, right? She initiated the topic.

Tomorrow is going to be wash out here, so my job is to sit down and refine that number. Unfortunately I have little aptitude and less experience as a negotiator. But I'm a very well known quantity to them. With this particular manager I have a 20-year professional association so I don't have much selling to do. Either they will think it's worth it to them to make it worth it to me, or they won't.

[suomalainen]

Great place to be. I found myself in a similar situation late last year. It didn't work out, but it was fun to just say "This is what I want." and to see if they could meet it. And who knows, maybe they'll come back at some point.

[IlliniDave]

I found myself in a similar situation late last year. It didn't work out ...

As I've thought about this overnight I'm pretty sure my experience will wind up mirroring yours. I think I'm still going to go through with it, but I'll be careful to couch it in a way that is respectful and not jerk-ish. One of the things that makes it difficult is that in the end I'll be doing exactly the same thing I've been doing all along, just shedding some recent additions to that which, while tolerable, are less in my wheelhouse than my longstanding role. So the only tangible benefit left to me in making the switch would be to benefit financially. Even though it is the reason we all show up there every day, it's considered poor form in the culture to throw it front-and-center.

I said above I'm not much of a negotiator, but I am good at diplomacy--we'll see if I'm good enough to pull it off without degrading relationships.

[Seppia]

If I can make a recommendation, make sure to explain the thought process that led you to your specific request.
If there is a clear logic behind it, it will be easier for them to see it as a fair demand, even in the case they cannot match it.