Critical Mass - Care and Feeding For Once Attained
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» Normxxx - How Much Is Enough?
How Much Is Enough?
By Billy and Akaisha Kaderli | 4 November 2005
A regular feature of The Motley Fool's Rule Your Retirement service is our success stories— profiles of people who have become financially independent. One of the most remarkable stories is about Billy and Akaisha Kaderli, who, at age 38, left their fast-track lives, moved to Nevis, West Indies, in the Caribbean, and started traveling the world. Their story follows.
The challenge was not realistic. No matter how hard or long we worked, we couldn't compete with Bill Gates' net worth. It just wasn't going to happen.
Once we got that fantasy out of the way, we asked ourselves: How much money is enough to retire? What size of nest egg do we need?
Obviously, this is a personal decision, and it's one that should be taken seriously.
For us, the amount we required to live per year was determined to be $20,000 (in 1990 dollars), and it needed to be generated from our financial holdings. But what amount of capital would do that for us? And how would we allocate that sum of money? Stocks? Bonds? CDs? Annuities?
How one invests his or her money is a question of risk management. Many years ago, we learned that we could be owners (equities) or lenders (bonds). Through business experience, we realized that we could make more money owning a business than lending money to one, though the risks are greater.
Working in the brokerage business demystified the stock market for us. We had owned stocks for years, so we decided to use equities for our portfolio. The fact that stocks have produced a compound annual average return of 10% for the past 70 years made investing in equities a common-sense approach for us, as well as a risk we were willing to take.
Once we made this decision, the math was easy. For every $100,000 invested, approximately $10,000 in annual income could be produced. So, bare-bones, we could meet our goal on just $200,000 invested. But that's cutting things too closely, and it did not allow for inflation, emergencies, unexpected expenses, or market downturns. In fact, as often discussed in The Motley Fool's Rule Your Retirement service, a much safer withdrawal rate is in the neighborhood of 4% a year. But we did discover that we were on the right track to achieve our financial freedom.
If stocks are too risky for you, and if you prefer CDs or bonds, the size of your nest egg will need to reflect your preference and the lower returns that it will generate. There is no "one size fits all." When it comes to your portfolio, you must be comfortable and confident with your personal risk tolerance.
Do you ever have enough money?
When you reach the amount that allows you not to hold a job any longer, your life opens up. You might choose to work, but you no longer have to do so. When you reach this stage, the income generated from your financial holdings supports your base lifestyle expenditures.
Once the funds for comfortable living, gift-giving, and emergencies are covered, how much more do you need? "You can't take it with you" is a common phrase, and it's true. In the game of life, the one with the most money doesn't win anything different from the one that came in last. We ultimately all get the same prize. So what we choose to do with our time and money here is up to each one of us. How do you want to spend your money and time?
You must realistically decide what lifestyle you want to live and what your desires are for your future. If you want to buy yachts and fabulous cars, or utilize high-end travel and dining options, then perhaps you need to keep working. If a simpler lifestyle appeals to you, then you could need less than you think. Some experts say that 25 times your current expenses is an excellent starting point. If you're confident that your portfolio can produce enough income to cover your expenses, plus inflation, we believe you're already there. It's really that simple.
In 1991, Billy and Akaisha Kaderli retired from the brokerage and restaurant businesses to a life of international travel. Visit their website at http://RetireEarlyLifestyle.com, and check out their new CD book, The Adventurer's Guide to Early Retirement.
P I C T U R E O F T H E W E E K
A Dental Menu In Thailand. Could The U.S. Do The Same?
(Prices Are In Thai Baht. 40 B = $1 USD)
______________
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» bob90245 - Re: How Much Is Enough?
In response to How Much Is Enough? posted by Normxxx:Some experts say that 25 times your current expenses is an excellent starting point. If you're confident that your portfolio can produce enough income to cover your expenses, plus inflation, we believe you're already there. It's really that simple.
The 4% withdrawal rate primarily applies to retirees at age 65 who expect to live an additional 30 years. For someone wishing to retire earlier, it might be safer to feather one's nest egg with more dough.
-- posted by bob90245
» Normxxx - This time is different?
This time is different?
<img Width="560" src="http://www.321gold.com/editorials/mauldi...">
-- posted by Normxxx
» bob90245 - Re: This time is different?
In response to This time is different? posted by Normxxx:It would be interesting to see the numbers for today. Your chart is about 3 or 4 years old.
John Greaney at the Retire Early Home Page has performed a study comparing P/E ratios to withdrawal rates.
-- posted by bob90245
» Normxxx - Re: Re: This time is different?
In response to Re: This time is different? posted by bob90245:Considering that we've only had one decent year in the last 5 or so, I can't see how it could be any better!
-- posted by Normxxx
» bob90245 - Re: Re: Re: This time is different?
In response to Re: Re: This time is different? posted by Normxxx:I guess you'll have to show me the raw data. This chart shows that, for the past year,we've been at the low end of the P/E range.
<img src=http://bigcharts.marketwatch.com/charts/...>
And you may have missed this observation from Greaney's article:
Plotting the maximum withdrawal rate against the P/E ratio for the year prior to the start of the 30-year pay out period yielded the graph below. There is a discerable trend showing that higher P/E ratios at the beginning of one's retirement result in a lower withdrawal rate, but in no period did the initial inflation-adjusted withdrawal rate fall below 4.265%. It's difficult to make much of an extrapolation from this graph given that the three highest P/E ratios examined supported withdrawal rates from 6% to 10% (the years 1896, 1923, and 1935.) See data table.
-- posted by bob90245
» Normxxx - Re: Re: Re: Re: This time is different?
In response to Re: Re: Re: This time is different? posted by bob90245:This chart shows that, for the past year,we've been at the low end of the P/E range.
??? The P/E ratio around 1980 was about 7 or 8x. It is now about double that! So far, we are still somewhat above the LT average, unless you are 'looking ahead,' which I rarely do— it's usually way off.
But a constant withdrawal at a fixed percentage should be relatively impervious to P/E, since if your 'nest egg' contracts, so does your withdrawal amount.
But I like the notion of using the P/E rate of the prior year to guide your withdrawal amount. It does seem somewhat generous, so I might subtract 1 - 2%.
-- posted by Normxxx
» bob90245 - Re: This time is different?
In response to Re: Re: Re: Re: This time is different? posted by Normxxx:The P/E ratio around 1980 was about 7 or 8x.
If you want to go back to the "glory days" of 1980, be my guest. Myself, I don't care to relive double-digit inflation and a stagnant economy.
Another point...
One cannot talk about P/E ratios without also looking at interest rates. Context is important. From Shiller's database:
-- posted by bob90245
» Normxxx - Re: Re: This time is different?
In response to Re: This time is different? posted by bob90245:If you want to go back to the "glory days" of 1980, be my guest. Myself, I don't care to relive double-digit inflation and a stagnant economy.
Maybe we won't have to go back. Some say it's in our near future!
But for P/E stats, I think anything less than about 100 years is relatively meaningless. Times change, but you are trying to capture relationships which remain relatively constant over all that change, and a few years won't do it.
-- posted by Normxxx
» Normxxx - Re: Re: Re: This time is different?
In response to Re: Re: This time is different? posted by Kirk:I don't know of anyone who does engineering fits to financial data!
-- posted by Normxxx
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