[aageneral] Retirement Planning Wars

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Article Title:
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Retirement Planning Wars

Article Description:
====================
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.

Additional Article Information:
===============================
815 Words; formatted to 65 Characters per Line
Distribution Date and Time: Wed Jun 1 01:17:35 EDT 2005

Written By: Lyle Wilkinson
Copyright: 2005
Contact Email: mailto:joe@diyportfoliomanagement.com

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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 weren’t 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 I’ve 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 I’m 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 I’d 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. I’m happy now
with more than 100% of my equity in the stock market.

In a future article I’ll 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.

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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

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