Three Pronged Approach to Retirement
As promised on Friday, I am going to delve into my retirement plans and share what I intend. Knowing what I know about inflation and purchasing power, I think you will find that this is a well rounded approach to the risks that will be present should I decide to live for 25 or 30 years following the day I quit my day job. It is not a really sophisticated plan per se with lots of fancy calculations, but is aimed at providing a living income for my wife and I with some extra money for travel purposes as well.
Risks to Retirement Funds
There are several risks to your retirement funds. Most people are well aware of the risks that particular investments have such as loss of capital. They tend to focus on this and so place their money into “safe” investments such as bonds or CDs. I know several older individuals with a fair amount of capital in savings accounts paying less than 1%.
There is also the risk that you might outlive your money. I have been reading a lot of articles about finding the perfect draw down percentage. If you take out too much of your portfolio in the early days of retirement, you may not have enough if you live longer.
Finally, there is the risk of inflation eating away at your purchasing power. Not enough retirees consider the impact of 25 years of inflation. I was in college 25 years ago and remember getting 2 pizzas for $5 from Little Caesar’s. I can also remember when gas cost less than $1 per gallon and a coke was 25 cents out of the vending machine. Whoa! I am afraid to tell you what else I can remember.
Anyway, these are the biggies so what plan do I have to not only provide me with a decent retirement, but also to mitigate and neutralize those risks. Enter the three pronged strategy.
Enter Retirement Debt Free
This is by far the most important criteria that I will insist upon before I am able to retire. This includes mortgages, school loans, wedding expenses (I have 4 girls), etc. I refuse to have a single penny of debt when I stop working. I want to know that all of my income in retirement will be going to support me and my wife.
This is what I am starting to work on now. Unfortunately, I did a really good job of saving for retirement. So much so that right now, cash flow has been hampered to some extent (more on this later). But, I am confident that it can be done now that I am increasing my focus.
Income Producing Real Estate
The second prong in the strategy is to have some income producing real estate which will provide monthly income to pay for our living expenses. Right now I have some rental property. I also have mortgages but the plan is to have them gradually paid off over time such that when the time to retire comes, the rent can be pure profit save for some of the expenses.
I also plan to manage myself in order to provide me with something to do. I am sure that I might get bored playing golf and shooting 7 or 10 under par every day (LOL). Of course, if I get too old and frail or want to spend months at a time on the road, I can always pay for property management.
The return on investment will be much better than a savings account, and I might even be able to raise the rent every so often to help mitigate the impact of inflation on my own expenses.
Stock Portfolio
I figure that half of my assets should be in real estate and the other half in stocks. The plan will be to live off the income from the real estate while letting the stock portfolio grow until mandatory withdrawals are necessary. Of course, then I will have to take the money out but I shouldn’t need much of it if the real estate covers my costs.
Isn’t investing in stocks risky? Not if you use protective puts and sell covered calls like I have been doing. I don’t have to worry about a market like 2008. As I move into more dividend stocks, that volatility should decrease even more. I have developed a great system that is working for me. Maybe someday I will share the results.
My Number
As for a draw down percentage, it shouldn’t even matter. I don’t plan on touching any of the principle between the real estate income and the dividend payments. Once I have decided this, it simply becomes a matter of figuring out how much rent I need to collect and make sure that I can cover my costs.
For example if I want to have $10,000 in monthly income, assuming that I will have about 25% expenses between taxes, insurance, vacancies, and maintenance, I will need to collect just over $13,000 in rents. That means I need to have about 13 houses locally. So that becomes my target goal for real estate.
I obviously need to pay off some more debt and get some cash for real estate if I want to get to that level of monthly income. If I need less, then I need less real estate. You can see how I am not necessarily looking at a particular number of $3 million or $4 million to retire, but looking at the income that can be generated by rents. In my area, 13 houses is about $1.3 million so that number seems easier to achieve than $3 or $4 million.
So that is the general gist of my plan. I don’t have to worry about inflation since I have it covered with rents and stocks. I don’t have to worry about investment risks of stocks due to the protective puts and my knowledge of options. I don’t have to worry about a draw down calculation since I will be living on rents anyway. Thus, I won’t have to worry about outliving my money.
So, I just need to worry about my debt!
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CFM, you nailed this post in my opinion. It’s all about the plan, not the destination. i’ve been going over and over my plan for last several months and one thing i want to go back and rethink is inflation. One other thing, we know past performance is no guarantee of future results, but i think liquidity will prove important for us (in college roughly same time ago…with daughters as well). I tend to believe that interest rates must increase at some point before i retire. therefore i want to have the liquidity to construct and strong cd ladder as another stream of income.
BE @ BusyExecutiveMoneyBlog recently posted..Is “winning the lottery” part of a sound financial plan?
Interest rates can’t stay this low forever, so it is best to start planning for that increase now.
Great post. I agree. We need to have a well diversified plan. How you plan to retire is similar to what we have in mind.
Miss T @ Prairie Eco-Thrifter recently posted..Save Money on Rent
Good luck with executing your plan.
I’m a fan of your option strategy, but I’m curious: were you using it in 2008? In a down market an option strategy saves your bacon….but the next question is when to jump back in. That’s where I see most people miss the boat.
50 percent real estate is a high number if there’s any threat to ever having to liquidate. As long as you can live off the income only, it’s an excellent plan.
…and just because I didn’t mention it, don’t think I didn’t catch the 7 – 10 under par quip…..with how many mulligans per hole?
AverageJoe recently posted..Boner of the Week: Nearly Fooled By Charts and Graphs
Maybe 2 or 3 mulligans per hole, but I would hope that I could get better if golfing everyday.
I starting trading options in 1999, but went with my current strategy in 2007. I was still learning and making mistakes in 2008, but only lost 18% which was much better than most for that year. I have one major mistake (and thus loss) which I am in the process of correcting, but it is taking some time. If not for that, my record would be solid. Of 27 completed trades since 2007, I have lost money on 1. I have 7 open positions. Three are negative currently, two of them slightly, and the biggie.
Oh, and with the options strategy I am using, there is no jumping back in. I am always in so no worries about that. I am almost to the point of never losing money on a trade.
I will enter retirement debt free. My mortgage will be paid off by then. Although I will have multiple income streams during retirement with COLA adjustments, I also will have a growth portfolio to protect me against inflation.
krantcents recently posted..The 3 D’s of Success
You have got it all together.
$5 Little Caesar’s…Pizza Pizza.
I’ve been looking into real estate. However, I’m trying to find another similar, non-stock investment. I haven’t found anything I’m satisfied with, but I have some time to find what I’m looking for.
Wayne @ Young Family Finance recently posted..Health Insurance – An Important Financial Benefit
Not sure what you might use to replace real estate to get similar characteristics. Let us know what you find.
I’m just glad your plan doesn’t involved heavily leaning on the government. Up here in Canada this is a big debate right now, and I fundamentally hate how helpless people are becoming and how desperate they are for government handouts. The situation is not sustainable. Please spread your message far and wide!
My University Money recently posted..Emasculation… Really?
My grandfather took me aside when I was 11 years old (about 4 months before he died and the last time I would see him in a coherent state) and told me never to take a handout or rely on anyone. There are times when I have worked 3 jobs. At one point, I could have qualified for food stamps, but have never taken a handout just like my grandfather told me. I will accept Social Security should it still exist since I have paid into the system, but will not count on its existence and must be full self-sufficient.
I like your plan. Can you really pay off all the mortgage debts before you retire? 13 houses seem like a lot of property. They will keep you busy in retirement.
retirebyforty recently posted..Frugal & Healthy Tip – Learn To Cook
We will have to see. I think that it can be done using the rental proceeds from the first few properties. Once I get the kids out of the house and don’t have their added expenses, I will be able to aggressively pay off debt including mortgage debt.
Or you could keep the mortgages and use leverage to your advantage by buying more properties. What is your thought on keeping the mortgages and buying more properties with the money.
YFS recently posted..Top 5 Things Your Real Estate Broker Won’t Tell You
I am not sure what my thoughts are at the moment. I will have to get back to you on that.
I like how you emphasized entering retirmeent DEBT FREE, this is the first stepping stone before reaching destination!
BeatingTheIndex recently posted..Why is Parallel Energy Trust in The Penalty Box?
Yes, debt free is an absolute requirement.
This approach sounds very sensible, indeed. Here in the UK many people would score negative on all three points; we will eventually hit at least two out of the three.
maria@moneyprinciple recently posted..The Money Principle Brain Teaser: what are your fears for the year ahead?
Hitting two of three is good progress.
Having no debt is the biggest part of my early retirement plan, as well as the biggest part of all my plans for money.
I am hoping to have dividends pay for my expenses and then have a bit of real estate for anything extra and for something to do (I think I will like fixing up places and maintaining them). So just your investment plan but reversed. But I like your plan a lot and it played a thought in my own.
Poor Student recently posted..January Dividends
It is a great plan, especially being debt free.
Great plan! Sounds much like mine: be debt free, have multiple rental properties generating a monthly cash flow and then have a sizable investment portfolio as well.
It’s great that you have such a thought out plan with monthly needs. Too many people are completely oblivious to how much they will need to live on. Many think that their expenses will go down since they won’t have to drive to work, buy work clothes, etc. But, if they plan to travel or have an expensive hobby (golf) their expenses could easily be the same or even higher.
MoneySmartGuides recently posted..Blame The Stock Market
Yeah, I don’t think many are well prepared for retirement.