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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 or some other paper type of asset like an annuity or private pension.   I want to know that all of my income from any private pension schemes will be going to support me and my wife.  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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26 comments - What do you think?  Posted by Cash Flow Mantra - February 6, 2012 at 5:15 am

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