Comments on: Retirement and Risk http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/ Wed, 08 Feb 2012 17:31:40 +0000 hourly 1 http://wordpress.org/?v=3.1 By: David Bates http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4673 David Bates Mon, 07 Apr 2008 22:20:27 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4673 Whilst I agree you cannot protect yourself 100% you do need to be aware of what can "eat" your Nest Egg over the long term apart from Inflation and Taxes and take some action to manage it. For instance I was paying fees of 2.24% to my Financial Advisers. I then read John Greaney's http://www.RetireEarlyHomePage.com and discovered how compound interest on Fees can take more of your Nest Egg that you do in 30 years. I want my Kids to have what's left, not my financial planner. So I switched my investments out of the high fees WRAP. I also found out from Jim Otar a financial planner (and a fellow engineer and a Canadian like yourself) in his article "Time Value of Fluctuations" that if you lose 20% of your Capital and take a 4% pension you will need a gain of 43% over the next three years to just get your capital back. He includes a real-life example in the article too. So that tells me to make sure I do not have large losses and to use Stop Losses to exit the market some of the time. Cash is a position. There is a big difference in strategy for retirees vs. someone still working. Distribution of the Nest Egg is not just reverse Accumulation. Reverse Dollar-Cost-Averaging for a pension can cause harm to a Nest Egg when in retirement. As Retirees we can run out of money doing everything right if we do not understand all that can "eat" our nest egg. In retirement we should not rely on the market coming back because it may not come back within our retirement time "window", even if it does come back "in the long term". As a retiree I have learned the most important thing in retirement is to protect my Nest Egg against large losses. It is the downside risk you have to plan for because it is so hard to replenish your Nest egg when there is inflation, taxes and a pension to be taken out of it whilst it is trying to recover. The point is we have to make sure we understand how the numbers work in retirement. It doesn't mean we have to become obsessed about protecting our Nest Egg, just informed of how we can minimize costs, minimize losses and actively manage it with our financial planner if we use one. I do have income from other sources but why should I let my Nest Egg be eaten by things I can avoid with a little knowledge and some planning. I worked too hard to make it. David Whilst I agree you cannot protect yourself 100% you do need to be aware of what can “eat” your Nest Egg over the long term apart from Inflation and Taxes and take some action to manage it.
For instance I was paying fees of 2.24% to my Financial Advisers. I then read John Greaney’s
http://www.RetireEarlyHomePage.com and discovered how compound interest on Fees can take more of your Nest Egg that you do in 30 years. I want my Kids to have what’s left, not my financial planner. So I switched my investments
out of the high fees WRAP.
I also found out from Jim Otar a financial planner (and a fellow engineer and a Canadian like yourself) in his article “Time Value of Fluctuations” that if you lose 20% of your Capital and take a 4% pension you will need a
gain of 43% over the next three years to just get your capital back. He includes a real-life example in the article too. So that tells me to make sure I do not have large losses and to use Stop Losses to exit the market some of the
time. Cash is a position.
There is a big difference in strategy for retirees vs. someone still working. Distribution of the Nest Egg is not just reverse Accumulation. Reverse Dollar-Cost-Averaging for a pension can cause harm to a Nest Egg when in retirement.
As Retirees we can run out of money doing everything right if we do not understand all that can “eat” our nest egg.
In retirement we should not rely on the market coming back because it may not come back within our retirement time “window”, even if it does come back “in the long term”.
As a retiree I have learned the most important thing in retirement is to protect my Nest Egg against large losses.
It is the downside risk you have to plan for because it is so hard to replenish your Nest egg when there is inflation, taxes and a pension to be taken out of it whilst it is trying to recover.
The point is we have to make sure we understand how the numbers work in retirement. It doesn’t mean we have to
become obsessed about protecting our Nest Egg, just informed of how we can minimize costs, minimize losses and actively manage it with our financial planner if we use one.
I do have income from other sources but why should I let my Nest Egg be eaten by things I can avoid with a little knowledge and some planning. I worked too hard to make it.

David

]]> By: Weekly Dividend Investing Roundup - April 4, 2008 » The Dividend Guy Blog http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4642 Weekly Dividend Investing Roundup - April 4, 2008 » The Dividend Guy Blog Fri, 04 Apr 2008 12:44:18 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4642 [...] Canadian Dream: Free at 45 discussed risk in one of his recent blog posts. [...] [...] Canadian Dream: Free at 45 discussed risk in one of his recent blog posts. [...]

]]> By: Ther Personal Finance & Tax Blogger http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4626 Ther Personal Finance & Tax Blogger Thu, 03 Apr 2008 19:04:21 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4626 Risk is part of life as it is part of investing. We take risks every single time we move. The drive to the store, filling up the gas tank, taking a vacation. We don't think about the everyday risks we take. Yet we worry to no end about our long term investments. Who really cares if the market is down this year? If we own investments in respectable companies it really doesn't matter. What we need to think about is how to maximize our investments in them. During the last downturn in 2002, I increased my investment amounts and the payoff was well worth it when the markets recovered. Again this time, I am increasing the amount I invest to take advantage of the bargains. People buy GIC's and park their money in the bad times. Why? It's a good opportunity to invest when you have a long timeline. Dean Risk is part of life as it is part of investing. We take risks every single time we move. The drive to the store, filling up the gas tank, taking a vacation. We don’t think about the everyday risks we take. Yet we worry to no end about our long term investments.

Who really cares if the market is down this year? If we own investments in respectable companies it really doesn’t matter. What we need to think about is how to maximize our investments in them. During the last downturn in 2002, I increased my investment amounts and the payoff was well worth it when the markets recovered. Again this time, I am increasing the amount I invest to take advantage of the bargains.

People buy GIC’s and park their money in the bad times. Why? It’s a good opportunity to invest when you have a long timeline.

Dean

]]> By: Canadian Dream http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4608 Canadian Dream Thu, 03 Apr 2008 11:58:20 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4608 Mike, Excellent point. I already know I won't be spending the same amount each year. After all $2000 of my yearly is for home repair and car replacement. I intend push of using those amounts for while by getting any last replacements done prior to quiting my job. Pharmadaddy & Ironman, Ya new toys to play with! Thanks for the links I'll have to check them out. Tim Mike,

Excellent point. I already know I won’t be spending the same amount each year. After all $2000 of my yearly is for home repair and car replacement. I intend push of using those amounts for while by getting any last replacements done prior to quiting my job.

Pharmadaddy & Ironman,

Ya new toys to play with! Thanks for the links I’ll have to check them out.

Tim

]]> By: Ironman http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4602 Ironman Thu, 03 Apr 2008 05:57:37 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4602 Thanks for the plug, Pharmadaddy! We've also modeled a <a href="http://politicalcalculations.blogspot.com/2006/10/lemony-snicket-and-sp-500.html" rel="nofollow">"what if" scenario</a>, where we wondered what would happen if an investor consistently earned the worst rate of return ever recorded for the periods over which the money they put in annually until the end of the investment. As an added bonus, we also <a href="http://politicalcalculations.blogspot.com/2007/07/worst-returns-of-s-500-vs-safest.html" rel="nofollow">did the math</a> comparing our model of the absolute worst of the S&P 500 vs the safest investment on Earth. Thanks for the plug, Pharmadaddy!

We’ve also modeled a “what if” scenario, where we wondered what would happen if an investor consistently earned the worst rate of return ever recorded for the periods over which the money they put in annually until the end of the investment.

As an added bonus, we also did the math comparing our model of the absolute worst of the S&P 500 vs the safest investment on Earth.

]]> By: Pharmadaddy http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4599 Pharmadaddy Thu, 03 Apr 2008 00:39:47 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4599 A useful tool I found while trying to assess some possible outcomes of my retirement planning can be found at http://politicalcalculations.blogspot.com/2006/05/sp-500-best-average-and-worst-returns.html This blog analyzes the historical returns of the S&P500 since 1871 and developed a nice calculator whereby you can punch in a holding period of your investments and it will give you the best, worst, and average case returns of that investment over that time period. It gave me a range to go with and showed me that even if I am met with the worst case scenario, I'll still be ok. A useful tool I found while trying to assess some possible outcomes of my retirement planning can be found at http://politicalcalculations.blogspot.com/2006/05/sp-500-best-average-and-worst-returns.html
This blog analyzes the historical returns of the S&P500 since 1871 and developed a nice calculator whereby you can punch in a holding period of your investments and it will give you the best, worst, and average case returns of that investment over that time period. It gave me a range to go with and showed me that even if I am met with the worst case scenario, I’ll still be ok.

]]> By: Four Pillars http://blog.canadian-dream-free-at-45.com/2008/04/02/retirement-and-risk/comment-page-1/#comment-4592 Four Pillars Wed, 02 Apr 2008 13:30:17 +0000 http://blog.canadian-dream-free-at-45.com/?p=391#comment-4592 I agree. Those calculators (while valuable) always assume constants ie you spend the preset amount each year (from the 4% rule or whatever) and depending on the situation you might run out of money. The reality is that you aren't going to keep spending your 'normal' amount of money until one day you run out. It's a lot more likely that you will adjust and compensate (ie cut costs, work part time etc) to prevent running out of money so the 81.5% success rate Adfecto mentioned is probably more like 95%+ in real life (and in my opinion). Mike I agree.

Those calculators (while valuable) always assume constants ie you spend the preset amount each year (from the 4% rule or whatever) and depending on the situation you might run out of money.

The reality is that you aren’t going to keep spending your ‘normal’ amount of money until one day you run out. It’s a lot more likely that you will adjust and compensate (ie cut costs, work part time etc) to prevent running out of money so the 81.5% success rate Adfecto mentioned is probably more like 95%+ in real life (and in my opinion).

Mike

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