Sunday, October 29, 2006

Retirement planning

Now that my net worth is finally back in the black, albeit only barely, I can once again focus some attention on retirement planning. Since I am 52, early retirement at 62 is just ten years away. Retirement at 65 is 13 years away, and a worst case retirement at age 70 is still only 18 years away.

I had wanted to make a solid stab at my revised financial model this weekend, but I got into other things and also realized that some of the key questions are not so easy to answer in a robust manner. Meanwhile, my 401k and employee stock purchase plan are on autopilot and accumulating value in excess of 30% of my gross salary each year.

The key questions or assumptions that I need to nail down to refine my retirement financial model are:

  1. What age will I retire at? That's when my asset accumulation ends and my drawdown begins.
  2. What age would I like to retire at?
  3. What criteria should I use for deciding when to retire?
  4. Will I be able to work part-time during retirement? What level of income could I expect?
  5. What lifestyle will I be able to afford in retirement?
  6. What will heathcare cost me in retirement?
  7. What will housing cost when I retire? Will it grow at, faster than, or slower than inflation between now and deep into my retirement?
  8. Should I plan on buying a house or condo to live in before I retire, or would it be wiser to accumulate financial assets and rent?
  9. What rate of inflation should my financial model assume, both before and during retirement?
  10. What rate of return should I plan for on assets before and during retirement?
  11. What asset allocation mix should I presume at various stages up to and then during retirement?
  12. Given my age and the fact that I am essentially starting over, what additional level of investment risk can I realistically take on?
  13. How long can I expect to live? How much risk am I taking if I model my asset drawdown to hit zero when I turn 105? Should I model it to 110 or even 120 to be really safe? How can anybody really know the answer to this type of question?
  14. How do I project social security benefits during retirement, particularly inflation? If I have my current benefit estimates from the SocialSecurity Administration, how do I model them out to my retirement age and during retirement?

I'm currently thinking that a rate of return of 4% is reasonably conservative. Warren Buffett used to talk about a long-term expectation of 7% with 3% inflation, netting 4%.

My main retirement plans are Roth, so I won't have any income taxes to pay. I have stock and cash that is in taxable accounts, so that needs to be discounted by taxes (and inflation).

I am currently assuming that I will work full time until age 70. That puts me in the most financially secure position, but I'm not sure I'll be able to last that long. Maybe I might enjoy life more reiring at age 65. On the other hand, maybe I can arrange my career to be more satisfying in those outyears.

There are plenty of retirement planning tools out there (e.g., MSN Money Retirement Planner), but it isn't clear how dependable they are. After all, it is always garbage in, garbage out. So, the catch is not the model, but the paramaters, such as future inflation, rate of return, and life expectancy.

-- Jack Krupansky


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