Practicing for Retirement

Why not practice before retirement? Here are my suggestions.

Focus

I made an easy transition into retirement because I focused on the mundane, day to day issues.

Focusing on a once in a lifetime event such as a spectacular trip may build your enthusiasm, but it does not address the real issue: what are you going to do all day? Even if you have lots of projects such as word around the house, you will eventually get them done. You need to look forward to each day’s activity. Vegetating around a television will not satisfy. Nor will alcohol.

I knew for sure that my days would be full. This is the key to retirement.

Somewhere along the line, you need to be sure about finances. This is how you can practice. Start about 5 or 10 years ahead of time.

Look at Something Simple

Assuming that you will be retiring with about $1.0 million or more, how about putting $10000 (that is, 1%) into the Something Simple portfolio? This consists of equal amounts into DVY and PFF, Exchange Traded Funds similar to index funds. Manage cash flows to withdraw $600 per year (plus inflation). This is a 6% (plus inflation) continuing withdrawal rate. Under no condition should you sell funds for income.

Something Simple

Read the article carefully. There is a high likelihood that this portfolio will decrease in price even though the income stream is likely to grow faster than inflation. Ask yourself whether you really are satisfied with something like that.

If not, you may prefer something along the lines of a delayed purchase approach. You may prefer something more traditional such as Valuation Informed Indexing. If so, practice first on the Scenario Surfer.

Matching Bills and Income

The next step is to match the $600 per year income with a bill. Perhaps, water. Perhaps, garbage. Perhaps, books and magazines. Get used to doing this. This is how to you measure progress.

Keep Track of Inflation

You can keep track of inflation by a variety of measures. However, you might just prefer to start out assuming 3% per year. Each year, increase your withdrawals by a factor of 1.03. In the first year, you would withdraw $600. In the second year, you would withdraw $618 (=$600*1.03). In the third year, you would withdraw $636.54 (=$618*1.03). And so forth.

Manage Your Cash Account

You will find that you have more than $600 in the first year. You need to save the surplus for later years. If the dollars were enough, you would do well to buy more DVY and PFF. With a small dollar balance, however, you would be better off putting the excess into a money market fund or a bank account. Fees wipe out any advantage of reinvesting a small dollar amount.

Managing your cash flow is one of the most important skills that you can learn for retirement.

Understand the Risk

Read my cautionary statements in Something Simple very carefully. Thoroughly understand the risks. Even then, there may be risks that I have not identified.

Training can sometimes be expensive. I do not believe that this will be the case. I believe that it will be rewarding. Regardless, proceed with caution.

Have fun.

John Walter Russell
August 20, 2008