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September 29, 2012


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Very interesting metaphor... I'm glad it appears I am on track as I am in my mid twenties and have been saving at least that much! Nice to know I'm on my way to Oregon.

Nice post. As a fellow financial planner I appreciate the detailed logic and the entire thought process.

The assumption that a 11% average annual return from the stockmarket is likely for the next 40 years assumes that the USA is in normal times.

Unfortunately we are far from that. For the first time in its long history the USA is facing a fiscal cliff at year end when the limit on the national debt must be raised. The Federal Reserve bank has just initiated the QEI program (Quantitative Easing to Infinity), one reason that gas and food prices have been rising. There is also the stubborn jobless rate of 8.2% average across the states. If anyone thinks that these are normal times then they have had their head in the sand for the last five years. Because the Fed is pumping so much money into the investment banks the stockmarket is now disconnected from the economy's dismal statistics and most of the trading is done by the computer trading programs at Wall Street's big banks. The small investor is totally at their mercy.

The bond market is affected far less by this but historically it has made smaller returns than the stockmarket.
Since 9/1/1988 Vanguard's S&P500 fund's ANN=9.67% but with a Max Drawdown of -55.26%.
Since 9/1/1988 Pimco's Total Return Bond fund's ANN=8.84% with a Max drawdown of -6.63%.

One fund I have owned this year is Pimco's Income fund whose ANN=23.35% YTD, Max Drawdown -0.89%.

I know it's almost impossible for busy working people to do, but if you subscribe to a fund database that is updated daily, comes with good software tools, and you have the time, education, and mental ability to learn the skills required to use them you can vastly outperform the average investor by staying in the strongest, low volatility, funds at all times rather than following the crowd with their index ETFs.

In my own case I retired at age 58 in September 1992 as a software engineer with $320K of investments. Our fixed gross income from our pensions and SS now totals $65K/year and our investments have grown to over $7M. The only withdrawals we have made, since 2005, are to pay the taxes on the MRDs due on our IRAs every year.

Old Limey,

Wow...$320K of investments at 58 seems really meager. We're in our early 30's and have managed to accumulate twice that all on our own with fairly modest incomes. However, I know that I'll never be able to reach the $7M threshold no matter how much I invest. Right now everything is about market timing.

With that in mind, what is you prediction for stocks over the next six months? I'm also in Vanguard's Intermediate Municipal Bond Fund and GNMA Admiral, but even so, I worry about municipalities quite a bit these days and sometimes I wonder if the 2% yield on these is really preferable than just putting $ into a 1% CD.

My husband and I have been saving for our retirement since we received our first paycheck. Aside from our personal retirement savings account, we are also paying for our retirement contributions. But as I have been saying, I do not have a specific age when to retire. I will keep on working, writing and blogging for as long as I can.

It is a shame more people don't realize the importance of saving for retirement in their 20's rather than a decade or two later. The pragmatic approach of 15 percent of your salary makes a big difference down the road.

You forget that salaries were a great deal lower in my days compared with today. In 1960 as a junior engineer at the largest aerospace company in the USA I hired in at $9,000/year. When I retired in 1992 I was a senior staff engineer, with an MS, making $72,500/year. My wife worked part time for about 16 years as a teacher's aide and retired in 1993 making $13,500/year. By comparison my 48 year old son, with only a high school diploma, just got promoted to US Western region sales manager for a large international company at $162,000/year. This may make you think about how high prices will be in another 30 years. The good thing however is that by the time you retire you own most of all the things that you need and don't have to buy much for the home other than maybe a new appliance now and again.

I cannot predict what the stock or the bond market will do over the next 6 months, I don't have a crystal ball.
There are generally 3 classes of municipal bond funds, short term, intermediate term, and long term. The best no-load municipal bond fund this year has been BCHYX. On 12/30/11 it was $9.60, today it is $10.13. For the YTD it currently pays a monthly income of 3.6c per share and has an ANN=12.2% and a Max Drawdown=-0.91%.

The short term muni bond funds vary little in price and pay a much smaller monthly amount. My wife recently received a low 6 figure inheritance that she wants to be kept separate from our investment portfolio so it's in a short term muni bond fund called STSMX that has a YTD ANN=2.61% and a Max Drawdown of -0.10%. I don't worry about the stability of municipal bonds, most of them also carry insurance. I own 110 different groups of municipal bonds with maturities ranging from 11/15/2012 to 10/1/2040 and an average yield of 4.98%.

To add to the above, set something aside for the possibilities of Health Issues that are not covered by Medicare/Medicare Advantage plans or other Insurance.

If one is assuming to live to 100, the prospect of developing some type of condition requiring Assisted Living/Memory Care/Alzheimer's increases dramatically after 80. Causes are many for this condition.

A combination of Long Term Care Insurance, Social Selectivity Income, Investment Income and other Income can make the "Cash" payments for that care. But what if only one of the couple is beset by these conditions?

I see this first hand in my Parent's. Mom has severe to profound Alzheimer's and probably should be in some type of facility. In the last 6 months has been in the Hospital and then Skilled Nursing/Rehab twice, for a total of 2 months. Of course Medicare pays for that. We are trying to help both parents age in place in their Condo. This requires the need for Caregivers to be hired and paid from cash reserves.

Their LTR and VA benefits covers only a portion of Facility care and would require the paydown of many assets to cover the additional costs. Current costs in our area are in the $9,000 to $11,500 per month range in an appropriate facility. And who knows the life span of Mom? From my calculations they have enough in Investments, SSA, Retirement Income, VA Benefits, and other sources to cover them until death. But, and I say but, there is a small probability that they could exhaust their monies and then have to go on Medicaid.

Since I have become directly involved in their care, I have come across a large segment of the population, doing the same thing as I. Many are friends from High School, after I moved back home.

Oh BTW, Mom only started showing signs of Dementia in the summer of 2009, just 3 years ago. She is now 89. Prior to that, they traveled extensively and enjoyed their Retirement.

Conclusion: Set aside some money for unexpected Major Medical Expenses. I have been going to special training sessions, conferences and so on regarding the subject. I have come across a lot of walking wounded: Spouses, Children and Family trying to take the best care of their Elders and wading though the maze.

One last thing: make sure all of your Legal Documents are in order if such befalls you or someone else in your family. Thankfully, my parent's did that.

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