The Semi-Retired Calculations – Part II

Alright in the interest of time I’m going to make a simplifying assumption here.  I’m going to assume that I don’t have much of a problem pulling money out of taxable and tax sheltered accounts once I semi-retire (ie: I can pull enough from my non-locked in/taxable accounts to hold off until I can need to pull  money out of my locked accounts).  So that way I can just pile all the money into one number as I sort out how much will I have at 39.  Please note that all my calculations are in present dollars, so all investment returns have been reduced by 1.5% to adjust for inflation.  I’m aware that official inflation is higher than that over a longer time frame, but my personal inflation rate is usually less than that.

Another thing I’m going to do is adjust my start time slightly forward to this summer.  Why? Because the final mortgage payment will occur about the middle of summer.  So it makes everything then occur on a nice neat yearly basis.  So as of Jan 1, 2010 I had about $100,000 in investments/savings.  Adjusting for my pension contributions and RRSP contributions till July 1, I will add in $5000.  Then to simulate growth on that I’ll add another $2500.  So my starting value of investments is $107, 500.

I will grow that forward at 5% for two years at $1250/month in contributions, which puts me at around $150,000.  I went with 5% since I’m not changing my investments during this time. At which point the mortgage is paid off.  So now rolling all that money over that I used to put on the mortgage means I can save in total $3965/month.  This doesn’t include my school board income.  Yet my school board term doesn’t expire until late that fall, so with that in mind I’ll just adjust my starting point up by $6000.

So growing $156,000 at 4% for five years at $3965/month I end up with $453,000.  I reduced this to 4% to cover off a significant shift over to fixed income in the portfolio that will occur during this time.  Now that value of $453,000 is actually highly significant.  Since I’m only taking out $18,000/year in this scenario, that would mean I can take that every year from my stash of money and never drawn down the principle as long as my returns stay at 4% + my personal inflation adjustment.  Nice eh?

Tomorrow I’ll try to wrap this scenario up as I link up the semi-retirement phase to full blown retirement when I turn 60.   Please let me know if you have any questions.  I’ll try to include answers in the post tomorrow or the comments on this one.

4 thoughts on “The Semi-Retired Calculations – Part II”

  1. I have two questions:
    1) Why fixed income? If you assume a 4% withdrawal rate (quite safe), wouldn’t you want to get the highest return or yield possible? You could create/buy a portfolio of fixed income, preferred shares, dividend-paying common shares and income trusts/REITs that would yield 6%-7% and the equity would still allow some capital growth.
    2) Have you considered borrowing money? Because you are assuming 4%-5% return, but banks’ prime rate is below 4%, you would come out ahead by borrowing money. In addition, it would offer a tax deduction (for the interest paid).
    What are your thoughts?

  2. Robert,

    1) The overall mix would approximately be $50,000 set aside for income stabilization. So any income we earn would go in there to help smooth out higher year with lower ones. It would also give me a two year full $27,000 expense float to cover any sudden stock or health issue. The remaining $400,000 I was thinking about $100,000 in equities and the $300,000 as fixed income. Why? Basically habit of thinking in terms of full retirement where you can’t recover from those down years and you plan on using that principle. Yet with some kind of income I could potentially expand that risk slightly. I still think I would have a large % in fixed income. I tend to think on the conservative side for risk management.

    2)I know borrowing is technically possible, but you can hang yourself with that rope. I’m not a big fan of leveraging and in this case I’m running such a short time frame I don’t think it will gain my much for the risk.


  3. Tim,

    Thanks for sharing how you think about these things. I don’t think there is a right or wrong answer, only what’s most appropriate for you.

    I’m not sure about bonds being conservative. The risk I see is reinvestment risk: what happens if interest rates are low and you have no choice but to reinvest at 2%-3%? (My answer is that hopefully your stocks have grown, so that you can either shifts assets from stocks to bonds, or take income from your stocks.)

    I think it’s a really good idea to adjust your investments for retirement two years (or more) early. Then you can understand how it works and maybe even become aware of pitfalls, before you depend on the results. Start owning a mix of stocks and bonds, to understand the characteristics and behaviour of each.

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