Author Topic: Variable draw rate  (Read 913 times)

ontario102

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Variable draw rate
« on: May 08, 2017, 11:53:22 PM »
Hi All-

Short time lurker. Thanks for the great information in this forum!

I'm planning for retirement only slightly early, in 8-10 years,

I don't have a unique situation, but probably not common. I'm 50; 2 very young children (<1yr/4yr), a wife 14 yrs younger, and I'm planning on retiring in a financially stable, but developing, foreign country (Costa Rica <CR>). Planning horizon is 35 years (95 yrs old).

I have expected yearly living expenses worked out fairly well, I believe (assuming a 2x higher than USA inflation rate and fairly stable exchange), but I am trying to work out how to approach estimating draw down because of variable income over retirement years due to when I/spouse/children may get SS, drop off SS, spouse eligible for 1/2 benefits, periodic trips to USA, 2% per yr spending reduction later in retirement etc.

The spreadsheet I have set up estimates inflation adjusted yearly draw, sometimes going as low as $21k but going up to $90-$100k for a few years, and associated viable draw rates (1.3% to 10.7%). In my spreadsheet, I am currently assuming about $900k, with growth at 7%/year, and it has calculated that I die leaving over $2m to my wife.....?! Some questions as I try to tighten up include:

1) using cFIREsim or other estimates, should I assume overall average 35 year draw rates/annual draw, or look at initial (high) draw rates in first period as one set, and re-calculate for second(lower average)?
2) What risks are there in substantially higher early year draw rates (6%+ ave. first 1/2 to < 2% ave. second 1/2 of retirement)?
3) Given that Certificate of Deposits rates in CR are government guaranteed (in state banks), give fairly high interest rates (ranging from 3.3%/1 yr to 6%/5yr in US$$, currently), and because bonds are such a crappy investment now and in the near-term, can these CDs be treated as and substantially, but not completely, replacing bonds in a portfolio?
4) Assuming CR CD rate spread remains 3-4% over US CDs, is it unreasonable to bump up my assumed return from 7% to 8%, given that normally a 6 to 7 % portfolio growth rate assumption is pretty standard given I may be 30% or more in these high yielding CDs?

Exchange rates, inflation, and CR interest rates are/could be difficult to predict, and the spread between US and CR CD rates may tighten, but the good news is that the CR central bank is at least making good progress on inflation (4-6% target) and the floating exchange rate has keep exchange rates within a 10% window for many years.

I would not convert to local currency until living locally in CR, and don't necessarily expect such large spreads in US to CR CD interest rates to remain forever; but there is good reason to believe they will be substantially higher than the US rates for the foreseeable future.

Thoughts?

MustacheAndaHalf

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Re: Variable draw rate
« Reply #1 on: May 09, 2017, 07:04:19 AM »
I assume you already have term life insurance setup for the next 10 years.  The goal would be that your wife and kids would be okay if something happens to you during your working years.

Moody's downgraded Costa Rica's bonds to Ba2, which I think is one notch below investment grade.  Essentially you're seeing higher rates because the government debt of Costa Rica is considered junk bonds - and might get worse.
https://www.moodys.com/research/Moodys-downgrades-Costa-Ricas-government-bond-rating-to-Ba2-continued--PR_361770

The purpose of bonds is to remain steady, so it's very dangerous to chase performance with bonds and CDs.  I would not move bond money into Costa Rica.  Take the lower performance, and keep it U.S. bonds.  If you want exposure to Costa Rica, I'd suggest the stock portion of your portfolio for that.  That's where risk and growth belong, not with the bond allocation.

Do you have a stock/bond allocation you'll use in retirement?  You'll want to ease into that allocation over the next 8-10 years.

ontario102

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Re: Variable draw rate
« Reply #2 on: May 09, 2017, 08:29:15 AM »
So I should be considering bank issued CDs as government (junk) bonds? That makes some sense, but private bank CDs are offering similar rates, but are not "insured" by the national insurance agency (INS) as of yet. They have introduced legislation to change that.

I'm heavy on the equities/cash (70/20) and light on bonds (8%), and well insured. Looking to re balance to 60/20/20, or maybe slightly higher (65 for equities.

I assume you already have term life insurance setup for the next 10 years.  The goal would be that your wife and kids would be okay if something happens to you during your working years.

Moody's downgraded Costa Rica's bonds to Ba2, which I think is one notch below investment grade.  Essentially you're seeing higher rates because the government debt of Costa Rica is considered junk bonds - and might get worse.
https://www.moodys.com/research/Moodys-downgrades-Costa-Ricas-government-bond-rating-to-Ba2-continued--PR_361770

The purpose of bonds is to remain steady, so it's very dangerous to chase performance with bonds and CDs.  I would not move bond money into Costa Rica.  Take the lower performance, and keep it U.S. bonds.  If you want exposure to Costa Rica, I'd suggest the stock portion of your portfolio for that.  That's where risk and growth belong, not with the bond allocation.

Do you have a stock/bond allocation you'll use in retirement?  You'll want to ease into that allocation over the next 8-10 years.