Wednesday, August 22, 2012

Staying on track

Right now a chap is being interviewed on BNN and he is saying that in his view this "train" is going to keep charging ahead, at least in the short term. But there are flags on the horizon. He is warning that investors must brace themselves for the possibility of a strong pullback in stock values.

I agree wholeheartedly. Today I checked my portfolio and it is up almost 11 percent for the year on an annualized basis. This is good --- maybe too good.

I use a spread sheet to track my investments and plan my retirement spending. Spend too much and you run out of money before your life runs out of steam. The rule quoted in much of the retirement literature is "remove no more than four percent annually from your retirement savings." It is a good rule of thumb, but only a rule of thumb.

My spread sheet has a column showing my portfolio opening value and my original goals for my portfolio's value at the end of the first year and at the end of every year thereafter through 2014. I estimated an overall annual return of seven percent with four percent to be removed annually to cover living expenses. (The seven percent figure reflects what a financial adviser at ScotiaMcLeod said he would deliver if I put my account in his care.)

In other words, retire on $400,000 and at the end of the first year you hope to have a balance of at least $412,000. ($400,000 + $28,000 [7%] - $16,000 [4%])

If the market goes through the roof, as it has since my retirement, one can spend a little more. I have. Based on my original retirement portfolio, I removed 6.1% from my plan this year. This might sound foolish but I defend this by saying I have 34 percent more in my portfolio than I had originally forecast.

Now, back to our speeding financial train. It can jump the tracks. A financial train wreck is never out of question. What would be a financial train wreck? How about a loss of 34 percent? If this should happen, I am prepared in two ways: I can cut the amount I remove from my RSP to 2.6%. That is the amount that I must remove, based on my retirement starting balance, in order to live. And mentally I have a 34 percent cushion. Until I lose 34 percent, I am still on track.

No comments:

Post a Comment