70 % Question

From time to time I run across references to 'the 70% of pre-retirement income being needed to maintain one's standard of living in retirement". I also see references to 'perhaps 50% is all that is needed'. I don't recall ever seeing the calculations and assumptions behind the 70% estimate but someone likely did it years ago. I expect there is some logical rationale behind this percentage estimate.

I wonder...did those calculations include "an equivalent income" from a home that is owned during retirement?

In many cases, the rent one would have to pay to replace one's home is not a small sum, and it should therefore be considered in the "How much do I need for retirement?" question.

When financial advisers are giving conservative advice to the general public the 70 % estimate may not be that far off the mark if one's home is included as part of the income. There may also be a bit of a safety factor in the 70% estimate.

For example, if one owns a $200,000 home, this "net worth component" could be sold and the money invested. It would provide perhaps $14,000 per year ($1,167/month) before tax at 7%.

The Four Pillars of Investing by William Bernstein

I'm currently working though a book I picked up at the library. I'm impressed with it so far and would recommend it to anyone who has money to invest. It is not an easy or quick read, but it contains critically important information for the investor. With respect to small investors, Bernstein points out that they (we) fail to understand the relationship between risk and reward, and that we fail to stay the course when things get tough.

I agree that ignorance about how the markets work and inexperience with the psychological aspect of being invested in the market, are important obstacles to overcome. Like Bernstein, I feel lucky (in a way) to have experienced a good sized bear market. I watched as co-workers got excited about the dot.com stocks soaring to ridiculous heights. It was a real time lesson in human nature during the building of the dot.com bubble. The media did a great job of cheer-leading everyone on.

It was difficult to keep from getting caught up in it all. One would have had to live like a hermit in a cave not to be effected by it. I must admit that in 2000, I owned shares of Nortel for about 10 days when it was at $65, before I came to my senses and sold. Crowd psychology can draw you in even when you know at an intellectual level that it is a dumb move.

Holding on to stocks during a bear market must be the most difficult. I have not experienced it first hand but saw the effects on others. During the dot.com bear market I was selling short and buying Puts. I didn't make any money, in fact even though I had a number of profitable trades, on balance I still lost a little, but I did have more fun than those who stayed in long positions.

Alcan Update May 24, 2007

Further to my last post about Alcan, it has now jumped up above the $90.00 level. Now...does my forecasting method work or was I just a lucky coin flipper?

Alcan Chart

The Smith Manoeuvre

I have requested Smith’s book from the library for further research into this concept. Although I own my home mortgage free I’m curious to see what I might have done.

If I understand it correctly…the basic premise is that the house title in one’s name gives one the power to make a big loan. Rather than just pay down the mortgage, the Smith Manoeuvre goes one step further.

As the principle is paid off each month, use this increment in growing home equity as collateral for a second loan and use the loan for investment. The mortgage payment and original loan amount remains the same and your equity in the home continues to grow as under the normal approach.

The interest on the "new loan" amount is then income tax deductible. I guess, in general terms…if one makes 10% on investment, pays 7 % on the "new loan" and has a marginal tax rate of 50%, then the after tax cost of the new loan is 3.5 %. The net increase in net worth is 10-3.5 = 6.5 %.

One of the main benefits is that rather than waiting 25 years, while paying off the mortgage, then start investing, one starts investing much earlier in life. This time factor is one of the biggest obstacles to becoming financially independent.

Alcan Update May 11, 2007

In my recent first post about Alcan I indicated that I expected the price to continue sideways for a time while the trading volume became lower and lower... then break out above the recent price peak near $90.

The price has not broken above $90 yet, but it continues to shows signs of likely doing so. The daily chart shows how the volume has continually diminished since the price peaked near $90. The price and volume pattern continues to follow a pattern that I have seen many times before.

In most cases, when I see a stock price move generally sideways and the volume continually drop off, it is a signal of a strong upward price climb coming next. The same thing can happen upside down when the price is getting ready to drop lower in a longer term downward price trend.

The literature on the stock market includes a theory that the stock market is a "random walk" meaning that one cannot predict the future. I agree that to a large extent one can not predict the future except on the basis of just being a "lucky coin flipper".

However, I continue to believe, that "on occasion", patterns of price and volume become apparent that increase the odds of being correct in predicting price movement. Unfortunately, for me at least, the existence of these patterns has not translated into the ability to make "sustained stock market profits". It is also a lot of work to find and track individual stocks that exibit such patterns.

These days I just make predictions for the fun of it and keep my money in safer harbours.

Alcan chart link.

"Top 5" Things To Achieve Early Retirement

I've decided to take on the "Top 5" challenge, as much to see what I could come up with this morning, in addition to being eligible for the random draw for $1001 USD being given away by Problogger.

So here goes.

To help you reach early retirement...however you define "early retirement" I can recommend the following five concrete actions.

1. Buy your own home and ensure that you can have the mortgage paid off before your early retirement date.
2. Monitor your cash flow by whatever method works for you. See my earlier post on this one for the easiest way I know how to do this.
3. Don't let your job be your entire world...view it as just a means to an end- just a way to generate cash flow. Do an excellent job while your there, but be able to walk away from it.
4. Drive a used car to avoid the heavy depreciation costs during the first few years of new car ownership.
5. Always live "below your means". Save by paying yourself first and continually look for ways to enjoy life while spending less.

S&P/TSX Composite Index

I'm not sure what is going on but I'm making a little money on my index funds these days. Up a couple of percent since April 20th. That beats the heck out of safe havens like GICs.

The TSX both comp and venture appear to be on jet fuel lately. I really don't care why...oil, banks, whatever. Maybe it's just month end buying by mutual fund managers or pension fund managers. I guess they have routines like all of us.

Those guys, the one's receiving all the savings from the "soon to be retired baby-boomers" have a lot of money to place somewhere. For one reason or the other additional money is going into the markets. It all works for me.

TSX Comp link
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=CA%3A89199000&sid=46938&o_symb=CA%3A89199000&freq=1&time=7

Update: I heard later in the day that a run on Alcan was responsible for the increase in the TSX Comp today (Monday). However, Alcan does not explain what happened to the index prior to today.

The chart for Alcan is interesting. (Link below)

I will not be betting any money on this prediction... but the Alcan chart strongly suggests a further price increase. The volume is decreasing as the price moves sideways near $90.00. Once the shares available for sale near $90 are sold any motivated buyers will have no choice but to pay a higher prices. There may also be some buy stop orders sitting just above this sideways price, aimed at riding the next wave upward. This could cause further gap ups. It will be interesting to watch.
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ca%3Aal&sid=0&o_symb=ca%3Aal&freq=7&time=3

Short Vacation

We spent a week visiting people on the mainland in Vancouver and Kelowna. This houseboat on Granville Island, very close to the heart of Vancouver, caught my attention.

I have no idea what the moorage fees are for this home but I expect this residence is a lot less expensive than living in one of the many hi-rise condos (in the background) that surround False Creek where Granville Island is located. I understand the condos are worth in-the-order of half a million dollars.


An interesting way to reduce housing costs.