Adjusting for Things not Going the Way I Planned

"In preparing for battle I have always found that plans are useless, but planning is indispensable." Dwight D. Eisenhower

When I took early retirement in October, 2007, the Dow and S&P 500 were at all time highs. Our liquid assets were equal to 23 times my annual salary before taxes and we had over 50% equity in our home. A Monte Carlo analysis by our financial advisor showed that savings had a 96% confidence factor of being able to last into our 90s, assuming a 7% return on investments.

In 2007, we were pretty comfortable with the decision to retire in my forties. We planned to maintain our lifestyle, live primarily on investment income, pay for our daughter's college education, and even leave an inheritance. After all, the analysis had a 96% confidence factor that my retirement would be successful.

Then the financial crisis of 2008 happened, and the remaining 4% probability took effect. Needless to say, the situation changed since our liquid assets have declined significantly. As the stock market went, so did our retirement accounts. Instead of growing 3% (7% gain minus 4% withdrawal) per year as projected, the accounts fell by 41% in 1.5 years, from 23 times salary to 13.7 times salary at the market bottom in March, 2009. As a result, our initial retirement plans became useless.

However, because we did the planning and understood the factors affecting retirement, we have been able to make some critical adjustments to account for the economic situation.

Spending has been cut back. Our original projection was to spend at 90% of our pre-rearmament expenses, which included a mortgage. We have cut our expenses by 30%, mainly by paying off the remainder of our home mortgage.

Having some wage income is now important. In 2007, I didn't think I would need work to cover living expenses. However, until our portfolios recover, I'm targeting to earn about 20% of annual expenses to reduce our retirement account withdrawal rate.

Implementing both of these adjustments boosts the probability of retirement success to over 92%, based on Monte Carlo analysis. At this point, the spending reduction has been completed and I earned about 10% of our annual expenses this year through part time jobs. Hopefully, these adjustments will enable our savings accounts to partially recover and, once again, cover current and future retirement expenses.

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This is not financial or retirement advice. Please consult a professional advisor.

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