Important Update to – How Much is Enough to Retire?

When I wrote the post I was focused on the assumptions Baby Boomers need to make to plan their retirement nest egg goals. It was a well-intentioned attempt to get Baby Boomers to really think about the six question Todd says you should ask yourselves before filling out any of the many free retirement calculators and then thinking life will be a breeze or, you will be moving into the poor house anyway.

However the post really missed what is probably the centre-piece of Todd’s eBooklet “How Much Is Enough to Retire? How he retired at 35 years old and what he did to achieve that.

Simply put it is all about building your capital so that in retirement you will spend less that the total returns on that capital. The goal is you never touch your capital. That is true wealth. That means all the assumptions I wrote about in my first post are irrelevant. (He does consider inflation too in case you are wondering.)

That’s the real magic and it makes it all the more important to get his eBooklet and read it.

Todd explains it better than I in his email response to my earlier post. The complete email is posted here for Baby Boomers to read. Todd has some valuable and well-considered comments on Jim Otar’s retirement calculator which is based on historical data too.

From: Todd R. Tresidder [mailto:todd@financialmentor.com]

Sent: Wednesday, 12 August 2009 4:45 AM

To: David Bates

Cc: ‘Todd R. Tresidder’

Subject: RE: Contact: My new book

Hi David,

Thank you for the review. Much appreciated.

I’m very happy with how you perceived the book and wanted to add just two things for your consideration…

1: The first is just a technicality – my last name is spelled Tresidder.

Early in the review it is misspelled. No big deal. Just thought I would point it out.

2: I like your emphasis on the assumptions problem and how I encourage a range of assumptions. The only thing I would add is I really offered two solutions to the assumptions problem in the book. The first solution you mentioned which is creating a confidence interval or using a range of plausible assumptions for those not familiar with the term confidence interval.

The second solution occurred at the end of the book and is the solution I personally adopted. I re-engineered my retirement analysis from being asset driven to cash flow driven. If you think about it cash flow is what matters.

Assets are just the middleman that throws off the cashflow and is at best loosely correlated to cash flow (assuming you are a boomer with a life expectancy in retirement approaching 30 years which includes both of us).

This reorientation from assets to cash flow eliminates nearly all the assumption problems and is invaluable for boomers with time horizons of 30 years or more where the math dictates essentially a perpetual income stream.

Another advantage of the cash flow approach is it opens up creative solutions to retirement. For example, let’s say you build your blog business up to where it throws off $2,000 per month in residual income through advertising, product sales, etc. Using the rule of 25 or 4% rule that is roughly equivalent to another $600,000 in retirement savings.

Most people find it far easier to figure out how to spend 2K less or earn an extra 2K per month in a fun business than to surface another 600K in savings.

In other words, once you refocus on cash flow it allows you to eliminate most of the assumption problems and get more creative at finding solutions to savings shortfalls – this is a key point and very relatable for the target market you serve.

Anyway, I just wanted to mention those two points as I really feel the latter one is very important and worth mentioning as I have not seen it developed in any publications outside my own.

Regarding the “engineering mentality” and the allure of Otar’s backcasting that you mentioned in your email… The reason I am so positive that he is wrong is my experience in the hedge fund business engineering trading systems for investment. (I also have an engineering mentality) The same allure exists and it is equally flawed.

The past is not the future. It is very tempting to run analysis on the past 100 years for anything from retirement scenarios to trading systems and believe it is valid. The problem is it’s not and the results consistently prove it. What it does is give you a framework and helps you understand how your model would behave given those historical scenarios, but it does not tell you what the future will be or what your model will do in the future.

It is a rough guideline that shows potential possibilities but nothing more.

The map is not the territory. History is not the future. No historically derived trading system ever performs in the future like it did in the past, and no historically derived retirement scenario can be relied on for the future. It just ain’t that simple or linear. It is dynamic. The future is untold and unpredictable.

The current fundamentals with entitlement payment problems, asset overvaluation, indebtedness, government funny-munny policies, and more have never existed before. The result will be unprecedented.

In addition, the last 100 years saw the rise of the US as the world’s great industrial power in a relatively sound currency environment with no real competitors. All that has changed. The past will not be the future.

To rely on the last 100 years as anything more than an interesting research exercise is a fools game (IMHO).

I really believe the only viable solutions in retirement planning are two

fold:

1: Asset driven approach using confidence intervals and extreme assumptions.

2: Cash flow approach as outline in final chapter of ebook.

Anyway, that’s my two cents worth.

Again, thanks for the review. You are welcome to add these comments to your comments area if you want. I just didn’t feel it was appropriate for me to comment on your review so I wanted to give you the option to ignore me, add these thoughts yourself, or add them to the comments as you see fit.

Whatever you think best serves your readers and your business. I’m just appreciative of your review.

Hope it helps, and again, thanks.

Todd R. Tresidder

Founder – FinancialMentor.Com

todd@financialmentor.com

775-852-8897

One Response to “Important Update to – How Much is Enough to Retire?”

  1. admin says:

    Todd,

    Thanks for being so nice about misspelling your name. It has been corrected.

    Let me assure you I actually took great care to spell it correctly. However when I did the spell check before uploading to my blog from Live Writer I kept clicking on “Change” for some reason. I recall aborting the spell check as soon as I noticed it was auto-correcting and then starting it again.

    Unfortunately it obviously thought “Reside” was fine and I did not pick it up. “Reside” is the first word in the spell checker list when checking your name.

    My sincere apologies for my careless mistake.

    With respect to your second point I made the choice of only focusing in the Assumptions in my post. I know it to be a “hot button” with me and you covered it so well. I get very annoyed at seeing many online calculators which appear to make it so easy to predict retirement income by just filling in a form in just a few minutes. This gives a false sense of security to many Boomers who find this overwhelming in the first place.

    But I concede I should have covered the other major topic in your eBooklet, that regarding your cash flow solution to retirement.

    With your permission already given, I will make your email a featured post on my blog and will add my response as the first comment.

    This is the least I can do for you and my readers.

    Regards,

    David Bates

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