Average Monthly Income For Farang?

[quadricorrelator]

200000 baht is US$5000 a month or $1250 a week or $60000 a year.I think a lot more than 1.5% of the US population make more than that and many a lot more.Someone who retires with a net worth of $1 million and gets 10% in interest and dividends could make almost twice the top amount without touching his principal.I will really like trying to find ways to spend my retirement.

1. I think the poster was saying the following: If one third of the posters are claiming over 200,000 baht per month, and the mean houshold income in the U.S. is 130,000 baht per month, then one third of the survey respondents are making over 150% of the mean household income in the U.S. I agree with this logic if the numbers are correct.

2. I think the overwhelming majority of American retirees (or Americans in general) do not have one million dollars. I have heard statistics that claim one in thirty are millionaires in the U.S., but I think that is doubtful. So many people can't seem to pay off their credit cards, or their house, that debt is rampant. I wonder how many people have managed to save even $50,000.00 after subtracting out their debt.

3. I agree with your idea that: If you have 1 million dollars, and you get a 10% return, then you get $100,000.00 per year. But, after taxes and inflation it comes down to only 40K per year (and that is optimistic if you are a foreigner living in Thailand).

I would also point out that you can not expect to get 10% every year. If you hit down years before up years, then you will probably never recover.

My calculations are as follows:

If your income is $100K, then you must have to pay at least 20% to the IRS. This puts you at $80K. Then, you must account for inflation, which is about 4% (historical long term average). That puts you at $40K (8% - 4% = 4%) per year. In addition to this, you must account for the fact that inflation is probably greater than 4% for foreigners in Thailand. So, your buying power is about $40K per year, or about 130,000 baht per month, if you have one million dollars.

Let me put it another way: Experts say that you can withdraw about 4% of your net worth per year without drawing down your principal. 4% is a safe withdrawl rate.

This statistic assumes that your assets are properly diversified. I doubt that most of us (myself included), have enough knowledge to diversify optimally.

I would argue that 4% is too high a figure since the market is overvalued if you compare price to earnings ratio with the historical average. I think 2% might be a safe withdrawl rate if you do not want to reduce your principal.

-q

[thai1on]

200000 baht is US$5000 a month or $1250 a week or $60000 a year.I think a lot more than 1.5% of the US population make more than that and many a lot more.Someone who retires with a net worth of $1 million and gets 10% in interest and dividends could make almost twice the top amount without touching his principal.I will really like trying to find ways to spend my retirement.

1. I think the poster was saying the following: If one third of the posters are claiming over 200,000 baht per month, and the mean houshold income in the U.S. is 130,000 baht per month, then one third of the survey respondents are making over 150% of the mean household income in the U.S. I agree with this logic if the numbers are correct.

2. I think the overwhelming majority of American retirees (or Americans in general) do not have one million dollars. I have heard statistics that claim one in thirty are millionaires in the U.S., but I think that is doubtful. So many people can't seem to pay off their credit cards, or their house, that debt is rampant. I wonder how many people have managed to save even $50,000.00 after subtracting out their debt.

3. I agree with your idea that: If you have 1 million dollars, and you get a 10% return, then you get $100,000.00 per year. But, after taxes and inflation it comes down to only 40K per year (and that is optimistic if you are a foreigner living in Thailand).

I would also point out that you can not expect to get 10% every year. If you hit down years before up years, then you will probably never recover.

My calculations are as follows:

If your income is $100K, then you must have to pay at least 20% to the IRS. This puts you at $80K. Then, you must account for inflation, which is about 4% (historical long term average). That puts you at $40K (8% - 4% = 4%) per year. In addition to this, you must account for the fact that inflation is probably greater than 4% for foreigners in Thailand. So, your buying power is about $40K per year, or about 130,000 baht per month, if you have one million dollars.

Let me put it another way: Experts say that you can withdraw about 4% of your net worth per year without drawing down your principal. 4% is a safe withdrawl rate.

This statistic assumes that your assets are properly diversified. I doubt that most of us (myself included), have enough knowledge to diversify optimally.

I would argue that 4% is too high a figure since the market is overvalued if you compare price to earnings ratio with the historical average. I think 2% might be a safe withdrawl rate if you do not want to reduce your principal.

-q

........ 1/3rd make more than 1.5% of the average salary paid in the USA ...

You are correct and I misinterpreted the statement about the 1/3-1.5%. and the average annual US salary is around $40,000 so $60,000 would be 150% more.The number of millionaires is dwarfed by the millions of farm workers,fast food employees,Walmart cashiers,etc.,so the average is pulled down so think the average middle class income is higher than $40,000 a year.My plumber and electrician get $50 an hour so do they quite well as compared to the average.My perspective is skewed as I grew up in a town with million dollar homes and doctors and lawyers and where everyone attended private schools.

Most people who reach retirement age are not millionaires at retirement but also most don't have to rely solely on Social Security.The negative savings rate and debtload is ominous for the future when the babyboomers start to retire and Medicare and Social Security will be tens of trillion in debt.

Don't see how $100,000 gets down to $40,000 taking into account 20% taxes and 4% inflation though.It should be around $75,000.

Withdrawal rates can vary depending on the stock/bond ratio and other investments.I am an active stock trader and my portfolio is heavily into stocks and am also in real estate.Fortunately in my case I am more comfortable than the $1 million case scenario laid out.

Edited April 1, 2006 by thai1on

[LaoPo]

People who make serious money, never talk about it

LaoPo

[thai1on]

People who make serious money, never talk about it

LaoPo

My father had a company with 800 employees so grew up with it.

I spent the last couple decades building office buildings so made it.

Don't make serious money now just play a lot.

Just the facts ma'am.

[LaoPo]

People who make serious money, never talk about it

LaoPo

My father had a company with 800 employees so grew up with it.

I spent the last couple decades building office buildings so made it.

Don't make serious money now just play a lot.

Just the facts ma'am.

I wasn't referring to you in particular, just general speaking, sort of.

I'm not a Ma'am...that's my LaoPo/wife; just use her Chinese 'wife-naming'

and...I hope you enjoy your well deserved playtime, and I mean that

LaoPo

[BKK Traveler]

3. I must keep company with people who are quite different than the ones who responded to this survey, since I know very few foreigners who make over 200,000 baht per month in Thailand.

I agree that the poll seems to not be very accurate, but given that the wording of the poll was completely ambiguous, it really has little significance.

Typically the people you know are at a similar income level. ESL teachers in BKK hang out with other ESL teachers. Retireees hang out with other retirees. Tourists hang out with other tourists. Execs probably don't hang out with much of anyone but if they did would hang out with people of a similar background. So if you are making less than 200,000 baht per month, then I'd expect the people you know would also be similar to you, so just because you don't know anyone making that kind of money doesn't really mean much. The people making large salaries are likely not very visible and even if they were they are probably wise enough not to go bragging about their income. Bragging about how much money you make will only attract people who want to (permanently) borrow some of your money, rip you off, etc.

[warriors]

Bragging about how much money you make will only attract people who want to (permanently) borrow some of your money, rip you off, etc.

Correct.

[The Dude]

I'll take that bet over not having cash. Thank you for your support

[quadricorrelator]

200000 baht is US$5000 a month or $1250 a week or $60000 a year.I think a lot more than 1.5% of the US population make more than that and many a lot more.Someone who retires with a net worth of $1 million and gets 10% in interest and dividends could make almost twice the top amount without touching his principal.I will really like trying to find ways to spend my retirement.

1. I think the poster was saying the following: If one third of the posters are claiming over 200,000 baht per month, and the mean houshold income in the U.S. is 130,000 baht per month, then one third of the survey respondents are making over 150% of the mean household income in the U.S. I agree with this logic if the numbers are correct.

2. I think the overwhelming majority of American retirees (or Americans in general) do not have one million dollars. I have heard statistics that claim one in thirty are millionaires in the U.S., but I think that is doubtful. So many people can't seem to pay off their credit cards, or their house, that debt is rampant. I wonder how many people have managed to save even $50,000.00 after subtracting out their debt.

3. I agree with your idea that: If you have 1 million dollars, and you get a 10% return, then you get $100,000.00 per year. But, after taxes and inflation it comes down to only 40K per year (and that is optimistic if you are a foreigner living in Thailand).

I would also point out that you can not expect to get 10% every year. If you hit down years before up years, then you will probably never recover.

My calculations are as follows:

If your income is $100K, then you must have to pay at least 20% to the IRS. This puts you at $80K. Then, you must account for inflation, which is about 4% (historical long term average). That puts you at $40K (8% - 4% = 4%) per year. In addition to this, you must account for the fact that inflation is probably greater than 4% for foreigners in Thailand. So, your buying power is about $40K per year, or about 130,000 baht per month, if you have one million dollars.

Let me put it another way: Experts say that you can withdraw about 4% of your net worth per year without drawing down your principal. 4% is a safe withdrawl rate.

This statistic assumes that your assets are properly diversified. I doubt that most of us (myself included), have enough knowledge to diversify optimally.

I would argue that 4% is too high a figure since the market is overvalued if you compare price to earnings ratio with the historical average. I think 2% might be a safe withdrawl rate if you do not want to reduce your principal.

-q

........ 1/3rd make more than 1.5% of the average salary paid in the USA ...

You are correct and I misinterpreted the statement about the 1/3-1.5%. and the average annual US salary is around $40,000 so $60,000 would be 150% more.The number of millionaires is dwarfed by the millions of farm workers,fast food employees,Walmart cashiers,etc.,so the average is pulled down so think the average middle class income is higher than $40,000 a year.My plumber and electrician get $50 an hour so do they quite well as compared to the average.My perspective is skewed as I grew up in a town with million dollar homes and doctors and lawyers and where everyone attended private schools.

Most people who reach retirement age are not millionaires at retirement but also most don't have to rely solely on Social Security.The negative savings rate and debtload is ominous for the future when the babyboomers start to retire and Medicare and Social Security will be tens of trillion in debt.

Don't see how $100,000 gets down to $40,000 taking into account 20% taxes and 4% inflation though.It should be around $75,000.

Withdrawal rates can vary depending on the stock/bond ratio and other investments.I am an active stock trader and my portfolio is heavily into stocks and am also in real estate.Fortunately in my case I am more comfortable than the $1 million case scenario laid out.

The reason that the 10% goes to 4% is the following:

1. The taxes are taken only from the 10% gains, so you lose 20% of the 10%. That brings you to 8%.

2. The inflation however, applies to the entire portfolio. Therefore, 1 million dollars loses 4% of its value over a year. This 4% of the 1 million dollars has to be replace from the 10% gain. 4% of 1 million is 40% of 100K. You actually lose 40K per year due to inflation on the 1 million dollars. So you lose 40% of the yearly gain due to inflation.

In fact, it is very possible that you will lose more to inflation than you will to your living expenses, especially if you are living in Thailand where expenses are lower.

I like the retire early homepage for learning about these issues. They claim that you can safely withdraw 4% per year without eating into your principal. Like I said, I think 2% is probably more realistic.

Their website is:

http://www.retireearlyhomepage.com/

Here is their study on safe withdrawl rates:

http://www.retireearlyhomepage.com/restud1.html

Here is their study on 4% withdrawl during bad market years:

http://www.retireearlyhomepage.com/novtips.html

-q

[Anon999]

Can't see what this has to do with the poll. OK so it may be ambiguous, however, it is asking us to guess the average monthly income for a farang. My guess was the average for the UK, taking into account the highs and lows. But nobody knows, so it's never going to provide and answer.

[DogNo1]

To quadricorrelator:

I think you misunderstand Schiller's observations on the principal of "safe withdrawal rate." If you withdraw 4% of your portfolio and it is optimally invested in well-diversified equities (which is his main point) rather than heavily weighted in bonds, then your portfolio will actually grow ahead of inflation. As a result of your portfolio growing, the 4% you withdraw actually increases each year as the value of your portfolio increases. Schiller found that even an investor who retired before the great crash of 1929 could safely withdraw 3.8% per year. So to use your example (which is exactly what I hope to do when I retire in a few years), if you retire with a portfolio of $1 million optimally invested in equities, the portfolio will make an average of 10% to 12% per year while you withdraw 4%. You are left with a net gain to your portfolio of 6% to 8%. Assuming that present tax law remains in effect, you will only pay 15% on the amount that represents capital gains. Even if you have made 100% on the equities you sell to withdraw the $40,000, you will be liable only for 15% tax on the basis cost of $20,000, or $3,000. This means that if you begin a retirement with $1 million, you should have $37,000 net your first year after US taxes. The next year, your portfolio should be worth, on average, 1,040,000 and you would again withdraw 4% of that, or $41,600. Of course, there will be up years and down years of the market, but it assumed that over time your portfolio will grow significantly. I am pasting below a quote from the page you referenced:

"Limiting your annual withdrawals in retirement to the "100% safe" level results in a significant portfolio at the end of all pay out periods. For a retiree starting with $1 million and a 50 year pay out period, there is a 50/50 chance of winding up with a portfolio of more than $16 million. That's $16 million after making annual inflation adjusted withdrawals for 50 years. Indeed, there is a 90% chance our retiree will have more than $9 million after 50 years. "

Nice to contemplate. Now if I can only maintain a good diversification in equities!

I hope this information will ease someone's mind about how far their savings can go.

[GuestHouse]

There is some very dangerous advice being given regarding investing retirement income.

The rule TO REMEMBER if you are past working age you cannot replace your retirement capital.

The investments you make should reflect this. How much you might make by investing in stocks is irrellevant, the issue is how much you might loose and how much you can afford to loose.

Like I said right up top. As soon as there are claims of high earned incomes, I get the salt out.

I get two pots of salt out when I hear claims of high income on stocks.

If you have enough money to retire and live off interest and never want to go back to work, put that money in Bonds.

If you need to invest in the stock market to maintain enough growth to continue in retirement, you haven't got enough capital to retire. You might do it, you might get away with it, but you are taking a risk for which the downside might well be poverty in retirement....or worse still, having to go back to work... in Farang Land

[quadricorrelator]

To quadricorrelator:

I think you misunderstand Schiller's observations on the principal of "safe withdrawal rate." If you withdraw 4% of your portfolio and it is optimally invested in well-diversified equities (which is his main point) rather than heavily weighted in bonds, then your portfolio will actually grow ahead of inflation. As a result of your portfolio growing, the 4% you withdraw actually increases each year as the value of your portfolio increases. Schiller found that even an investor who retired before the great crash of 1929 could safely withdraw 3.8% per year. So to use your example (which is exactly what I hope to do when I retire in a few years), if you retire with a portfolio of $1 million optimally invested in equities, the portfolio will make an average of 10% to 12% per year while you withdraw 4%. You are left with a net gain to your portfolio of 6% to 8%. Assuming that present tax law remains in effect, you will only pay 15% on the amount that represents capital gains. Even if you have made 100% on the equities you sell to withdraw the $40,000, you will be liable only for 15% tax on the basis cost of $20,000, or $3,000. This means that if you begin a retirement with $1 million, you should have $37,000 net your first year after US taxes. The next year, your portfolio should be worth, on average, 1,040,000 and you would again withdraw 4% of that, or $41,600. Of course, there will be up years and down years of the market, but it assumed that over time your portfolio will grow significantly. I am pasting below a quote from the page you referenced:

"Limiting your annual withdrawals in retirement to the "100% safe" level results in a significant portfolio at the end of all pay out periods. For a retiree starting with $1 million and a 50 year pay out period, there is a 50/50 chance of winding up with a portfolio of more than $16 million. That's $16 million after making annual inflation adjusted withdrawals for 50 years. Indeed, there is a 90% chance our retiree will have more than $9 million after 50 years. "

Nice to contemplate. Now if I can only maintain a good diversification in equities!

I hope this information will ease someone's mind about how far their savings can go.

Thank you for the corrections and idea. May I make some comments and ask some questions?

1. Increasing withdrawls over time: I think I understand part of your correction to my post. If the portfolio still grows after withdrawls, taxes, and inflation, then the withdrawl can grow as well (since you can withdraw the same percentage, but the portfolio has grown in value). You get more buying power with same percentage withdrawl since the buying power of the portfolio has grown.

2. Your tax calculation correction: I think you saying that the low tax rate is because you are only withdrawing 40k per year, not the full 100K (since much of the 100K is left in the stocks). That is good news (the post to which I was responding was withdrawing 100K). Thank you for this information.

3. Growth rate discrepancy: But, I still do not understand how the portfolio can grow significantly. Let me give a concrete example:

Given (in the first year)

i) 1 million in assets

ii) 40K withdrawl

iii) 15% taxes

iv) 4% inflation

v) 10% yearly growth

At the end of one year you get

+100K from the growth

-40K from inflation

-6K from taxes (40K * 15%)

-40K from withdrawl

This leaves 14K or 1.4% growth of the portfolio.

At 1.4% annual growth, the portfolio doubles in buying power in 51 years. You wind up with about 4 million dollars in 51 year, but it has 2 million dollars of buying power in today's dollars due to inflation. Your buying power doubles in 51 years. But, 1.4% does not leave much room for error.

If I use the 12% growth rate instead of the 10% growth rate, then the portfolio grows by 3.4% yearly buying power growth. That would multiply the buying power by a factor of 5 in 50 years. That is quite a bit better, but still not the 9 million Schiller is talking about.

I don't see how portfolio buying power could multiply by 16 in 50 years. That would mean your portfolio would have to double in buying power every 12.5 years. Your portfolio would have to get about 6% return per year after inflation, taxes, and withdrawls. But, this does not agree with my 1.4% calculation. Do I still have a flaw in my calculations or reasoning?

I would feel alot safer withdrawing 2%, rather than 4%.

4. How do you get 10% growth: I don't see how it is possible to get 10% growth in a portfolio unless you are invested 100% in stocks. I think bonds return about 6.5% and stocks return about 11%. So, if you have 50% in each then you get about 8.75% annual return (before tax and inflation).

-q

Edited April 2, 2006 by quadricorrelator

[jdinasia]

quick correction for the 1.5% remark ... that should be 150% or 1.5 X

[bendix]

I genuinely don't think it's that surprising that over a third of posters claim to be making over 200,000 a month. Why is it so surprising that there should be a fair number of well-paid expats on this site? I'd be surprised to see those figures on other 'more salacioius' Bkk/Thailand bulletin boards, but not Thai Visa.

Nor do I think it's that hard to find such salaries IF you have been relatively successful in the west. A friend of mine recently resigned from a well-paid position in Sydney. He came to Thailand three weeks ago, originally planning to take 6 months off before finding something to do. In that time, he has been offered two jobs, one at 180,000 a month, and another slightly less. Neither is what anyone would call an 'expat package' and neither will give him the huge apartment or luxury lifestyle which people seem to think comes with expat packages.

Someone else i know (in fact, I'm VERY close to him *ahem*) earns 490,000 a month, plus an annual bonus of around 1.3 million. But he's taxed at local rates, which means take-home is around 350,000 a month. Sure, he lives in a fantastic condo in the best part of town and is now looking to buy, but he doesnt eat out every night, is not interested in the hooker scene and even gets the BTS to work every day. He's choosing his lifestyle because he's aiming to save 200,000 a month with the view of giving up the rat-race in a couple of years time.

Horses for courses really.

He tells me he can't wait to swap his current affluent lifestyle for a more sedate time earning maybe a quarter of what he does now.

[The Dude]

A couple of things to respond to some recent interesting posts:

re: the tax issue; when you are a smart dude like The Loser, you pay no tax as he has numerous loopholes

re: guest house talking about retirement and buying stock; totally agree.

re: a million bucks; you listen to some of the poverty packers in this forum and you'd think you could live like a certified king for 1000 years on that kind of money up in rimwad village, issan.

re: bendix recent comments. agreed.

[Storekeeper]

I have heard this form people working at some embassies in bangkok

Some of those people are "local hires" and aren't getting anything but straight pay

based on their pay level. Lots of people standing in line for those jobs for even just

80,000 baht per month ... and saving their governments big bucks.

[greenwanderer108]

The greenwanderer has something to say to the Dude...nothing personal

All bow down to the wits of the Dude

Refers to himself like a WWE wrestle freak

Condesends on most for he is so rude

My guess is he's just a rich old geek

Sits behind his computer acting so fake

Trying to convince himself he's on top

Duh!!! Honeycombs are better than frosted flakes

So how does he spend when he goes to shop?

Is he so clever with his baht out on the town?

Has he ever even eatan Somtum I wonder?

Or is he just so rich with a silver spoon and crown

Doesn't have the balls to step out on yonder?

Talking down on Isarn as a poorman's hub

But has he ever been to this place he frowns?

Couldn't survive eating the Thai man's grub

But those who can he labels them clowns

[The Dude]

The Dude is proud that he has inspired a poet. The Dude has his ode to Green Wanderer:

Poor Little penniless Green Wanderer

He thinks all rich expats are money launderers

He came to Thailand a young man

Without 2 cents to throw in a tin can

He needs to go home and make some cash

then he can come back in 30 years with a stash

His future doesn't have to be so bleak

If he'd just stop acting like such a freak

So GW dude go home and get a job

after decades of work you won't be a slob

go and earn yourself a pension

so you can live in this country with no tension

Then when you're rolling in the dough

You will come back to Thailand, Land HO

copyright: The Dude publishing (aka Dig It with a Shovel Studios) Sukhumvit Soi 6 Bangkok Thailand

not to be used without express written permission of The Dude and associates

Edited April 3, 2006 by The Dude

[britmaveric]

Classic Dude I hand out a spade to you for your creativity!!!

[greenwanderer108]

If I did just what the Dude said

Coming back here when I'm old

My pencil almost out of lead

Barely hanging on...nearly dead

pockets fat he says---lots of gold

And to be what I despise

A rich old expat livin it up

Waisted 30 years away

With my eyes on some prize

Thought it over and again

But I think I'd rather stay

He thinks I'm in poverty

Cause I make less than him

But I'm quite fat actually

With lots of beer and meat

Attached to my limbs

Listen closely now all of you

For I will tell you a fact

Thailand's not so expensive

Despite the lies in the stats

but for the ignorant expat

Whos list of needs is extensive

You deserve what you get

When they steal all your pension

They charge you the higher price

And you think it's normal

As long as it does suffice

You need your rack of lamb

And I'll stick to chicken and rice...

[DogNo1]

Quadricorrelator:

First, let me respond to another poster who claims that you should have all of your money in bonds because stocks are risky. That's right. Stocks are risky and I believe that part of my portfolio should be in bonds (it is - TIPS). The question is how to protect the rest of your portfolio. The answer is through stop-loss sell orders that limit your loss on any holding to 25% to 30%. If you're out into cash at that point you can probably recover when the market turns. If there is a terrible bear market like in 1929, the proper stop-loss sale of your holdings would limit your losses to around $300,000 of your $1 million. The point Schiller is making, though, is that even someone who didn't act to preserve his capital would have come out owning a portfolio worth $9 to $16 million at the end of 50 years. What he doesn't mention is that the value of that person's portfolio would have fallen by as much as half in the short term, so that the 3.8% withdrawal from the portfolio would have dropped from $38,000 per year to $19,000 per year, but then increased as the investor's portfolio recovered and moved ahead. At least an investor who is in the red won't be paying any taxes, since capital gains losses can be subtracted from capital gains profits for a lifetime or until the investor is in the black.

The answer to how a $1 million dollar portfolio can grow over the years despite a 4% withdrawal rate is simply that over time, on average, you will be withdrawing less than your portfolio earns. Let's suppose that in a so-so year for the market, your portfolio only earns 6%, although the historic average for the market is 10% to 12%. Your portfolio earns $60,000. You withdraw $40,000. Your portfolio at the end of that year will be worth $1,020,000. Inflation works behind the scenes, eroding the value of the dollar, but you won't see it except in the cost of living. Regarding taxes, let's say that you sell 1,000 shares of XYZ stock that cost you $20,000 for $40,000. Since your capital gains are only $20,000, you will only pay taxes of 15% on the $20,000. That's only $3,000, leaving you with a net income of $37,000. Usually your capital gains will be lower, I think, so you would have a larger net income. Although at the end of a year inflation will have decreased the true value of your money, you would still have $1,020,000 in your portfolio. Your portfolio would have needed to grow $40,000 to $1,040,000 to keep up with inflation, so in this particular year, you will be 2% behind inflation. Schiller claims, though, that over time, averaging the good years with the bad, your portfolio will grow at the rate of around 10% to 12% per year so that, on average, even after your 4% withdrawal, you will be 2% to 4% ahead of inflation. (10% to 12% minus 4% withdrawal minus the 4% hidden erosion of inflation still leaves you with a gain of 2% to 4% in the real value of your money, although on paper, your portfolio will show a gain of 6% to 8%)

Although bonds are less risky than stocks, Schiller's point is that they do not earn enough to keep pace with inflation. If your portfolio is 100% bonds that earn 4.5% (a fantastically good rate right now) and you withdraw even the 2% that you propose, you will be 1.5% behind inflation since it averages 4% per year. (4.5% minus 2% withdrawal minus the 4% hidden erosion of inflation equals a negative 1.5%). In actual terms, your portfolio would grow by half a percent to $1,005,000 but would have needed to grow to $1,040,000 to keep pace with inflation.

I hope that I've been clear. Anyway, my personal strategy will be to keep my portfolio about 70% in stocks protected by stop-loss sell orders. I lost my shirt in the bear market of 2000 and learned my lesson.

I wish all of us, including myself, good luck. I'm looking forward to retiring in 3-4 years.

[DogNo1]

BTW, I just checked the average annual return on my portfolio that I've held for 7 years now and it is 11.1% It includes TIPs which are US Treasury inflation-protected bonds.

[quadricorrelator]

Quadricorrelator:

First, let me respond to another poster who claims that you should have all of your money in bonds because stocks are risky. That's right. Stocks are risky and I believe that part of my portfolio should be in bonds (it is - TIPS). The question is how to protect the rest of your portfolio. The answer is through stop-loss sell orders that limit your loss on any holding to 25% to 30%. If you're out into cash at that point you can probably recover when the market turns. If there is a terrible bear market like in 1929, the proper stop-loss sale of your holdings would limit your losses to around $300,000 of your $1 million. The point Schiller is making, though, is that even someone who didn't act to preserve his capital would have come out owning a portfolio worth $9 to $16 million at the end of 50 years. What he doesn't mention is that the value of that person's portfolio would have fallen by as much as half in the short term, so that the 3.8% withdrawal from the portfolio would have dropped from $38,000 per year to $19,000 per year, but then increased as the investor's portfolio recovered and moved ahead. At least an investor who is in the red won't be paying any taxes, since capital gains losses can be subtracted from capital gains profits for a lifetime or until the investor is in the black.

The answer to how a $1 million dollar portfolio can grow over the years despite a 4% withdrawal rate is simply that over time, on average, you will be withdrawing less than your portfolio earns. Let's suppose that in a so-so year for the market, your portfolio only earns 6%, although the historic average for the market is 10% to 12%. Your portfolio earns $60,000. You withdraw $40,000. Your portfolio at the end of that year will be worth $1,020,000. Inflation works behind the scenes, eroding the value of the dollar, but you won't see it except in the cost of living. Regarding taxes, let's say that you sell 1,000 shares of XYZ stock that cost you $20,000 for $40,000. Since your capital gains are only $20,000, you will only pay taxes of 15% on the $20,000. That's only $3,000, leaving you with a net income of $37,000. Usually your capital gains will be lower, I think, so you would have a larger net income. Although at the end of a year inflation will have decreased the true value of your money, you would still have $1,020,000 in your portfolio. Your portfolio would have needed to grow $40,000 to $1,040,000 to keep up with inflation, so in this particular year, you will be 2% behind inflation. Schiller claims, though, that over time, averaging the good years with the bad, your portfolio will grow at the rate of around 10% to 12% per year so that, on average, even after your 4% withdrawal, you will be 2% to 4% ahead of inflation. (10% to 12% minus 4% withdrawal minus the 4% hidden erosion of inflation still leaves you with a gain of 2% to 4% in the real value of your money, although on paper, your portfolio will show a gain of 6% to 8%)

Although bonds are less risky than stocks, Schiller's point is that they do not earn enough to keep pace with inflation. If your portfolio is 100% bonds that earn 4.5% (a fantastically good rate right now) and you withdraw even the 2% that you propose, you will be 1.5% behind inflation since it averages 4% per year. (4.5% minus 2% withdrawal minus the 4% hidden erosion of inflation equals a negative 1.5%). In actual terms, your portfolio would grow by half a percent to $1,005,000 but would have needed to grow to $1,040,000 to keep pace with inflation.

I hope that I've been clear. Anyway, my personal strategy will be to keep my portfolio about 70% in stocks protected by stop-loss sell orders. I lost my shirt in the bear market of 2000 and learned my lesson.

I wish all of us, including myself, good luck. I'm looking forward to retiring in 3-4 years.

Hi ermooney,

Thank you for your thoughtful reply and calculation examples. I think I follow your calculations.

1. I still have the following question: Let me ignore inflation, taxes, and withdrawls in order to focus on my question. In order to get the 10% to 12% market growth return, don't you need to have all your assets in the stock market? Won't a percentage of bonds reduce your return?

In the case of your plan, the return should be (12% * .7) + (6% * .3) = 10.2%

(since you have 70% invested in the market and 30% in bonds).

2. Stop loss execution: How exactly would you do this? Would you use the following procedure?

i. If your stocks + bonds fall below 30%, then you sell everything.

ii. Wait until the "phantom porfolio" recovers, and then continue exactly as it had been.

You don't know how long it will take to recover, so you don't know how much lost income from the bond payments you might lose. The lost income stream due to bond liquidation is unknown since you don't know how long it will take for the portfolio to recover. I guess it wouldn't be much anyway.

If this really works, then it would reduce the portfolio volatility without reducing the return. I am amazed that is possible. It means that you would be reducing risk without reducing reward. I am amazed this can be done through this simple method. It does seem to make sense to me, but I am still amazed.

Why wait until it drops 30%? Why not sell if it drops 10%? Aside from trading expenses, you could completely avoid any loss at all if you refused to let your portfolio drop at all.

3. How do TIPS work? Do they give a fixed percentage above inflation? If so, what is the percentage?

Here's one thing that bothers me about TIPS: You get taxed on the increase due to inflation (as well as any other gain). If inflation goes up 4%, then you have to pay taxes on that 4%, so you don't really get the full inflation protection.

4. In your 11.1% growth over the past few years, does that include deposits made into your portfolio?

thanks,

-q

[davethailand]

As i'm English i only earn 50000bht per month.

[GuestHouse]

Walter Mitty's Guide to Retirement Planning

First, let me respond to another poster who claims that you should have all of your [pension capital at the time of retirement] money in bonds because stocks are risky. That's right. Stocks are risky and I believe that part of my portfolio should be in bonds (it is - TIPS). The question is how to protect the rest of your portfolio. The answer is through stop-loss sell orders that limit your loss on any holding to 25% to 30%. If you're out into cash at that point you can probably recover when the market turns.

I've added the [pension capital at the time of retirement] because that is the point I'm making.

Am I the only person round here that remembers the Only Fools and Horses.... ????

Now please excuse me while I go out and buy another Kg of table salt... The BS level in here is getting beyond a joke, I need salt to take the taste away.... Sell Rodney Sell !!!!

Edited April 3, 2006 by GuestHouse

[Gary A]

I got nervous and sold totally out of the stock market. 2005 was a SUPER year for me. I now have three closed end bond funds. The three average a little over 9% yearly dividends paid monthly. Since these are still technically stocks I put a 15% stop loss on them. They have a low beta but I can't afford to lose much of my nest egg. I sleep well at night. The funds are; PHT, PTY and PFN. There is no load and no fees like mutual funds.

[thaihome]

If I did just what the Dude said

...blah... blah...

I do have to complement the retort to the even wittier jab from the other dude.

I am curious as to why you think just because a person is making what you consider a salary that should be outlawed that that person is automatically being ripped off or is paying too much for everything. Just this past weekend, we went to dinner on Sat at very nice wine bar (patronized over 90% by Thais) spent about 6K. Next night went to a another place and spent 600 (mostly beer). We really enjoyed both for what they are, but especially enjoy being able to choose either one without any financial impact.

Can you?

[DogNo1]

Hi q,

Let me take your last question first. The 11.1% is the figure returned by the portfolio feature of MSN Money that I use to keep track of my portfolio. I enter each new purchase and dividend reinvestment into it and it keeps track of the amount of gain of each stock over the purchase price and brokerage commission. It has a number of different views you can set up. One is performance which lets you see how much each holding has made in total, during the last month, during the last year, etc. It also calculates the average yearly gain of each holding. The 11.1 % is the average yearly gain of my entire portfolio including the bonds. You are correct in observing that having a percentage in bonds (in my case 30%) lowers your overall return. It also lowers your beta (portfolio volatility) and lets you sleep better at night although, theoretically, you should be able to protect a portfolio of all stocks successfully with stop-loss orders. I may move to all stocks at some point.

A stop-loss order is actually an order that you place with your brokerage to sell a stock when it reaches a certain price. If the stock doesn't fall to the price that you set, it doesn't sell. When it does sell, though, it may sell a bit below the price that you set. The stop you put on a stock should depend on what you consider reasonable volatility. Here's the reason I set many of my stops at 30%. About two years ago, I bought MFLX at $19. It promptly dropped to around $13 but because I believed in the ccompany and was in communication with the CEO, I didn't sell it. It then fluctuated for more than a year and finally went up to $22 around June of last year. I put a stop-loss sell order on it for $20. The price dropped to $19 and my stock was sold at $19.85. Two weeks later, the stock was at $38.00. Now it's at $60. Fortunately, I bought it back and am $23,000 ahead on it now. A stop-loss sell order of 30% (at $16) or even 20% (at $18) would have kept me in the stock and I would now be $41,000 ahead. I have seen many stocks and ETFs fluctuate up and down 20% each way. If you believe in the stock, you should be willing to ride this amount of fluctuation out, since as I pointed out, a 30% loss is recoverable in a couple of years. If you sell and buy every time a stock fluctuates 10%, your trading fees tend to eat up your capital gains and you will be very busy monitoring your portfolio. In the past, I lost money on selling stocks and then buying them back after they had gone up past the sell price. That happend to me pretty often a few years ago and I decided to ride out a fair amount of volatility. Some active traders do buy and sell based on small fluctuations in stock prices, but it's a pretty miserable existence, in my opinion and not worth the money you save sometimes.

Right now, most of my money is distributed in various Exchange Traded Funds and just a few stocks. There are index and closed-end funds that you can check out on etfconnect.com. One of my largest holdings is VTI, the Vanguard Total Market Index Fund. Its volatility is low but it still has made me 15.4% annually.

Regarding TIPs, they are treasury bonds that pay a certain return plus inflation. Besides the interest each year, the government also puts in an extra percentage that corresponds to the inflation rate for that year. My TIPs fund has not done too well, only earning an average of 3.8% per year. I expect it to do better as long-term bond rates catch up to short-term bond rates in the future. As you point out, I am paying 15% interest on the dividends each year. I may move my money into somethng else later, but basically I am holding the TIPs to cut down on portfolio volatility. The TIPs had done pretty well until about six months ago. BTW, you can view all of the details of any ETF just by typing in the fund symbol (TIP, VTI, etc.) at the top of the page in etfconnect.com and pressing "Enter." You will find that practically no ETF has a yearly maintenance fee of over 1%. Most are around .5% or so.

One final point is that I would only want to sell my stocks and stock ETFs in a real bear market where I needed to limit my losses to 30% or less. Schiller and Brokamp point out that you will come out ahead in the long run if you can ride out market volatility but I am not willing to lose more than 30% because of my age and because I can not wait 10 or 20 years for my portfolio to recover. Even if you are stopped out in a bear market, you can probably find a sector of the market that will be doing OK such as real estate investment trusts (REITs), gold or silver funds, overseas funds, or others. You should then be able to make enough within a few years to overcome your losses and yield an average yearly return of 10% to 12%.

I subscribe to The Motley Fool's "Rule Your Retirement" newsletter. An article by Robert Brokamp about the advisability of having most of your money in stocks just appeared yesterday. I can email it to you if you like. Of course there is risk in investing, but I believe that if you manage your portfolio correctly you can achieve gross yearly returns of 10% to 12%. It's worked for me so far.

[DogNo1]

Gary A:

I checked out your funds and they look pretty good. I may move from TIPs into one of them. Technically, PHT is a mixed bond and preferred stock fund. It's management fees are a little high at .99% but it looks like a great fund. Its four year average return is 15.75%. Thanks for the tip.