Retirement Planning

I'm trying to figure out what I will need to retire, so I can plan accordingly and can achieve my targets without any heroic efforts at dramatic belt-tightening later in life...

Every resource I tap has a different formula. Here's what I think makes sense for me...

The necessary condition for retirement is to be debt free... I currently have a mortgage, but no other debt - I must have my home paid for.

But more importantly, I think that my uncommitted liquid assets (investments, savings accounts etc. outside of any funds earmarked for college for our kids (when we have them) should equal 50 times our annual expenses the day we retire. In addition, we should have a bit extra set aside if we are retiring early.

Based on where we currently live, I think our expenses would probably be about $4k p.m., at current prices, including property tax, condo fees, utilities, food and entertainment, health insurance, occasional travel and setting aside money to buy a reasonable car every 5-7 years.

This translates into a $2.4M retirement fund target at today's prices. Assuming a conservative 3% withdrawal rate, that would allow me to withdraw $72k per year, or about $48k after federal and state taxes.

In the meantime, a conservative portfolio should be able to generate about 6% returns, which would give us the ability to keep pace with inflation, especially in the early years. However, our consumption basket will shift towards healthcare over time, and we will probably experience higher inflation than the broader economy, so we are still exposed to the risk that we might need to tap into principal during retirement.

But if my plan calls for us to tap into principal, like so many plans out there, we don't have the buffer to absorb major shocks (either financial / market shocks or health shocks).

Mortgage regulation?

So I've been reading about the whole sub-prime issue, and seeing the different "fixes" for the problem... I see the conservative (caveat emptor) and the paternalistic view (people need to be protected from their own choices because they are incapable of making the right choices), and I don't buy either in their pure form.

Is there a middle ground? I think so. I think people need to be protected from a lack of information / misinformation, but cannot and must not be protected from the consequences of an informed decision - no matter how inappropriate the decision is.

So: regulate disclosure, so that the mortgage market suffers from less asymmetric information, and, having armed the borrower with enough to make an informed decision, let the borrower beware.

No small print, no hidden terms, and then, if the borrower proceeds with the contract, the lender's liability should only be limited to failure to disclose or gloss over a disclosure to close the deal.

If the lender/broker influences the borrower to not worry about the terms / borrowing limits/ payment / rates in future periods, that is a violation of the code of conduct and creates a potential liability. If the lender makes all appropriate disclosure (regulation needed to determine what constitutes appropriate disclosure), the lender has met his/her duties, and should be insulated from the legal consequences of the loan - though not, obviously, the financial consequences.

In either case, I don't think anyone who buys the mortgage from the lender / broker should be liable for anything. We cannot have a secondary market if every purchase transfers the liability and therefore the onus of ensuring that every individual mortgage in the security meets standards. We can have a secondary market even if individuals make poor choices that cost them their homes... The pricing of the security will reflect the risk, and may lose value, but the market provides liquidity to the market, lowering rates for everyone and bringing the American Dream within more people's reach.

Any thoughts??

When will the housing market turn? I vote for 2008.

I've been watching the housing market for several years, and decided to hold off upgrading my house in 2005/06 because I thought the market would go into a decline in late 06 and stay there for at least 18-24 months. So I hope to save money and position myself to take advantage of the downturn to move to a bigger place.

I think its going to get uglier in many parts of the country. I'm not sure what I want next : Another townhouse, a condo in the city, or a house with a yard - or even stick with my place. But I do know that I'm preparing to make the best of it, and can afford to sit on the sidelines watching :-)

More charity thoughts

Digging a bit deeper on the previous post on charity...

Perhaps I might be able to find a financial institution I can work with in a three way arrangement.

Say the institution lends a needy student the money for medical college tuition. I step in with the offer (when she begins the program) that, upon completion of her medical degree, I will pay 20% of her student debt for every year that she spends working in a small town / village.

It sounds good, but I wonder how practical it might be. I need to investigate this further.

Bang for Charity Bucks

I've been thinking about the best way to maximize the impact of my charity dollars, not only to make a difference to the recipients life, but also, to achieve a social good.

I believe that spending the money in the developing world would make the money go much further, and has a greater public benefit impact as well. Being Indian, that leads me to wanting to direct my charity to India.

Healthcare and education are the areas I view as greatest public goods. Sure, a developing economy needs more engineers and architects and entrepreneurs and a host of other critical contributors... But I want my money to go towards helping drive grassroots change as people work their way out of poverty.

At the margin, I want to help enable a poor student to learn medicine, and I want to incent her to practice medicine in a rural area or a small town. I need to figure out a way to reach a young girl (who may be a greater agent of change in a patriarchal society) who would otherwise not find financing, so I'm making a genuine difference at the margin, not just subsidising education for someone who would have become a doctor on her own (or borrowed)dime anyway. And how do I get her to stay and practice in places most in need of doctors, when she can earn so much more by moving to the bigger cities?

My first post

I'm not sure how to begin... I've been thinking about blogging for a very long time, but I'm finally ready to take the plunge.
A little bit about myself: I'm an equity analyst with a major bank, with a wide variety of interests. While I expect to touch upon many of them, including reading and travel and music and politics and the environment, I expect to focus mostly on topics related to the economy, the markets, and personal finance.

Someday, I hope to go back to school to get a PhD in economics, but I'm a long way away from that goal - I have much to do to get clearer on who I want to be and what questions I want to answer. But in the meantime, I hope to use this blog to explore my thoughts.