Drawing down a windfall...

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freddie
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Re: Drawing down a windfall...

Post by freddie » Mon Sep 08, 2014 11:51 am

kaudrey wrote:
Tarkus wrote:So… I guess I am wondering if we are crazy to be withdrawing from our portfolio to fund our lifestyle. There’s simply not a lot of advice available on people who are drawing down their investments even prior to retirement.

Are we on the right track or misplaying our hand? What would you do in my shoes?


I am glad you are thinking that you are spending too much. I think if my portfolio shrank that much in 3 years I'd be addicted to sleeping pills because there would be no way I could sleep at night. One problem with living a higher lifestyle when you are working is that it is hard to reduce that lifestyle in retirement, so it becomes a cycle of perpetually needing more money.

If I were you:

1) put your kids in public school
2) vacation budget = $10K
3) shopping budget = $10K (what are you buying for $57K???)
4) keep that car for 10 years at least, next car should be under $30K
5) find other ways to cut expenses

Because your income situation is questionable in 2 years, at the MOST, I would live on the $250K (ALL expenses, including taxes). I would save the $80K rental income, and stop withdrawing any money from your portfolio. If you want any hope of being able to spend anything near that in retirement, you have to be building up your portfolio, not reducing it. Or are you thinking that when you turn 65, suddenly you will be OK living on $50K or even $100K?


This might be overreacting. The portfolio really isn't shrinking (granted I don't know what it was before he sold the company). Remember the portfolio didn't start with the 6 million and the 1.4 million donation to the company really isn't a spending problem. That is an investing one. Lets say he takes 4% out for the next 20 years of his working life. Odds are he will have ~6 million real when he retires. That isn't going to be enough by any means to replace a 400k lifestyle but it is a heck of a lot more than 50 or 100k. Now obviously there are all sort of investments risks along the way (i.e. he might only have 500k or he could have 10 million) but to some extend you can adapt along the way. In 15 years when schooling ends you can adapt by not replacing that spending, cut trips down for a couple of years during a bad run, and so on. The 4% rule is a guideline more than an absolute plan. When you have a lot of time and ability to cut expenses you can be optimistic about life.

It really comes down to that job. If it pays out 250k/yr for the next 20 years, go ahead and live the 400k lifestyle. You will be fine. If it goes down to 100k though you need to be able to adapt to living on 250k. Cut that vacation budget down, shoot the horse (I am afraid to ask how you spend 11k on pets), no more house renos, and so on. But I definitely wouldn't look at a 1 year budget. You need to look at 5+ year ones so you can see what your total expenses are (i.e. last year for me expenses were up almost 75k due to one time things needing to replace a heating system, 10+ year old car, unexpected medical, moving costs. You need to budget for costs like that but project out that I am buying a new car and HVAC every year is not useful).

Bubbagump
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Re: Drawing down a windfall...

Post by Bubbagump » Mon Sep 08, 2014 1:08 pm

This could be a handy tool:

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

But as was previously mentioned and this tool confirms, 2-2.5% withdrawal rates are about as far as you can push things and never draw down your nest egg.

I am looking at a liquidity event (as the suits call it) myself and have based my planning on about a 2% withdrawal rate (or less as I'll probably work jobs that I make no money but have no stress. Soup kitchen line worker maybe. A librarian. ) .... then as I get older (35 now) I can ramp up spending if it makes sense seeing that I can't take it with me.

freddie
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Re: Drawing down a windfall...

Post by freddie » Mon Sep 08, 2014 1:34 pm

Bubbagump wrote:This could be a handy tool:

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

But as was previously mentioned and this tool confirms, 2-2.5% withdrawal rates are about as far as you can push things and never draw down your nest egg.

I am looking at a liquidity event (as the suits call it) myself and have based my planning on about a 2% withdrawal rate (or less as I'll probably work jobs that I make no money but have no stress. Soup kitchen line worker maybe. A librarian. ) .... then as I get older (35 now) I can ramp up spending if it makes sense seeing that I can't take it with me.


it depends on your risk tolerance. If you want to be north of 99%, you need to get to down to 2%. If your happy with around a low 90%, then 3% works out. If your happy with 80%, 4% is more than adequate. 20% failure sounds horrible but the real world result isn't going broke. It is that you need to cut your expenditures somewhere along the way. In all of the cases, odds that 15 years in you will be able to bump them up.

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Zapped
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Re: Drawing down a windfall...

Post by Zapped » Mon Sep 08, 2014 2:18 pm

Tarkus wrote:In the hands of my private equity partners ... the business has not done well. They were very aggressive and leveraged the business to the hilt, taking on a huge multi-million dollar bank loan to acquire a competitor. That decision only made sense if the growth continued, and starting about a year ago, the industry has been flat or shrinking. In 2013, we missed our budget considerably. Earlier this year the bank demanded that the investors de-leverage the company, and with a gun to my head I wrote a check for my share of the “capital call”: $1.4 million. To have done otherwise would have meant being diluted out of the business I worked so hard to build. (I have a lot of doubts and angst about whether I made the right decision.)
:
Are we on the right track or misplaying our hand?


As someone who has always been an employee and never a manager nor an entrepreneur, I don't have to worry about Machiavellian arbitrage schemes and how they affect my ownership stake in any company. I've been on the sidelines as the replies come in to this thread, though, waiting for somebody to ask a loaded question. Curiosity has gotten the better of me so I've got to ask it now.

Let's call Tarkus' company AVIS and the competitor HERTZ just to keep things straight. The investors I'll call ANGELS.

A Parable For Today: The ANGELS want to buy HERTZ. They can't afford to buy HERTZ outright and can't get a bank or another group of investors to foot the bill. So they buy AVIS instead. When the deal is done they use the equity and goodwill of AVIS to leverage the real transaction they desired all along - to acquire a loan sufficient to purchase HERTZ. It doesn't matter if AVIS is saddled with debt or if the ANGELS make management errors along the way. They don't care if AVIS lives or dies; in fact it's better if AVIS dies off leaving HERTZ dominant. In the interim, there may even be employees remaining at AVIS with either a vestigial ownership stake or strong desire for continued employment who might freely give back some of the original proceeds from the sale of AVIS to further strengthen the ANGELS balance sheet and eventually strengthen HERTZ. It's only in retrospect that what transpired seems obvious to all who attended the party. Soon enough AVIS will be gone, former AVIS employees will flee, HERTZ will dominate, and the ANGELS will be counting their manna from heaven.

Does this seem like a fairly accurate description of what happened here?
- Jim in Austin, TX

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Abe
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Re: Drawing down a windfall...

Post by Abe » Mon Sep 08, 2014 5:14 pm

Your problem is you are spending way too much. If it was me and I was your age, I would NOT be drawing anything from my investments unless I had to. I would let my investments continue to work for me as long as possible. Your 250k salary should be plenty to live on. I would start now looking for another job two years down the road.
Slow and steady wins the race.

freddie
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Joined: Sat Feb 08, 2014 11:06 pm

Re: Drawing down a windfall...

Post by freddie » Tue Sep 09, 2014 7:48 pm

Zapped wrote:
Tarkus wrote:In the hands of my private equity partners ... the business has not done well. They were very aggressive and leveraged the business to the hilt, taking on a huge multi-million dollar bank loan to acquire a competitor. That decision only made sense if the growth continued, and starting about a year ago, the industry has been flat or shrinking. In 2013, we missed our budget considerably. Earlier this year the bank demanded that the investors de-leverage the company, and with a gun to my head I wrote a check for my share of the “capital call”: $1.4 million. To have done otherwise would have meant being diluted out of the business I worked so hard to build. (I have a lot of doubts and angst about whether I made the right decision.)
:
Are we on the right track or misplaying our hand?


As someone who has always been an employee and never a manager nor an entrepreneur, I don't have to worry about Machiavellian arbitrage schemes and how they affect my ownership stake in any company. I've been on the sidelines as the replies come in to this thread, though, waiting for somebody to ask a loaded question. Curiosity has gotten the better of me so I've got to ask it now.

Let's call Tarkus' company AVIS and the competitor HERTZ just to keep things straight. The investors I'll call ANGELS.

A Parable For Today: The ANGELS want to buy HERTZ. They can't afford to buy HERTZ outright and can't get a bank or another group of investors to foot the bill. So they buy AVIS instead. When the deal is done they use the equity and goodwill of AVIS to leverage the real transaction they desired all along - to acquire a loan sufficient to purchase HERTZ. It doesn't matter if AVIS is saddled with debt or if the ANGELS make management errors along the way. They don't care if AVIS lives or dies; in fact it's better if AVIS dies off leaving HERTZ dominant. In the interim, there may even be employees remaining at AVIS with either a vestigial ownership stake or strong desire for continued employment who might freely give back some of the original proceeds from the sale of AVIS to further strengthen the ANGELS balance sheet and eventually strengthen HERTZ. It's only in retrospect that what transpired seems obvious to all who attended the party. Soon enough AVIS will be gone, former AVIS employees will flee, HERTZ will dominate, and the ANGELS will be counting their manna from heaven.

Does this seem like a fairly accurate description of what happened here?


Sounds like the investors thought company A(10 million) and company B(20 million) together would make company AB(60 million) so they do these deals. Our partner says great idea that will turn my 4 million into 8. But those synergies don't come about and then company AB runs into a case where they need 5 million bucks (partly to pay back the loans used to buy the companies) to meet the needs for the next 2 years. There have 2 choices. A) raise the money from the partners or B) get the money from outside investors. The outside investors look at it as say company AB has a worth of 10 million so for 5 million we want 90%. So our partner has a choice. Right now he owns 13% of AB. If he doesn't put up money his share gets diluated down to lik 1% or he can put up the money and maintain his ownership position. Of course the problem with B is that he is througing money into a poorly run company

You might say deal B is horrid but if the option is between bankruptcy and taking the deal, you take the deal.

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