Smart Investing


May 18, 2012


Determining the right time to retire

I often hear people say, "I understand how Brent Wilsey builds a portfolio, but how do I know when I can retire? How does the portfolio change?"

I don’t have enough room here to explain everything in detail, but I do promise, before the end of 2012, to do a workshop on how to know when you can retire.

Right now, people may be getting a little nervous again because the markets have been pulling back for the last few weeks. Don’t get nervous — this happens. It’s normal.

If you go back to 1980, you will discover that despite average intra-year drops of 14.5 percent, the calendar year returns were positive 25 of the 32 years. I don’t know about you, but I like those numbers.

Investors must keep their heads on straight no matter what markets are doing, and this is true for investors building their wealth along with those who are using their money for living expenses.

The first thing the potential retiree must do is find out what their expenses are. Sounds simple, but I have had many investors come into my office over the years who had to go back home to figure out what their expenses will be when they retire.

Once you get this number — and be sure to be realistic about it — you can add up your income from all sources to see if it will match or, hopefully, exceed your expenses.

I have also seen many people spend thousands of dollars with a “financial planner” to see if they can retire. Don’t waste your money. If your expenses exceed your income, you can’t retire. It’s that simple.

Be sure to include income from all sources, like Social Security, pensions and investments. The investments might be an area that people become most confused about. Do you switch to bonds, annuities, REITs? So many choices.

For the past 15 years, I have had a rule for retirees that we can take distribution of 6 percent from the portfolio. It has worked well, even during 2009.

I tell people it is like a chess game: One must plan ahead two to three years and be prepared for the unexpected. When markets go down, and they will go up and down, you will more than likely panic on the downside and sell at low prices and ruin your retirement plan. Because of this, I have always advocated that investors have a professional who knows what he is doing and is not just some salesperson hawking some investment to you.

Setting up the plan involves diversification, some liquidity and the right investments. Let’s say you have $500,000 in investments that you are going to use for retirement income — 6 percent of $500,000 would give you $30,000 per year in income, or $2,500 a month. That’s the easy part.

Now you must pick the investments. Do not fall for any rules of thumb that are supposed to work, or any age calculations. If stocks are priced well, buy stocks; if bonds make sense, buy bonds.

It is important to plan for the downside, so I generally keep about 18 percent in cash in the beginning. This way I know I can pay out 6 percent for the next three years and not worry about selling anything in the portfolio. I also know that if the portfolio that I built is earning 2 percent per year in three years, I will have another year’s income accumulated for year four. If you know what you’re doing and you’ve done a good job of investing at reasonably low prices, in four years some of those investments should be worth more. At that point in time you can begin to harvest some of your investments for income.

The big mistake that can kill your entire plan is if you sell your losers and keep your winners. While this might make you feel better, it is portfolio suicide. You are actually selling low and buying high by doing this. Why? Because you hate to look at your losers month after month but like to brag about your winners. What I do in this portfolio, and it has worked for years, is to sell the investments that have become overpriced and hold or sometimes even invest more into those that are currently down.

This type of plan can work, or you can go the old route of taking your 1-2 percent interest on your CDs or bonds. I would also encourage you to consider that you could be in retirement for 15-30 years, so why would you need short-term investments?

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


May 18, 2012