My retirement plan was written in late 2005 and is over due for a review which I did over the weekend. Here are my notes:
1. no draw down: the "no draw down" financial model remains the basis for my plan. Simply put, given the very long period for which our retirement savings must last (50 years) and fears about inflation, I consider relying on draw down of principal to fund retirement too risky;
2. asset allocation: I had considered a more or less equal mix of real estate and equities as the best means of providing both recurring income and protection against inflation. While I still favour these two asset classes, I have been educating myself about the benefits of asset allocation and rebalancing and am more open to adding other asset classes (especially bonds and commodities) to the mix;
3. calculating retirement needs: my model divided my retirement needs into five categories: (i) income producing assets for living expenses (ii) lump sums for completing my children's' education (ii) lump sums for anticipated one off events such as my children's' weddings and a one time change of our primary residence (iv) our primary residence and (v) an emergency fund. I see no reason to change this list of retirement needs. However, I do continue to speculate about (a) the amount of money needed in each category and (b) the best place to invest each category. I am still inclined to view the categorisation as a means of working out how much we need in order to retire and then not distinguish between the five categories in my portfolio management;
4. prioritising asset acquisition: I had intended to put the real estate investments in place first to allow time for rental income to pay off most of the mortgages before retirement. My thinking has now shifted and I am more inclined to start building the equity components at the same time. This process started in April 2006 with a mixture of monthly automatic payments supplemented by lump sum investments into various mutual funds;
5. real estate investments: the number of properties we require has changed. Based on original projections, I had expected to need to purchase one more investment property and to upgrade one of the existing properties. As my vacancy rates have been higher than anticipated, I have decided that I should buy two more properties (as well as upgrade one existing property) to provide an additional safety margin. At present all my Hong Kong properties are residential. I am considering making the last two acquisitions small retail shops to better diversify the portfolio;
6. progress: I am on track to retire at 50 (should I chose to do so). Even after adjusting for inflationary increases in anticipated retirement expenses, I require a return on my investments of 6.1% pa over the next nine years to achieve this. This number (obviously) includes a number of significant assumptions. However, I am confident that so long as both my wife and I remain in our current (or similar) employment divergence in the other assumptions (inflation, exchange rates, yields, tax rates, lifestyle, location) should not have a material impact on timing.
In summary, progress towards the goal of retiring at 50 is going well. The changes to the plan mentioned above are relatively minor and should not effect timing.