What is retirement rule of thumb

[jpg7n16]

I see that a couple of you are involving income in the formula, but I personally feel comfortable when expense is in the formula because these days jobs and salary is changing/fluctuating a lot and one can control and have somewhat stable expense patterns compare to income patterns.

Just remember that these are all estimates anyways. No one knows exactly how much you need because of all sorts of variables. Life isn't fixed, so even expenses can and will change during retirement.

Like Jim said above, since most people base expenses off of income, the 70-80% adjustment is an estimation of expenses as it relates to a percentage of income. Steve would use a 50% adjustment in his calculation.

When I calculate, I choose a slightly higher income and a slightly higher expense ratio. Both of those would require a higher target for me to shoot for. I'd rather save a bit too much, than a bit too little.

[disneysteve]

When I calculate, I choose a slightly higher income and a slightly higher expense ratio. Both of those would require a higher target for me to shoot for. I'd rather save a bit too much, than a bit too little.

I agree. My goal is not to replace what we currently live on. I want to have a higher disposable income in retirement so I'm shooting for 70-80% just like everyone else. I'm just hoping I'll have an easier time reaching that point since we only live on 50% now.

[MonkeyMama]

I see that a couple of you are involving income in the formula, but I personally feel comfortable when expense is in the formula because these days jobs and salary is changing/fluctuating a lot and one can control and have somewhat stable expense patterns compare to income patterns.

Good point.

I actually would probably use expenses to guage retirement needs (our income too has been far more volatile than expenses). I suppose I should have said, the younger you are the higher you should aim for. Using income was just an "easy" answer. But now that I think about it, might not make much practical sense to many people. Certainly not me.

I am aiming for "expenses" times a higher factor than 25, while in my young 30s. I'll put it that way!

[TrunkMonkey]

Most of the advice here and from advisors advocating 4% withdrawal seem like scare tactics and totally unrealistic. Also advice you get from online calculators usually overestimate the savings needs for most retirees.

You can judge your own needs better then anyone else.

If you want a guaranteed withdrawal for life just buy an annuity. You can get a guaranteed rate ~6.5% if you are 65. Spend this or stagger it and buy another later in 10 years - use this for your basic expenses.

That is one option to beat 4% withdrawal rate.

[Seeker]

Most of the advice here and from advisors advocating 4% withdrawal seem like scare tactics and totally unrealistic. Also advice you get from online calculators usually overestimate the savings needs for most retirees.

You can judge your own needs better then anyone else.

If you want a guaranteed withdrawal for life just buy an annuity. You can get a guaranteed rate ~6.5% if you are 65. Spend this or stagger it and buy another later in 10 years - use this for your basic expenses.

That is one option to beat 4% withdrawal rate.

And buying an immediate annuity has expenses that are related to the management of them. Many people lose money in the long run and would be better off just putting their money in savings (and retaining their principal).

I suppose you can purchase an immediate annuity for a guaranteed rate of 6.5%, but how much will it cost you? How much will each payment return? Add up all the "returns" until you reach the amount paid in. How long will that be?

The principal (purchase) immediately becomes the property of the investment firm (it's not in anyone's best interest to buy an annuity from an insurance company -- investment company's annuities are usually better products), and there are tax considerations as well.

People lose money by not managing their own financial future.

The money used for the purchase, management, etc for annuities, almost never get returned 100%. Ask what the payout rates are. Count them up. And know that even without inflation and all the other invisibles, you will never get all your money back from purchasing an annuity.

[jpg7n16]

Most of the advice here and from advisors advocating 4% withdrawal seem like scare tactics and totally unrealistic. Also advice you get from online calculators usually overestimate the savings needs for most retirees.

You do realize we're only talking about withdrawl rates, not earnings rates right? What scare tactics has anyone here used?

You can judge your own needs better then anyone else.

I disagree with this. That's why people study this topic and make a living doing it. And many people just aren't comfortable doing the math involved.

In fact let's take a poll: Say you think you need to have $60k of retirement income every year.

1) What amount of money would you need in a tax free investment account at retirement to create an inflation adjusted income stream of $60k at the beginning of each year, every year from age 65-95 (30 years), where the remaining principal in the account grows at an average of 7% and inflation averages 3%?

2) What if you wanted to guarantee you would never run out of money... how much would you need saved up to be able to withdraw an inflation adjusted $60k "forever"? (in quotes cause obv you'll die before then - but this is the question the OP asked)

All who can answer these questions please raise your hand.

If you want a guaranteed withdrawal for life just buy an annuity. You can get a guaranteed rate ~6.5% if you are 65. Spend this or stagger it and buy another later in 10 years - use this for your basic expenses.

That is one option to beat 4% withdrawal rate.

Another option is to write a bigger number on the withdrawl slip when you take money out. That is a much cheaper way to beat the 4% withdrawal rate.

Of course, you'd run out of money faster - so in order to withdraw that much, you'll need to earn a higher return on the principal that's left. Which would mean you need more risk, and around retirement you usually don't want more risk.

The 6.5% rate above is likely a pure single life annutity rate, meaning that you lose all your principal when you die.

What rate could you get if you wanted to keep what's left over (aka. deferred annuity)? According to Annuity Rates, Annuities, Annuity Quotes, Immediate, Indexed and Fixed Annuities you can get around 3.8% which is really close to, but slightly less than 4%.


P.S. - if you didn't say 1) $1,093,225.74 (18.22x) and 2) $1,605,000 (26.75x) you might need some help figuring out how much you need to save

[jIM_Ohio]

Most of the advice here and from advisors advocating 4% withdrawal seem like scare tactics and totally unrealistic. Also advice you get from online calculators usually overestimate the savings needs for most retirees.

You can judge your own needs better then anyone else.

If you want a guaranteed withdrawal for life just buy an annuity. You can get a guaranteed rate ~6.5% if you are 65. Spend this or stagger it and buy another later in 10 years - use this for your basic expenses.

That is one option to beat 4% withdrawal rate.

LOL you criticize 4% withdraw rate, and your only alternative was an annuity. Annuities usually come with costs and inefficiencies which the 4% withdraw rate could actually take advantage of (life span, lower costs).

The 4% withdraw rate is standard financial planning and is used in numerous publications. Feel free to select alternatives, but to criticize many responses and not offer any good planning alternative is not good IMO.

[jIM_Ohio]

You do realize we're only talking about withdrawl rates, not earnings rates right? What scare tactics has anyone here used?


I disagree with this. That's why people study this topic and make a living doing it. And many people just aren't comfortable doing the math involved.

In fact let's take a poll: Say you think you need to have $60k of retirement income every year.

1) What amount of money would you need in a tax free investment account at retirement to create an inflation adjusted income stream of $60k at the beginning of each year, every year from age 65-95 (30 years), where the remaining principal in the account grows at an average of 7% and inflation averages 3%?

2) What if you wanted to guarantee you would never run out of money... how much would you need saved up to be able to withdraw an inflation adjusted $60k "forever"? (in quotes cause obv you'll die before then - but this is the question the OP asked)

All who can answer these questions please raise your hand.


Another option is to write a bigger number on the withdrawl slip when you take money out. That is a much cheaper way to beat the 4% withdrawal rate.

Of course, you'd run out of money faster - so in order to withdraw that much, you'll need to earn a higher return on the principal that's left. Which would mean you need more risk, and around retirement you usually don't want more risk.

The 6.5% rate above is likely a pure single life annutity rate, meaning that you lose all your principal when you die.

What rate could you get if you wanted to keep what's left over (aka. deferred annuity)? According to Annuity Rates, Annuities, Annuity Quotes, Immediate, Indexed and Fixed Annuities you can get around 3.8% which is really close to, but slightly less than 4%.


P.S. - if you didn't say 1) $1,093,225.74 (18.22x) and 2) $1,605,000 (26.75x) you might need some help figuring out how much you need to save

From a planning standpoint, consider 3 things

1) retirement accounts are usually the primary source of income for many people. Other sources would include SS and pensions. Coming up with a generic plan to spend 60k and save for that without considering other 2 options will have a person oversave.

2) I consider it OK to use an annuity to reduce risk. If a person "needs" 60k of income, they probably do not really "NEED" all 60k. If that person gets an annuity for 20k, has SS of 20k and investments for other 20k, some probabilities will ocur
a) the SWR goes down considerably
or
b) the success rate of the same SWR shoots thru roof (annuity takes away longevity risk)

3) Studies have shown people do not need as much spending power (investment balance) past age 85 (might occur as early as age 75). So the 60k income I want at age 55 for retirement might actually go down by age 75 (less travel, less expense to live, less active lifestyle).

[jpg7n16]

From a planning standpoint, consider 3 things

I'm not sure if you were disagreeing with what I wrote, or adding to it, so just in case:

My point wasn't to show the only two ways of calculating retirement needs, but rather to give 2 simplified scenarios (notice how I made them tax free, didn't consider SSI income, changing income needs, gifting strategies, etc. etc. etc.)

In order to show why the phrase "you know your retirement needs better than anyone else" has some major drawbacks, I showed this instead: if you struggle to answer the 2 simplified questions above, how are you qualified to "know your needs" better than a professional?

Your 3 considerations show that there is much more involved than just saying "well, based on what I know about myself and my spending habits, I'd like to have $60k a year."

[TrunkMonkey]

You do realize we're only talking about withdrawl rates, not earnings rates right? What scare tactics has anyone here used?


I disagree with this. That's why people study this topic and make a living doing it. And many people just aren't comfortable doing the math involved.

In fact let's take a poll: Say you think you need to have $60k of retirement income every year.

1) What amount of money would you need in a tax free investment account at retirement to create an inflation adjusted income stream of $60k at the beginning of each year, every year from age 65-95 (30 years), where the remaining principal in the account grows at an average of 7% and inflation averages 3%?

2) What if you wanted to guarantee you would never run out of money... how much would you need saved up to be able to withdraw an inflation adjusted $60k "forever"? (in quotes cause obv you'll die before then - but this is the question the OP asked)

All who can answer these questions please raise your hand.


Another option is to write a bigger number on the withdrawl slip when you take money out. That is a much cheaper way to beat the 4% withdrawal rate.

Of course, you'd run out of money faster - so in order to withdraw that much, you'll need to earn a higher return on the principal that's left. Which would mean you need more risk, and around retirement you usually don't want more risk.

The 6.5% rate above is likely a pure single life annutity rate, meaning that you lose all your principal when you die.

What rate could you get if you wanted to keep what's left over (aka. deferred annuity)? According to Annuity Rates, Annuities, Annuity Quotes, Immediate, Indexed and Fixed Annuities you can get around 3.8% which is really close to, but slightly less than 4%.


P.S. - if you didn't say 1) $1,093,225.74 (18.22x) and 2) $1,605,000 (26.75x) you might need some help figuring out how much you need to save

How many people need 60K in retirement? I wonder how many retirees actually spend this amount of money? You would need an income of about 100K per year to have 60K left over after 15% savings and taxes.

How many people earn >100K per year, about 10%, of that how many spend all their after tax income, maybe 1/3 of that. So Then how many people spend everything that's left over. It seems that only about 3% of the population spends >=60K.

Income inequality in the United States - Wikipedia, the free encyclopedia

Sorry your doomsday scenario is just that.

I think the median income is more like 45K, how much does that person spend after taxes and savings?

By the way, which segment of the population has the most money, yep its the old people.

So your strategy is to save all your money and then just die, bad idea.

Its a bad idea to tell retirees to withdraw 4% or else. This is wrong and a scare tactic. There is more risk that they don't spend anything and then die, a very inefficient way to utilize the income they have saved throughout their lifetime.

The most efficient way of spending money in retirement is to use an immediate annuity, at age 65 you can get a withdrawal rate of ~7%.

Much better then living in fear withdrawing 4%, its a better option for most people.

[jpg7n16]

How many people need 60K in retirement? I wonder how many retirees actually spend this amount of money? You would need an income of about 100K per year to have 60K left over after 15% savings and taxes.

...Sorry your doomsday scenario is just that.

Why are you criticizing the number I pulled out of a hat to show how people need help doing the calculations??

How much would you need for $45k?? The process is still the same, and most people don't know how to calculate it.

My point was NOT - "OMG look how much you need!!!!!!! You better save a lot now or else!!!!"

My point WAS - if you don't know how to calculate how much YOU need, professional assistance is helpful.


Hence my statements:

That's why people study this topic and make a living doing it. And many people just aren't comfortable doing the math involved.


....All who can answer these questions please raise your hand.

P.S. - if you didn't say .... you might need some help figuring out how much you need to save

[TrunkMonkey]

I think the point of the thread was to estimate a rule of thumb for how much your withdrawal rate should be and how much you need overall in retirement.

I don't think the rule of thumb of 4% is good advice. The amount of money that some advocate saving are not realistic or in line with what people spend. I think you end up telling people to over save, and give people the wrong impressing when you give examples like 60K per year would cost 1.6 million.

According to the survey by us labor dept

The Spending Habits of the Average American

The average consumer unit 2.5 people, with 1.3 wage earners spends on average about 45K per year and earns about 63K.

A lot of people are saying that there is a retirement crisis coming, they make it seem like the elderly are in great danger. But if you look at which groups have all the wealth, it is largely held by the elderly.

[jpg7n16]

I think the point of the thread was to estimate a rule of thumb for how much your withdrawal rate should be and how much you need overall in retirement.

I don't think the rule of thumb of 4% is good advice. The amount of money that some advocate saving are not realistic or in line with what people spend. I think you end up telling people to over save, and give people the wrong impressing when you give examples like 60K per year would cost 1.6 million.

According to the survey by us labor dept

The Spending Habits of the Average American

The average consumer unit 2.5 people, with 1.3 wage earners spends on average about 45K per year and earns about 63K.

A lot of people are saying that there is a retirement crisis coming, they make it seem like the elderly are in great danger. But if you look at which groups have all the wealth, it is largely held by the elderly.

So you criticize my response by saying that the point of the thread is about withdraw RATES - and as evidence, you show a different withdrawal AMOUNT?

The amount needed in retirement is different for each person. Just because the national average is $45k, does not mean that I could personally retire on $45k/year. My needs may be $30k, $45k, $60k, or $100k+. (the 60k above was an example, not a suggestion)

But the withdrawal RATES are just numbers about how long the money will last. If you withdraw 100%, it'll last one year. Withdrawals of 4% will theoretically last "forever."


So what is your solution for the withdrawal rate problem? A single life annuity that dies with you.

The most efficient way of spending money in retirement is to use an immediate annuity, at age 65 you can get a withdrawal rate of ~7%.

Much better then living in fear withdrawing 4%, its a better option for most people.

I addressed your annuity solution in an earlier post.

But with your 7% annuity, you would purchase the same lifetime income stream for much less. And when you die, you leave your spouse/heirs $0 (and your spouse loses his/her income stream).

With our 4% withdrawals, we have a lifetime income stream. And when we die, our heirs will be taken care of. Spouse will have same income stream as before, and upon his/her death, there will be a good inheritance for the children/grandchildren/whoever else we want.


Remember with your annuity, that if you die after 2 years in retirement, you would have paid roughly $662k to purchase 2 years of a $45k salary. The rest is lost.

And there are annuities that let you keep your money after you die - and their withdraw rates are a bit less than 4%.



So yes, you would be able to get an income stream for a smaller amount using an annuity - but it comes at a price.

[TrunkMonkey]

The withdrawal rate people were advocating was 4%. The assumptions and numbers they quoted was 4% of the initial balance. So if you have a 100K lump sum the withdrawal is 4K per year.

This is too low and bad advice, so I am saying the withdrawal rate of 4% people so often quote is wrong.

It is wrong because it inefficiently deals with the risks of investment losses and outliving your assets. Buying an annuity is a way of insuring these risks, instead some push 4% withdrawal rate as a means of self insuring these risks.

The second point was debating the amounts of money quoted as necessary to sustain people in retirement. You didn't specifically say that was how much people needed but its the same as the 4% rule people always cite. It is a commonly thrown out statistic that does not have a lot of backing.

The old people have all the money and they could afford to spend more income in retirement.

[jpg7n16]

The withdrawal rate people were advocating was 4%. The assumptions and numbers they quoted was 4% of the initial balance. So if you have a 100K lump sum the withdrawal is 4K per year.

This is too low and bad advice, so I am saying the withdrawal rate of 4% people so often quote is wrong.

It is wrong because it inefficiently deals with the risks of investment losses and outliving your assets. Buying an annuity is a way of insuring these risks, instead some push 4% withdrawal rate as a means of self insuring these risks.

You've misunderstood the 4% recommendation then. The object is to find your need, and save up an amount that your need is about 4% of. So if you need $45k/year, you should attempt to save up to $1,125,000. (as 4% of 1,125,000 is 45k) This would maximize the chance that you will not outlive your money.

Or the 4% recommendation can be used as a method of determining, "I have $X saved up. How much can I withdraw to make it last the rest of my life?" If 4% is too low for your situation, you should either keep working and saving until you have enough, or accept the risk that you may run out of money at some time.

If someone needs $40k/year, they should retire when they have roughly $1mil. But if they want to retire on $700k, yes that amount can last a long time, but they should understand that it will likely last about 30 years. (They would be withdrawing 5.7%/year) If that's a risk they're okay with, then good for them - they should retire and be happy.



If you are planning to retire on $100k, you are out of your mind, and are screwed either way. They will have to keep working, and should not retire.

Your "solution" is to buy a 7% annuity. Great. Now they don't have 100k to use for expenses, and they only get back 7k a year. Congrats.



You also continue to ignore the fact that in order to get that 7%, you must forfeit all the remaining money when you die.

The second point was debating the amounts of money quoted as necessary to sustain people in retirement. You didn't specifically say that was how much people needed but its the same as the 4% rule people always cite. It is a commonly thrown out statistic that does not have a lot of backing.

Please reread where I said it was an example, not a suggestion.

The old people have all the money and they could afford to spend more income in retirement.

That is a horrible generalization.