Retirement Age vs. Savings

[corn18]

Did an analysis tonight on when I could retire.

Fixed variables:
Min Annual Savings = $48,500 (max 401k+employer match, max IRA for myself and wife, catch up contributions @ age 50)

Variables:,
Additional Annual Savings
Reduced Expenses

Chart is below. What this tells me is I can't save enough to retire before 60 if I keep my target income @ $150k. I can retire earlier if I reduce my expenses in retirement. If I do both, I can retire a lot earlier. If I save an extra $50k/year and reduce retirement income target to $100k, I can retire @ 56.

It is revealing that reducing expenses accelerates retirement MUCH faster than increasing savings. Correlates well with it is more effective to reduce expenses by $1 vs. earning an extra $1.

Tom

[Retired To Win]

Is your retirement budget for you and your spouse or just you?

Is a mortage still in the budget? Have you considered paying it off with some of that extra savings?

Are you factoring in social security income into your projections?

Finally, can you tweak those expenses down some more? I've driven mine way down without feeling deprived. http://retired-to-win.savingadvice.c...ne-budget.html

Good luck!

[corn18]

Is your retirement budget for you and your spouse or just you? me and spouse. I'm the only one with income

Is a mortage still in the budget? affirmative

Have you considered paying it off with some of that extra savings? I have and would love to. I am paying extra each month and an extra payment each year (bi-weekly) so it will be paid off by the time I am 66, but I will likely move a few times between now and then. Little equity. So I need to figure out how to remove the mortgage boat anchor. I have to save for college and fill up the EF and car fund and, and, and...

Are you factoring in social security income into your projections? negative. That certainly helps, but would like to get to my goal without it.

Finally, can you tweak those expenses down some more? Yes. I have driven them down from $164k to $150k with modest adjustments. The biggest expense is annual travel @ $20k, so if I had to, I could lop $20k out straight away.

[humandraydel]

Do you live in a high CoL area? Could you retire to a low CoL area? You might be able to buy a house outright at that point. Also, what about expenses that could easily go away if you retire such as lawn care (do it yourself!), gas for your commute, extra car?

Can you work part time from age 55 to 60?

[corn18]

Do you live in a high CoL area? not currently

Could you retire to a low CoL area? I have no idea where I will end up. Not a homesteader and I'll go where my job takes me and then decide where to retire.

You might be able to buy a house outright at that point. Maybe.

Also, what about expenses that could easily go away if you retire such as lawn care (do it yourself!), gas for your commute, extra car?

I have three scenarios that I track. Each has a different level of expenses associated with it:

1. Bare minimum (I can retire now)
2. Frugal (could retire @ 63 with no additional savings)
3. Desired (can retire @ 65 1/2 with no additional savings)

Can you work part time from age 55 to 60? Sure. Not sure how that would help. I'm in the 39% tax bracket so getting a job that pays $10,000 / year would result in about $5,500 take home. I work a lot now and adding any extra hours of work for such a low ROI would not be desirable. I might be able to consult once I retire which I would enjoy.

If SS is still around, that changes everything as I am max'd out on that. An extra $40k / year certainly helps the calculations.

Tom

[rennigade]

This is a valuable lesson to young people...the power of investing early and watching your retirement accounts snowball over the years.

The longer you wait the tougher it is.

[Like2Plan]

If I save an extra $50k/year and reduce retirement income target to $100k, I can retire @ 56.

It is revealing that reducing expenses accelerates retirement MUCH faster than increasing savings. Correlates well with it is more effective to reduce expenses by $1 vs. earning an extra $1.

Tom

Saving 50K more would be quite a challenge--you are already saving $48500 out of 150,000. But, I don't understand all your budget numbers.
If you are saving 48,500 for retirement out of 150,000--you are living on 101,500. Do you anticipate increasing your spending in retirement?

[corn18]

Saving 50K more would be quite a challenge--you are already saving $48500 out of 150,000. But, I don't understand all your budget numbers.
If you are saving 48,500 for retirement out of 150,000--you are living on 101,500. Do you anticipate increasing your spending in retirement?

Difficult to decipher with the data I provided. My apologies.

To keep it simple, my wife and I determined we could retire happily on $150k of annual income. That equates to $111k of annual expenses based on the taxable vs. non-taxable withdrawals I forecast. In order to come to this number, we did a bottom's up analysis of our expected spending in retirement. We did NOT base it on what we spend now, although in some areas, that did provide a basis of estimate.

What do we spend now? $150k / year, not including any savings. So, we have to figure out how to reduce annual EXPENSES from $150k to $111k. To be honest, just getting the kids out of the house solves that problem. Interestingly, I am forecasting my retirement expenses to be 75% of my current expenses. That seems to correlate with many retirement calculators.

The point of this post was determining when I could retire. At my current savings rate, that is 65-66. If I increase savings, it accelerates that by about 1 year for every additional $15k I save annually. If I reduce retirement expenses (i.e. no house payment), then I can accelerate that by 1 year for every $8,000 of expenses I reduce. Not really rocket science, just an interesting analysis.

My single biggest expense in retirement right now is a house payment. I have little equity in my current house and plan to move at least once, probably twice, between now and retirement. I just assumed I would always have a mortgage or rent. But what if I didn't? This analysis will help me make future house buying decisions. It would be very beneficial for me to eliminate that house payment in retirement. Probably more beneficial than saving a lot more now for retirement. So I am looking at a plan to accelerate payment of my mortgage and NOT buy a new house when I move that obliterates any equity I have built up by then. Buy a modest house that I can pay off before retirement. Never thought that way before. Buy as big a house as they would give me a loan for. Bad move.

Tom

[Like2Plan]

tomhole,

I see. It sounds like you have a good plan. It also looks like you are not planning to pre-pay your mortgage at the expense of retirement saving--which is a good. The analysis that others have done generally puts you ahead (on average, over time) if you invest the money and then pay off the mortgage in one lump sum (especially when the interest rates are so low). But, if you have the extra money--why not bet on a sure thing?

[kv968]

Tom, just curious...what withdrawal rate are you using for your retirement accounts in your projections?

[corn18]

Tom, just curious...what withdrawal rate are you using for your retirement accounts in your projections?

I actually run 2 scenarios. Scenario 1 is a simple 4.6% withdrawal rate. Assumes 7% earnings on non-taxable accounts and 4% on taxable accounts. So it basically maintains forever.

The second scenario is based on this calculator: Flexible Retirement Planner. I run a monte carlo analysis based on how much I save, retirement age, how long I live and when I retire. The model then spits out a probability of success based on lots of variables. This model assumes I can draw down the balance over time to hit my income targets. I set it up to spit out how much I would need to save to hit a 95% probability of success for a given scenario. In some cases, it requires drawing down the balance to get to the income required. That's all part of the probability of success number it spits out. This is a much more complex approach, but when I compare the two results, the correlation is very good.



The 4.6% model is more pessimistic as it maintains capital throughout. The monte carlo is more aggressive in that it is allowed to reduce capital to meet income requirements.

Interestingly, when you boil it all down, I need $2.6M to retire with either scenario. Just retire earlier in one vs. the other.

Tom

[kv968]

I actually run 2 scenarios. Scenario 1 is a simple 4.6% withdrawal rate. Assumes 7% earnings on non-taxable accounts and 4% on taxable accounts. So it basically maintains forever.

Interestingly, when you boil it all down, I need $2.6M to retire with either scenario. Just retire earlier in one vs. the other.

Tom

Thanks Tom. Looks like you're pretty much on target with both of the models agreeing.

I've used that Monte Carlo simulator and its a good way to give you an more detailed estimate of where you might be rather than just throwing some numbers together. One problem I do have with it however is the way it calculates (or shows) how you withdrawal the money. It just doesn't seem to make sense. First of all it wipes out your taxable income first then seems to use all the tax-deferred then goes into the tax-free instead of giving you a more tax advantageous blend of them.

The withdrawal rates and numbers don't seem to add up either either. I know its taking consideration the taxes you'd have to pay and all of that but I just can't get it to add up in any cohesive way. Not that I don't believe the numbers and realize its only a simulation, but I can't see how they get some of the numbers they do. Even when using the "stable" income selection with no additional inputs, the median portfolio value and the given withdrawal rate, it doesn't seem to match up with total withdrawal even when trying to figure out the taxes involved. I'll have to play around with it some more

[corn18]

Thanks Tom. Looks like you're pretty much on target with both of the models agreeing.

I've used that Monte Carlo simulator and its a good way to give you an more detailed estimate of where you might be rather than just throwing some numbers together. One problem I do have with it however is the way it calculates (or shows) how you withdrawal the money. It just doesn't seem to make sense. First of all it wipes out your taxable income first then seems to use all the tax-deferred then goes into the tax-free instead of giving you a more tax advantageous blend of them.

The withdrawal rates and numbers don't seem to add up either either. I know its taking consideration the taxes you'd have to pay and all of that but I just can't get it to add up in any cohesive way. Not that I don't believe the numbers and realize its only a simulation, but I can't see how they get some of the numbers they do. Even when using the "stable" income selection with no additional inputs, the median portfolio value and the given withdrawal rate, it doesn't seem to match up with total withdrawal even when trying to figure out the taxes involved. I'll have to play around with it some more

I agree with all of your observations. My advice to anyone trying to use that sim is to make sure they back up the results with the more classic (and simple) 4% rule of thumb (ROT) or some other ROT. I'm satisfied now that that estimation method is good enough to get you in the ballpark and probably as close to home as any fancy monte carlo simulator.

[janecropper]

It depends on your goal. If you're hoping to retire, then you're going to want 400x your average monthly expenditure. This gives you a 3% safe withdrawal rate which should last forever. So if you spend $5K/month, then you need $2M. The 400x comes from dividing by 3%, and multiplying by 12 months.

[snafu]

I'm surprised by your numbers. We have seen remarkable increases in value in our various retirement accounts since about February 2013 but hampered by contribution limits that are linked to earned income. Do your holdings reflect the increased valuation of the DOW?

How percentage of your income has been spent supporting the house since 1/1/2014? Do you think total housing costs exceed the ideal 28%? When DKs leave for college, you and DW will need to assess whether downsizing makes sense. How do you see your 1st 5 years of retirement? Do you have hobbies or interest that have potential to garner income?

Do you have items no longer used, needed or loved? What can be sold and never missed?