So, how much are you trying to save for retirement?

[LivingAlmostLarge]

Also at least for me personally our lowest earning years are now, in our 20s. We are starting out with our first jobs. So how can we really know what we'll need? DH has a good salary, I probably will as well. So it's tough but we just save the maximum and hope it's enough. Right now it's all we can.

So how do you calculate for people just starting out. According to Millionaire next door, we're AAW (Average accumalators of wealth). But I think in 10 years we'll be PAW.

[jIM_Ohio]

If my mortgage was paid off, my wife could support me the rest of my life and I an retire now.

My income pays the mortgage and all retirement contributions/savings/vacations. Wife pays the utilities, cars and groceries/gas.

So I need to replace 25X of my expenses for me to retire. My wife gets the hard part. LOL.

[jIM_Ohio]

Disneysteve,

I would like to get your thoughts about the market as it pertains to retirement and retirement income.

Ok, so if someone parks a large chunk of money for retirement, say 2 million dollars, and they put it in very low risk investments netting 5% returns on average, you are saying that the $100K earned without even touching the principle isn't going to work long term.

What if that same person has 50-60% in the stock market for presumably higher returns, enough to fight off inflation, and the market hits the skids for 2-3 years, and this person loses 20-30% of their retirement nest egg? I ask this because I have about 10 examples of this happening to fairly well off retired people within the last 10 years. I still know people that are only just new recouping what they lost in the tech bubble nearly 7 years ago!

I like Dave Ramsey and all, but he makes it sound all so easy, just pick a growth stock mutual fund, one with a good 10 or 20 year track record, and you will be earning 12%. What hogwash in my book. I would love to find someone who typically averages double digit returns every year, and again, even if they do, will most likely lose a very large chunk at some point in time when the market corrects itself.

I guess what I am saying is, which is more preferrable, getting good sleep at night knowing you will be earning an honest 5% return every year, but may be losing out to inflation, or, you are exposed to the markets, have good years taming inflation, but then also risk losing a quarter or a third of your investment portfolio to a bad year or two?

At 32 years of age, I don't worry about that large drop so much because I know I will be in the market for a long time. But what about those retirees who may not have 5 years just to recoup market losses?

Just curious of your thoughts on this.

I don't think this works long term. That is a 5% starting withdraw rate. If retirement is more than 18 years, and inflation is around 3%, the 100k in income is 50k 18 years later (in spending power).

Dave Ramsey's plan isn't that sound either.

While accumulating, you want growth oriented assets. When in retirement/ draw down you want two things- income and stability. Income from dividends, interest and capital gains. Stability from numerous asset classes (I have read that an 8 asset portfolio works well for this).

The 4% withdraw rate also assumes withdraws are cut back in down years (do not sell off in down years). Always withdraw from an appreciating asset.

[jIM_Ohio]

Great question, and a very realistic one, too, as you've seen. I don't think a retiree, or someone close to retiring, should have 50-60% of his money in the market. Retirees need to maintain some exposure to stocks to achieve growth and combat inflation, but 50 or 60% at age 60 or 65 is probably too much for just the reason you pointed out. At that age, there simply isn't time to recover from a market downturn.

if someone lost big in tech bubble when they were 60-40 stocks-bonds, I will suggest they were to heavy into tech while holding a moderate portfolio. Where was large value? Because my large value fund went UP when S&P 500 went down during the tech bubble.

If someone lost money in tech, then went 60-40, they learned they were taking on too much risk the hard way. Shame on them. They sold at the bottom and bought at top. That only works if you are selling short or in a bear fund.

[jIM_Ohio]

To throw a wrench into the equation, a lot of people that are years away from retirement (about 30 for me) have to remember that the 25 x salary rule works on your last years income. If I was to plug that number in now and multiply by 25, then I would be significantly low-balling myself because it would not take in to account the inflation over the next 30 years. This gets mathematical, so if you hate numers, just skip to the next post. None of this takes into account a pension, living on less, or social security (which in 30 years I'm not holding my breathe for anyway) In this example, if I plugged 50K as a salary in and multiplied by 25, it would look like I would need $1,250,000. I would actually need to calculate what 50K would be at the rate of inflation for the next 30 years (and hope my salary stays the rate) and then multiply that by 25. In this case, my salary in 30 years would need to be about $120K to be equivalent to the buying power of $50K today. That means I would need to have saved $120K x 25 = $3,000,000. If I only saved 1.25 million, then what I thought my 50K a year retirement buys me is about 20K in purchasing power.

If you base the 25X number off expenses, it is more accurate, as expenses don't change as much as income.

If you base the 25X number off expenses, you will also gain a mortgage payment back from equation (30% of income?) which changes things considerably.

I plan for 25X current spending. But that is used to create milestones along my path, not be a hard number to reach. Because if you ever have 25X expenses currently saved you CAN retire.

[Snave]

Also at least for me personally our lowest earning years are now, in our 20s. We are starting out with our first jobs. So how can we really know what we'll need? DH has a good salary, I probably will as well. So it's tough but we just save the maximum and hope it's enough. Right now it's all we can.

So how do you calculate for people just starting out. According to Millionaire next door, we're AAW (Average accumalators of wealth). But I think in 10 years we'll be PAW.

The AAW/PAW/UAW thing from the Millionaire Next Door is completely thrown out the window when you are young. Don't pay attention b/c it is 100% not possible, unless you were given some sort of trust, inheritance or something. The way they do the math is (age x salary) / 10. So, for a newly graduated college student that earns a salary of $35,000 at 22 years old, that works out for them to have a $77,000 net worth to be an "accumulator of wealth." When exactly were you suppossed to amass that kind of money in your first few months on the job? Let's say that same individual gets a big promotion in 3 years and is making $50,000. That means they should be at (50 x 25) / 10 = 125K at 25 years old. Not to say the PAW/UAW/AAW isn't worth something, but for your age, take it with a grain of salt. The age portion of that dictates a lot.

[tripods68]

Ok, so if someone parks a large chunk of money for retirement, say 2 million dollars, and they put it in very low risk investments netting 5% returns on average, you are saying that the $100K earned without even touching the principle isn't going to work long term.

You have to also remember as inflation rate climbs, CDs, savings rate, also increase to retain and attract investors. Better yet, if the inflation is your biggest issue, then invest only on inflation-protected securities (TIPS). The downside you won't receive income until you sell it or it matures. There is also Municipal inflation-linked securities issued by various government entities. They pay on semi-annual interest adjust based on CPI depending on your tax bracket, you could possibly come ahead when compared to fully taxable bonds including TIPS.

[Like2Plan]

Don't pay attention b/c it is 100% not possible, ....

I am about 3 years from retirement, so I had the opportunity to go to a pre-retirement seminar about a year ago.

The planner who gave the talk on "how much do you need?" approached the topic in two steps.

The first part was the fun part. I'm simplifying, but basically write down all your goals for retirement. This way you could adjust your financial needs accordingly.

The second part was figuring out exactly how much you are getting now as a base line. When you are retired, you won't be funding:
1. 401K
2. IRAs
3. paying a SS tax
4. Medicare taxes (except for later on when you pay for part B)
5. pension fund.
All together these deductions could represent 20% or more of your income (depending on how much you fund your retirement accounts). That is why some folks who are planning to maintain status quo don't need to replace 100% of their income in retirement.
(Also, the more you put into savings, the less you get used to spending. )

[disneysteve]

The second part was figuring out exactly how much you are getting now as a base line. When you are retired, you won't be funding....

This is also an important part of the calculations, and there is no simple formula for this because it is different for everybody. We currently put 18% of my gross pay into savings, mostly retirement and some for DD's college. So we aren't living on 100% of my pay - we're living on 82%. Add to that the principal and interest on our mortgage and the payments on our home equity loan and we're actually living on just 73% of my gross.

Since in retirement we will no longer be saving for retirement or college and our mortgage and HEL will be repaid, we don't need to replace 100% of income. If we replace 75% we should be just fine. That lowers the nest egg goal by about $750,000 for us. Add in the possibility that we'll still get SS payments, even at a reduced amount, and that lowers our savings need by another $250,000 or more, so that knocks the total need down by $1 million or so. That's a pretty big difference.

[aida2003]

I found Henry K. Hebeler's Analyze Now Website a worthy visit for online retirement calculation. I choose the Free Pre Retirement Planning worksheet.

Disclaimer: I am not Henry K. Hebeler, AnalyzeNow.com is not my site. I gain nothing but a temporary glow to the ego by sharing the URL here.

You beat me, Paulette (I actually didn't anticipate so many answers in such a short time ), but I was also going to recommend his site or even to read one of his books. I bought one (something about Retirement planning) and I find him the most conservative guy out there, and that's why I like him. He has some great worksheets in his book that I put in Excel 2 years ago, but I haven't updated them for 2007.
It's also fun just to read his FREE articles on his site.

[jIM_Ohio]

You have to also remember as inflation rate climbs, CDs, savings rate, also increase to retain and attract investors. Better yet, if the inflation is your biggest issue, then invest only on inflation-protected securities (TIPS). The downside you won't receive income until you sell it or it matures. There is also Municipal inflation-linked securities issued by various government entities. They pay on semi-annual interest adjust based on CPI depending on your tax bracket, you could possibly come ahead when compared to fully taxable bonds including TIPS.

Most cash investments have a negative real return when inflation is factored in.

CDs- negative
Money markets- negative
bonds- maybe 2% above CPI (even I bonds).

I would not compare I bonds to CDs as an investment. The risks of each are quite different.

[jIM_Ohio]

I am about 3 years from retirement, so I had the opportunity to go to a pre-retirement seminar about a year ago.

The planner who gave the talk on "how much do you need?" approached the topic in two steps.

The first part was the fun part. I'm simplifying, but basically write down all your goals for retirement. This way you could adjust your financial needs accordingly.

The second part was figuring out exactly how much you are getting now as a base line. When you are retired, you won't be funding:
1. 401K
2. IRAs
3. paying a SS tax
4. Medicare taxes (except for later on when you pay for part B)
5. pension fund.
All together these deductions could represent 20% or more of your income (depending on how much you fund your retirement accounts). That is why some folks who are planning to maintain status quo don't need to replace 100% of their income in retirement.
(Also, the more you put into savings, the less you get used to spending. )

Any planning requires assumptions. One planner could even suggest another planners assumptions were bad to prove one point or another.

The bottom line:

withdraw rate is everything in retirement, IMO.

You have a given amount saved. You withdraw a percentage of this. Most planning I read suggests this withdraw rate is what drives

a) whether portfolio will last 20-30-40-50 years
b) accounting for inflation in withdraws
c) accounting for market performance in withdraws.

Most people on this board are accumulating assets. Meaning anything stated on withdrawing (this post included) is theory only, few people, if any, on this board are actually drawing down (and if they are, they haven't chimed in on this thread yet).

The issue with the assumptions which changes for everyone is what the withdraw covers.

For example:
1) travel
2) a mortgage
3) health care
4) basic living expenses
5) hobbies (golf bill might increase)
6) gifts (grand kids might cost more than kids)

Trying to relate the withdraw amount to expenses 20 years away is not relevant. 20 yeard could see expenses more than double (from inflation) or not change at all. The price of airline tickets, for example, do not appear to get inflated that much (over last 10 years). The cost of gas is controlled by OPEC, not inflation. Most mortgages are fixed rate- meaning those payments don't change. Health care costs are not included in CPI.

So the government might report inflation with CPI, but that is a commodities number (food and resources) and does not really account for services (like health care) or some other things which people spend money on (energy costs are removed from it, I think).

As some people have said "save all you can". Based on withdraw rate and the studies of withdraw rate, if at present time you have 25X current expenses (a 4% starting withdraw rate), you can stop saving and retire at will. This assumes the money is invested with moderate risk (60-40 portfolio). This also assumes future performance will resemble past performance and the 60-40 portfolio can generate a return of around 7% per year.

If you need a reference on withdraw rate, I suggest looking at the trinity study. The 4% withdraw rate was the result of the study.

The study looked at
a) asset allocation
b) market performance of that asset allocation (back tested)
c) what withdraw rates succeeded with that allocation based on the market performance.

If someone looks to go with something more aggressive than 60-40, the risk is some down markets might wipe away the ability of portfolio to last. The upside is that portfolio could last longer. The primary issue to determine this is if the market went down early in retirement or later in retirement (the biggest risk is the market going down in first 3 years of retirement).

If somene looks to go with something more conservative than 60-40, the risk is that times of high inflation will wreak havoc on withdraws, and force higher increases, which cause that person to run out of money.

If people can change spending patterns, going more aggressive or more conservative is a viable option.

[aida2003]

Most cash investments have a negative real return when inflation is factored in.

CDs- negative
Money markets- negative
bonds- maybe 2% above CPI (even I bonds).

I would not compare I bonds to CDs as an investment. The risks of each are quite different.

Also, add taxes you'll pay on earned interest and it gets worse.

[disneysteve]

Even though I called it an oxymoron, working in retirement is another variable. I know a number of current retirees who are working for pay in ways they never imagined themselves doing 10 or 20 years ago, and these people aren't working out of financial need but rather out of personal interest or the need to be doing something useful with their time.

My mom is 77. She started doing volunteer work at the community center a number of years ago. She liked it, and they like her, so much that they initially started reimbursing her for gas money and then eventually put her on the payroll for the work she does there. She doesn't need the money, but it certainly changes the equation of how much she needs to draw from her investments each year.

I have an uncle who moved to Florida after retiring years ago. He's now in his early 80s. He started helping out at the snack bar in their condo complex clubhouse and ended up taking over and running the snack bar himself - a paid position through the condo association.

I have a patient who retired last year. He had always dabbled in painting, but had never pursued it beyond a personal hobby. Since retiring, he started painting regularly and got hooked up with a local gallery that is now exhibiting and selling his artwork.

So what your life will look like 20 or 30 years from now, or even 10 years from now, is truly unknowable. You can use all the planning calculators you want to and there will still be variables that you can't possibly account for.

[LivingAlmostLarge]

Yeah but it's better to plan for the worse, save more then end up up the creek when you retire. I'd rather get used to stash as much cash as possible now than later.