Are we doing ok?

[jIM_Ohio]

Standard of living: A term describing the amount of goods and services that an average family or individual views as necessary.
(Standard of living | Define Standard of living at Dictionary.com)

Lifestyle: the habits, attitudes, tastes, moral standards, economic level, etc., that together constitute the mode of living of an individual or group.
(Lifestyle | Define Lifestyle at Dictionary.com)

But maybe that's just how they define it in the dictionary...

I think this pretty much sums it up:



How that reads: If I change my spending habit from 3x to 1x, that is not changing my spending habit.

I have done significant research on retirement... and much of the discussion comes back to advice this board gives to some degree or another- and that is live on less, not earn more or spend more. You are putting word in my mouth and misusing the posts well out of context because of some textbook definition.

Once a person retires, their income is fixed. Even if they use the 25X rule and 4% rule, those guidelines can test the risk tolerance of a retiree because selling stocks at a low into a 40% down market to get an inflation increase just adds bad money after bad money... to point where when inflation kicks in, the best thing to do is adjust expenses, not increase income.

This research has also shown one other inflation catching issue... the #1 risk to all portfolios is inflation. Its not the 2.4% average which will get you, and its not the 40% down markets which will get you, its the spikes in inflation.

There are many examples in history where a 40% down market recovered in 2-3 years (or less) which include both 1987 and 2008-2009 and 1999-2003. There are many examples where inflation over a short period of time was 10% or 20% (double digit) and that is where most of the damage is done.

I am not into text book definitions of what words mean, I am into the practice of understanding how most people deal with financial problems. Most people do not deal with inflation by increasing income, they deal with it by cutting expenses.

I think you're missing that these costs will be in 30 years. Your options of a, b, or c - only consider how I will pay for them today. But you don't have them today... they are 30 years away.

The question is: "how much do I need to maintain the same spending habits in 30 years?" not "how can I afford higher costs today?"

If a family wants to maintain a lifestyle of eating out at a nice restaurant twice a week, flying across country on vacation once a year, driving the car to and from work instead of taking the train, and living in an upscale neighborhood, then you need to evaluate the costs of maintaining those same habits (see definition above) in 30 years.

In general, a basket of identical goods will go up in cost by 2-4%/year on average. And therefore, you should expect the costs to maintain the same habits to roughly double in 30ish years.


But if you want to boycott the gas stations when you retire, that's your choice. "Well 30 years ago, I only had to pay $2 a gallon! I'm not buying more than $25 of gas this week!"

Can you imagine trying to live in today's economy with a "Leave it to Beaver" budget? "Here's $5 for groceries honey, that should last us a while" - well that's what your method will force you to do in retirement. Live on a budget that was suitable for the economy 30 years ago.

I am NOT missing what the costs will be in 30 years
my planning uses only 1 projection:

25X of CURRENT expenses
once I hit 25X of current expenses, I know I can retire, and once I am within 12X of current expenses, my asset allocation will change drastically (from 95-5 to about 40-60) within 2-3 years (and maybe within 6 months).

I know my expenses today will not be the same in 30 years
for one thing, my mortgage will be long gone
for another, I will be retired in about 16-20 years
for another my kids will have started HS, finished HS, started college and I HOPE finishes college within 20 years.

so projecting current expenses 30 years out is silly, if I look back 10 years and check my expenses, they look nothing like what I have now. House changed (3 times), cars changed (2 times), kids were born (2 years ago), kids did not need formula (1 year ago), wife switched jobs (4 times), I changed jobs (once).

All those inputs changed expenses, so projecting expenses out, and adding an inflation number to them creates sticker shock only, but that number is not a realistic target.

If you have 25X of CURRENT expenses saved, you are at minimum financially independent. Depending on risk tolerance, length of retirement, immediate increases in expenses (like kids college, lump sum payments or similar) and lifestyle (maybe you like working), you might need to save more or have little desire to retire. Measure current savings vs current expenses.

Do NOT measure projected future expenses (an unknown) to projected future investment assets (another unknown). Too many unknowns will lead to bad planning decisions.

The decision this could steer people too... if current expenses are 40k and you project the 25X number (current expenses) to be $1 M, then add in inflation (3%) and see in 24 years you need $2 M, then set all plans based on getting $2 M, the following problem might present itself:

1) person saving around 7k per year sees the $2 M and decides to take on more risk because timeframe for $2 M might be 40 or 55 years.
2) the "more risk" from #1 has person make bad decisions and or see bad results (if they get bad results, they stop investing or look for a different asset class which lowers returns)

The solution to above is keep your eye on the process and then the process finds the prize...
1) $40k of expenses is $1 M nest egg needed
2) when they have $500k (half way there) re-run the process
a) look at expenses
b) 25X that number
c) verify allocation meets the current risk profile (in my case I am expecting to drop risk profile considerably once I am halfway there)

In the solution step, if one of those 10% inflation years has appeared, then its probable that 500k is not halfway there. If the CPI inflation was 2.4%, its very possible expenses went DOWN. As bills get paid off expenses decrease... depending on how the family treats bill payoffs, it's possible expenses go down even when inflation is positive my net expenses today are about the same as they were 2 years ago, we added some bills recently- like satellite radio- which increase expenses, but generally speaking when student loans were paid off (2008) or car is paid off (2010) or mortgage is paid off (2025?) expenses go down, not up, and the expenses go down even in a positive inflation environment.

[jpg7n16]

I am not into text book definitions of what words mean, I am into the practice of understanding how most people deal with financial problems. Most people do not deal with inflation by increasing income, they deal with it by cutting expenses.

Smart people deal with planning for inflation by including some factor for it in their projections of what the future will be like.

Again you are confusing planning for the future with managing today. Of course you limit expenses in the present - but that's not the realm we're dealing with.

Do NOT measure projected future expenses (an unknown) to projected future investment assets (another unknown). Too many unknowns will lead to bad planning decisions.

If I did the exact opposite of this quote, I would be doing a fantastic job at planning. When dealing with a future event, you absolutely should measure projected future expenses to projected future investment assets. And you should adjust along the way. Each day that you get closer to retirement, the estimates will be more and more accurate.

Any decent planner knows that you should plan for what the event will cost - at the time the event takes place.

Take college. If you were planning on sending your newborn child through college, would you a) plan your savings to pay for college at today's (2010) rates? -known- or b) make a projection of future increases in college expenses, and plan your savings based on projections of how much it will take to pay for college in 18-20 years while making adjustments based on actual increases in cost and investment earnings along the way? -unknown-

B is much better. Why would you treat retirement any differently?


All your advice only makes sense if an individual is seeking to answer the question: "can I retire today?"

But if (like the OP) you are asking, "are we on pace to meet what our projected needs will be at retirement?" Then your 25x CURRENT expenses formula has no value.

Now, "am I on pace to have 25x projected expenses at retirement?" is a very useful question. The answer to that is of value (which is why I answered this question for the OP earlier in the thread).


And FYI - ALL planning is based on preparing for unknowns. No one knows the future. That's why you make plans and adjust for new info along the way.

[jIM_Ohio]

Smart people deal with planning for inflation by including some factor for it in their projections of what the future will be like.

And FYI - ALL planning is based on preparing for unknowns. No one knows the future. That's why you make plans and adjust for new info along the way.

There is no confusion here and your analogies come out of nowhere.

I plan based on knowns, and make simple projections based on as many known factors as possible. You missed most of my points, we do agree that you adjust along the way.

In your plan you make guesses about a linear inflation rate (2.4%-3%), rates of return, expenses in the future, and probably a few others, but those are the big 3.

I have all 3 accounted for, but account for them in a much different way.
Expenses are NOT linear. The expenses a person has today will NOT be the expenses they have in 30 years. Some expenses go away, some new ones might appear in their place. The sum total of the expenses generally is within 10% of the previous set, maybe 25% if something big gets paid off (like a mortgage).

By using a known factor today (current expenses) you know if you can retire today (you had this correct too). The target for retiring is to match current expenses. I know my current expenses, I do not know the current inflation rate. So I know how to account for 60k of expenses today ($1.5 M saved). Because I do not have $1.5 M saved, I keep working and saving.

Next year I will look at investment balances (do so Dec 31) and if I have $1.5 M then, then I retire, otherwise, I keep working and saving. In 2012 I would repeat the same process. 2013 repeat and so on.

If I use your technique and take a projection, I would need to do the following:
1) take the 60k and add 2.4% to it each year when I analyze year end account info
a) this number would be fake- there is no $63440 number in my current budget, but you insist that number is "real"
b) then 5-10-24 years from now when that 60k number is now 120k, even though my expenses are still MUCH closer to 60k than 120k, I am comparing to an abstract number in my budget (the 120k of expenses is a fake number, only existing from projections)
2) compare retirement account balances to the abstract (fake) number
3) use that comparison and do the 25X/4% calculation
4) deal with changes
a) any time inflation changes, redo
b) anytime expenses change, redo
c) when expenses or inflation change, project number thru all other calculations

The end result would be a lower SWR and forcing me to work longer than I have to retire.


The process is MUCH simpler

1) know CURRENT expenses
2) compare 25X of CURRENT expenses to retirement balance. If retirement balance is higher, retirement is real.
3) If expenses change, repeat


In my process, expenses change for 3 reasons
1) expense is added (like satellite radio)
2) expenses are removed (like mortgage paid off)
3) cost of items change (inflation)

In your situation you use 3) to trump 1 and 2. I can tell you from tracking expenses for 15 years that 1 and 2 happens 100X more than #3. Expenses change because of human behavior, when CPI changes most people do NOT increase their spending.

Again you are confusing planning for the future with managing today. Of course you limit expenses in the present - but that's not the realm we're dealing with.

Any decent planner knows that you should plan for what the event will cost - at the time the event takes place.

Take college. If you were planning on sending your newborn child through college, would you a) plan your savings to pay for college at today's (2010) rates? -known- or b) make a projection of future increases in college expenses, and plan your savings based on projections of how much it will take to pay for college in 18-20 years while making adjustments based on actual increases in cost and investment earnings along the way? -unknown-

B is much better. Why would you treat retirement any differently?

Planning for the future would also involve understanding my behavior today, and using that to my advantage tomorrow. If part of today's planning is keeping expenses fixed (when gas prices go up, then something else gets cut back). Last I checked, gas prices (energy prices) were not included in CPI anyway (the prices of these commodities are too volatile and would make inflation much higher than it really is and change more than it really does).

If I limit expenses in the present, my plan should account for that behavior. If you retire and do not limit expenses, you will become a wal mart greeter.

college costs are different than retirement for 3 big reasons
1) college has a finite timeline (4 years) so money saved does not need to last thru all market cycles- much of the 4% withdraw in retirement is to deal with same cycles, so the same rules do not apply (I don't create a 25X target for college savings, the target comes from somewhere else)
2) the consequence of not meeting the savings goal is low (my kid can get a loan)
3) college costs do not follow standard economic patterns (supply/demand). In short, colleges set their own price, increase them when they want, and its not the economy which is telling colleges what they cost.

I save what I can for kids college, which right now is $0. My retirement comes first. Because wife and I agreed we are not paying 100% of college costs, this is a less relevant part of discussion.

[jpg7n16]

There is no confusion here and your analogies come out of nowhere.

I plan based on knowns, and make simple projections based on as many known factors as possible. You missed most of my points, we do agree that you adjust along the way.

Yeah I'm gonna call BS on this one. I've seen you give advice related to asset allocation, primarily because of projections about future returns - which are unknown (no one knows exactly what the market will return in the future). You support a 20% bond allocation because it will limit risk and not have a high impact on return. Really? You know what the future returns will be?

In fact, higher up in this thread, you give estimates based on a 9% return on investments. How do you know it will average 9%? The simple fact is, you don't. And so you yourself have made planning suggestions in this very thread based primarily on an unknown estimate.

So why do you use projections on investment value, but ignore the need to do projections on costs?

In your plan you make guesses about a linear inflation rate (2.4%-3%), rates of return, expenses in the future, and probably a few others, but those are the big 3.

I have all 3 accounted for, but account for them in a much different way.
Expenses are NOT linear. The expenses a person has today will NOT be the expenses they have in 30 years. Some expenses go away, some new ones might appear in their place. The sum total of the expenses generally is within 10% of the previous set, maybe 25% if something big gets paid off (like a mortgage).

Again, you don't understand math. Inflation jumps around, sometimes up, sometimes down, but in the long run, it will average around 3%. Things don't have to be linear to work out to an average.

If something that costs $1 today costs $2 in 20 years, that is a 3.52% average inflation rate - and it really doesn't matter whether or not there was a 10% year in there somewhere.

But why are you even dealing with changing a budget for today's costs when evaluating a retirement scenario?? Those are 2 separate planning issues.

Please use this inflation calculator: Inflation Rate Calculator- from InflationData.com
And find me a 20 or 30 year period of time where expenses went down by 10%. Good luck.

From 1980 to 2010, costs increased by 178% (average of 3.47% a year)
From 1990 to 2010, they increased 70% (average of 2.69%/year)

In 1980, the average income was $19,170 (1980s history including Popular Culture, Prices, Events, Technology and Inventions)

And you want to suggest that for retirement, someone who had 30 years to go (in 1980) could retire comfortably today on 19,170 * (1-.10) = $17,253? You said expenses could go down by 10% (maybe even 25%)...

That's pushing poverty level: http://www.coverageforall.org/pdf/FH...vertyLevel.pdf

By using a known factor today (current expenses) you know if you can retire today (you had this correct too).

Yeah... but nobody cares, because nobody's asking for advice about whether they can retire today.

They're asking about 25-30 years from now, and all you keep saying is, "do you have 25x current expenses? Then you can't retire yet."

Thank you Captain Obvious. We're not trying to.

The process is MUCH simpler

1) know CURRENT expenses
2) compare 25X of CURRENT expenses to retirement balance. If retirement balance is higher, retirement is real.
3) If expenses change, repeat

It is much simpler - for someone trying to retire today. Not so much for planning a saving strategy to meet needs 30 years from now.

college costs are different than retirement for 3 big reasons
1) college has a finite timeline (4 years) so money saved does not need to last thru all market cycles- much of the 4% withdraw in retirement is to deal with same cycles, so the same rules do not apply (I don't create a 25X target for college savings, the target comes from somewhere else)
2) the consequence of not meeting the savings goal is low (my kid can get a loan)
3) college costs do not follow standard economic patterns (supply/demand). In short, colleges set their own price, increase them when they want, and its not the economy which is telling colleges what they cost.

1) Has nothing to do with how you can afford college once it arrives. The investments need to survive through multiple market cycles to have enough to pay for it when it begins. - like retirement.
2) If you don't meet your retirement goal, you can bum off your kids. Or the government. It's not ideal, but then neither is making your kid get loans for college.
3) hahahaha - yeah no free market with colleges. People never choose state schools over private. People never consider the cost before enrolling and choose a different school because the price was too high. Colleges never close because people won't pay to go there. (That is supply and demand in action)

Link: college shuts doors - Google Search

I save what I can for kids college, which right now is $0. My retirement comes first. Because wife and I agreed we are not paying 100% of college costs, this is a less relevant part of discussion.

Whether you personally need to save for children's college has no impact on how people who want to pay for their kid's education should plan to pay for college.

That starts with making an estimate of what college expenses will be at that time, and developing a savings plan to work towards that goal. As HS graduation approaches, the estimates of cost are more and more accurate, and one day become known.

You should do the same for retirment: make an estimate of what living expenses will be at that time, and develop a savings plan to work towards that goal. As retirement approaches, the estimates of cost are more and more accurate, and at that point you should have 25x.

[wal23]

Wow look what I started !!!! Someone asked if I would be interested in real estate as an investment. One thing I have always wanted to do is invest in rental houses but have never had the guts to do it. My thought is to possibly cash out one of our IRA's (approx. $40,000) and buy a solid rental house using the IRA money as a down payment. I think with housing prices being so low and with a credit score in the 800's this could be a good time to take the plunge/risk. I have read up on landlording, pros and cons etc. My dream is to own and operate rental houses on a full-time basis and quit the job that pays me well but I am not 100% passionate about. Easier said than done though huh?

[jIM_Ohio]

Yeah I'm gonna call BS on this one. I've seen you give advice related to asset allocation, primarily because of projections about future returns - which are unknown (no one knows exactly what the market will return in the future). You support a 20% bond allocation because it will limit risk and not have a high impact on return. Really? You know what the future returns will be?

First, I don't advocate what allocation to hold, only state the volatility change as bonds move from 0-60% based on studies like the trinity study and other retirement planning studies.

Second, I do not believe 20% bonds is limiting risk, I believe it reduces returns without reducing volatility enough to justify the 20% position.

In fact, higher up in this thread, you give estimates based on a 9% return on investments. How do you know it will average 9%? The simple fact is, you don't. And so you yourself have made planning suggestions in this very thread based primarily on an unknown estimate.

So why do you use projections on investment value, but ignore the need to do projections on costs?

The primary unknown I use in my planning is the return of the investments- my approach is to use many known variables (like expenses and how they change for me) and use as few unknowns as possible (like investment return). This gives better results.

Again, you don't understand math. Inflation jumps around, sometimes up, sometimes down, but in the long run, it will average around 3%. Things don't have to be linear to work out to an average.

If something that costs $1 today costs $2 in 20 years, that is a 3.52% average inflation rate - and it really doesn't matter whether or not there was a 10% year in there somewhere.

Actually it does matter for retirement withdraw strategies if inflation was 10% or the nominal 3% used. Nominal inflation means business as usual on withdraws, where as high inflation means the withdraw strategy needs to adjust.

But why are you even dealing with changing a budget for today's costs when evaluating a retirement scenario?? Those are 2 separate planning issues.

No they are not. How you do today's budget will establish the habits you can rely on when living on a fixed retirement income.

Please use this inflation calculator: Inflation Rate Calculator- from InflationData.com
And find me a 20 or 30 year period of time where expenses went down by 10%. Good luck.

From 1980 to 2010, costs increased by 178% (average of 3.47% a year)
From 1990 to 2010, they increased 70% (average of 2.69%/year)

In 1980, the average income was $19,170 (1980s history including Popular Culture, Prices, Events, Technology and Inventions)

I have seen those calculators and more. You keep missing my point. Those inflation numbers take into account how costs change of a given "index" of items. Some items get removed (like costs of gasoline or energy), some costs shift (like if corn syrup increases in cost, then peanut oil or another substitute is used to keep the costs down) and some costs go up (like the cost of steel, cars and similar).

I believe the inflation rate and inflation indexes account for items like steel, corn syrup and eggs. I do not think most stated inflation rates account for energy. If steel is included, I haven't had to buy any steel yet, and hope I don't need to anytime soon.

I don't buy cars every year either, so if cost of a car goes up 3% per year, I would need to buy one about every 15 years, which means I need 3 in a 45 year retirement. There are other withdraw strategies which can account for this.

http://www.coverageforall.org/pdf/FHCE_FedPovertyLevel.pdf[/url]

I did not say this, and this is an example of you pulling an analagy out of thin air. If a person had $19170 expenses in 1980 and wanted to retire, the 25X rule for that is $480k. 2010 is their 30th year of retirement, and I could run a monte carlo to find out if they still have money left... I believe they would be "just fine".


[QUOTE=jpg7n16;262972
Yeah... but nobody cares, because nobody's asking for advice about whether they can retire today.

They're asking about 25-30 years from now, and all you keep saying is, "do you have 25x current expenses? Then you can't retire yet."

[/QUOTE]
Another example of you putting words in my mouth... I am showing people how to calculate when they retire, and the process is

calculate current expenses
multiply by 25X
if assets are greater than 25X target, retirement is on the table.

If expenses change, repeat calculation
so expenses change in 10 years, repeat the calculation
if expenses change 5 years later, repeat

If the person uses inflation to project the number, when expenses change, they need to redo the math anyway, so why add in the factor anyway?


[QUOTE=jpg7n16;262972



It is much simpler - for someone trying to retire today. Not so much for planning a saving strategy to meet needs 30 years from now.

[/QUOTE]

If you are planning retirement and don't want to retire today (or anytime soon) the best thing you can so is spend less than you earn, set aside between 15-25% for retirement and then check the math once in a while.

calculate current expenses
multiply by 25X
if assets are greater than 25X target, retirement is on the table.

If expenses change, repeat calculation


If you are 30 years away, no need to create lots of targets and create a situation with lots of unkowns. 16 years ago I could not tell you where I would be living today, I could not be telling you how much money I make, and 15 years from now I probably will have a much different career than my last 15, so adding lots of factors into a projection distorts any plans built on such false numbers.

However my spending habits 15 years ago and today are still the same. The things I value in life are about the same. Those factors need to enter into planning as much as any numbers.

Quote:
college costs are different than retirement for 3 big reasons
1) college has a finite timeline (4 years) so money saved does not need to last thru all market cycles- much of the 4% withdraw in retirement is to deal with same cycles, so the same rules do not apply (I don't create a 25X target for college savings, the target comes from somewhere else)
2) the consequence of not meeting the savings goal is low (my kid can get a loan)
3) college costs do not follow standard economic patterns (supply/demand). In short, colleges set their own price, increase them when they want, and its not the economy which is telling colleges what they cost.

1) Has nothing to do with how you can afford college once it arrives. The investments need to survive through multiple market cycles to have enough to pay for it when it begins. - like retirement.
2) If you don't meet your retirement goal, you can bum off your kids. Or the government. It's not ideal, but then neither is making your kid get loans for college.
3) hahahaha - yeah no free market with colleges. People never choose state schools over private. People never consider the cost before enrolling and choose a different school because the price was too high. Colleges never close because people won't pay to go there. (That is supply and demand in action)

Yes it does

Because the cost of college is 4 years and not 30 a few things are true about college which are not true about retirement

1) you can pay cash for college (inflation over any 4 year period for tuition at 1 given school is minimal)
1a) you cannot realistically pay cash for retirement which lasts 30 years (meaning be 100% CDs).
1b) the cash for college can come from earnings from parent for example

2) conventional financial planning is to make sure retirement is secure before kids college is paid by parent, that was my point.

3) College costs go up because of factors not seen in rest of economy. For example each time the federal government raises the federal education credits, tuition "mysteriously" goes up by about the same amount. Then factor in state credits and tuition goes up even more. I read that in 2 sources about 5 years ago.

College also has endowments, you cannot really get an endowment or scholarship for retirement. Harvard's trust fund is the source of many asset allocation studies. If Harvard were "forced" to payout 4% of its endowment each year, nearly every student could attend for close to free (if I read that right). Of course if Harvard was forced to do that, they would just increase tuition so 4% of the endowment was only a fraction of the costs.

Then other colleges with smaller endowments which compete with Harvard would raise their tuition or be underpriced and students would actually stop attending those schools (my alma matter is one of them- they raised tuition to appear competitive with Harvard because the 15k I paid each year attracted the wrong kind of student or so the dean said.

So colleges are not subject to the normal business cycle, and normal supply and demand principles in this regard (their cost is based in part on what market will bear, but not all colleges are subject to those constraints).

Whether you personally need to save for children's college has no impact on how people who want to pay for their kid's education should plan to pay for college.

That starts with making an estimate of what college expenses will be at that time, and developing a savings plan to work towards that goal. As HS graduation approaches, the estimates of cost are more and more accurate, and one day become known.

You should do the same for retirment: make an estimate of what living expenses will be at that time, and develop a savings plan to work towards that goal. As retirement approaches, the estimates of cost are more and more accurate, and at that point you should have 25x.

With college, if the goal is to pay 100% of costs, then you have two distinct advantages relative to retirement

1) College is less than 18 years away when you seriously start saving for it
2) Most of the money for college will come from contributions, not earnings. If a person wants 100k saved for college, best planning would suggest to set aside about 30-60k of this and let the market create the rest. The earlier money is put in, the less savings is needed, however I think few people can put in 30k before kid is 4 to get it to double twice by time they are 18 (that is 10% returns right up until freshman orientation).

Market cycles over 15 years and over 30 years/60 years have much different behaviors. That will effect how people save for those time periods. College (15 year savings period) you can find numerous time periods (like all of the 1970s) where the market is flat for most of the period.

I believe the return of stocks for any 30 year period is higher than 9% including the great depression.

The error with comparing college expenses to retirement expenses are many

1) college expenses are controlled by the college, your retirement expenses are controlled by you
a) meaning you either pay what the college wants or attend somewhere else (for less)
b) meaning for retirement if your expenses are too high you can find a way to change them

2) college expenses within a 4 year period are consistent/accurate once college is chosen, and an investment pattern to fund those 4 years is easy to predict (fund with cash).
a) basic planning suggests you lower volatility (risk) as time horizon approaches
b) if you focused retirement investing and spending on a specific 4 year period, you still need a long term horizon on the monies for the other 26 years. So when you withdraw money in retirement, its about meeting current costs and still having money left for next 29 years (or 28... or 27...)

3) Household expenses shift all the time. This changing demographic means the expenses are a moving target and have little to do with inflation
a) examples include paying off cars, mortgage, traveling more, hobby related expenses, more golf and entertainment fees and similar, and increased health care costs.
b) The shifting of the expenses should not be confused with inflation- do health care costs go up because you are old and on medicines at age 75 you did not need at 55, or did budget go up because of inflation even though those same costs were not in budget 20 years ago?
*c) studies have been done to show costs go down for about 75% of retirees in the following stages:
ages 55-75 costs stablize after an initial spending spree early in retirement
somewhere between ages 65-75 spending goes down until about age 85 as retirees become less physically active
around ages 75-85 the costs spike with end of life health care

*the ages of the study were qualified with they could see the clear trend in 75% of retirees studied, but the ages varied to where ranges were given, which overlap. Generally depended on the health of the individual.

**the 4% withdraw rule actually leaves lots of money on the table based on this new spending study (the study was less than 4 months old at time of this post). There is a new withdraw table the study showed which allowed higher withdraws early in retirement (like a 5% SWR) the lowering the withdraw rate in retirement in 3-5 downward shifts as spending decreased.


always enlightening LOL

[jpg7n16]

First, I don't advocate what allocation to hold, only state the volatility change as bonds move from 0-60% based on studies like the trinity study and other retirement planning studies.

Oh so you use historical information to project what will happen so you can plan accordingly? That sounds an awful lot like what I'm doing with these costs.

Second, I do not believe 20% bonds is limiting risk, I believe it reduces returns without reducing volatility enough to justify the 20% position.

The primary unknown I use in my planning is the return of the investments- my approach is to use many known variables (like expenses and how they change for me) and use as few unknowns as possible (like investment return). This gives better results.

Again, another statistic based on an unknown. Investment returns are a HUGE unknown. Do you know the future volatility of the bond asset class? Do you know that bonds won't substantially fall in price and eliminate gains that could have come from stocks?

You argue against my method, and then do the same thing - except for in one crucial area - costs.

Actually it does matter for retirement withdraw strategies if inflation was 10% or the nominal 3% used. Nominal inflation means business as usual on withdraws, where as high inflation means the withdraw strategy needs to adjust.

For withdrawal scenarios yes, but not while you're in an accumulation stage (aka ages 35-65) which is where the OP is. During accumulation over 30 years, one year's inflation is not important.

By the way, withdrawal scenarios means post 25x life. We are dealing with how to get to 25x (well... you're not, but you know what I mean).

I did not say this, and this is an example of you pulling an analagy out of thin air. If a person had $19170 expenses in 1980 and wanted to retire, the 25X rule for that is $480k. 2010 is their 30th year of retirement, and I could run a monte carlo to find out if they still have money left... I believe they would be "just fine".

You obviously misread my statement. Clearly I was referencing a yearly salary/withdrawal amount. And you again show how you are confusing accumulation stage (35-65) with withdrawal stage (in retirement today).

My example was that in 1980 a working person age 30 something (like the OP), would have an average income of $19,170. If they had 25x $19,170 by the time they retire (2010), they would have to withdraw based on $479,250, which would give them an income stream today of $19,170 (the 4% rule) - and that income stream is woefully inadequate today as compared to 30 years ago.

And thus an example of how the advice you gave earlier fails to account for growing costs.

Here's your original suggestion that I am trying to show is terrible:

I conclude you spend 105k per year. Is this accurate?

105k of spending means you want about $2,625,000 to retire on.

If you retire at age 68, that means the following would be good benchmarks for savings based on 90-10 allocation giving you 9% returns before inflation.

Age 68 $2,625K
Age 60 $1,313K
Age 52 $657k
Age 44 $329k
Age 36 $165k

Which the OP today (2010) is 38. And your advice suggests that when the OP turns 68 (2040), they should have accumulated only $2,625,000 - to maintain the $105k expenses.

Which is true. $2,625,000 will allow you to maintain $105k expenses at a 4% withdrawal rate.

The only thing you're forgetting is that $105k in 2040 will only buy about half of what it would have today in 2010. Said another way, $105k in 2040 will purchase about the same as $52.5k will today. (See inflation figures above - which actually show that it is closer to 1/3 so $105k in 2040 would be like $105k/2.78 = $37,769 today if inflation is identical to 1980-2010)

If the OP followed your advice and retired when they reached 68 with $2,625,000 and 4% withdrawals, you would have cut their standard of living in half (or worse).

Which is terrible planning. And terrible advice.


So like I've been saying all along, $2,625k is fine if they want to retire TODAY. Not so much for in 30 years...

Please see my original reply for a much more realistic picture of what the OP will need.

...if retiring today.

[jpg7n16]

Wow look what I started !!!! Someone asked if I would be interested in real estate as an investment. One thing I have always wanted to do is invest in rental houses but have never had the guts to do it. My thought is to possibly cash out one of our IRA's (approx. $40,000) and buy a solid rental house using the IRA money as a down payment. I think with housing prices being so low and with a credit score in the 800's this could be a good time to take the plunge/risk. I have read up on landlording, pros and cons etc. My dream is to own and operate rental houses on a full-time basis and quit the job that pays me well but I am not 100% passionate about. Easier said than done though huh?

You didn't start anything We're both stubborn, and I feel his advice is terrible so I'm trying my best to show you a true picture of what you'll need. (And trying to show how I'm right too hah)

I don't like the idea of cashing out an IRA for real estate down payment. Even if it's a Roth, you'll get taxed on all earnings + a 10% penalty for early withdraw. So for a Roth, you eliminate your entire retirement advantage (tax free withdrawals). Don't cash out an IRA too soon. Find another way to make this dream happen.

If rental real estate is your dream - and you plan on using the rental income to support yourself through retirement, I'd much rather see you reduce expenses and/or retirement savings, and increase savings towards a down payment on your first rental.

I'm very cautious about lowering retirement savings though. What is your plan if it doesn't work out, or isn't as fun as you hoped it would be?

[wal23]

If real estate investing did not work out I would continue to work where I work, collect my nice salary, take my 6 weeks of vacation annually and count my blessings.

[jIM_Ohio]

Oh so you use historical information to project what will happen so you can plan accordingly? That sounds an awful lot like what I'm doing with these costs.

No, what we are doing is different. As the other thread points out, most people can adjust costs to meet inflation (and not actually raise costs/spending). My plan is based on that behavior more than historical inflation percentage, because my experience, and the experience of investors on other boards, has told me that inflation really only affects spending when it spikes high. Most people do not see the nominal 2.4% inflation in their expenses.

Again, another statistic based on an unknown. Investment returns are a HUGE unknown. Do you know the future volatility of the bond asset class? Do you know that bonds won't substantially fall in price and eliminate gains that could have come from stocks?

I have said before using unknowns is OK
however using too many unknowns gives abstract answers which make planning too difficult.

You argue against my method, and then do the same thing - except for in one crucial area - costs.

Nope, costs are contained by behavior more than they increase with inflation. You are trying to use math when behavior of nearly every person on this board is opposite what the math says.

Yes costs go up, but most people adjust spending when costs go up (they cannot increase spending when costs go up because income is fixed, or increasing spending would end up making them live beyond their means.

Focus on the behavior to see my side

For withdrawal scenarios yes, but not while you're in an accumulation stage (aka ages 35-65) which is where the OP is. During accumulation over 30 years, one year's inflation is not important.

While accumulating inflation has no impact on the investment performance. As you pointed out 1 year's inflation is not important, so 30 years inflation is not important either.

By the way, withdrawal scenarios means post 25x life. We are dealing with how to get to 25x (well... you're not, but you know what I mean).


You obviously misread my statement. Clearly I was referencing a yearly salary/withdrawal amount. And you again show how you are confusing accumulation stage (35-65) with withdrawal stage (in retirement today).

My example was that in 1980 a working person age 30 something (like the OP), would have an average income of $19,170. If they had 25x $19,170 by the time they retire (2010), they would have to withdraw based on $479,250, which would give them an income stream today of $19,170 (the 4% rule) - and that income stream is woefully inadequate today as compared to 30 years ago.

And thus an example of how the advice you gave earlier fails to account for growing costs.

the withdraw today in 4% situation would not be $19170 in 2010, it would be $62k today, looks OK to me.

If you don't know that number, its 4% with 3% inflation increases per year in the withdraw on the original 19170... so if they had $19170 of spending in 1980, and retired in 1980, then they would have a 62k withdraw in 2010.

My advice captures costs changes... its an iterative plan, not a static one.


Here would be an example, if the person in 1980 was a new entry level worker earning 19170 per year, and they created a retirement plan, I would tell them to set aside 20% of their gross pay.
their target would be 479k.

If their expenses changed, then they need to redo the math above.
If their expenses did not change, the original plan is true whether it is 1980, 2010 or 2040 (479k covers 19k of expenses)

When expenses change, you redo the math


If the person in 1980 followed your logic, they still do my math every time expenses change. The difference is the numbers are less abstract, here is what I mean:

in 1980 they take the 19170 and inflate it and get the 62k number/$1.5 M target
in 1985 expenses change to 25k and they redo math and get a 66k expenses number/ 1.65 M target
on any spreadsheet they have they need to compare the 62k or 66k and also calculate number and remember how they got it
in 1990 they change expenses to 50k and see they need a $2.7 M target

and so on
each time they add in the inflation numbers when they analyze plan and it distorts (abstracts) the target. I strip that math out, because its 25X expenses and when I get it, retirement is very real (its very real at 12X but cannot pull trigger until 25X).

I originally had the inflation in my retirement plan 15 years ago when I started. The issue was expenses were changing as I was paying off student loans, getting new cars and moving (lots happened in first 4 years) that trying to follow numbers thru all the calculations

because retirement is a convergence point for many people
the best example is pay down a mortgage (to reduce expenses) while accumulating money in a retirement account
One is reducing expenses, which lowers target by 25X that expenses, and the other is accumulating money, 4% of which can be spent.

The expense has "no inflation" because a mortgage is usually fixed so its tough to predict that inflection point until investments are about 12X expenses, then much more detail can be done (like choosing year and paying down mortgage more aggressively).

Here's your original suggestion that I am trying to show is terrible:



Which the OP today (2010) is 38. And your advice suggests that when the OP turns 68 (2040), they should have accumulated only $2,625,000 - to maintain the $105k expenses.

Which is true. $2,625,000 will allow you to maintain $105k expenses at a 4% withdrawal rate.

The only thing you're forgetting is that $105k in 2040 will only buy about half of what it would have today in 2010. Said another way, $105k in 2040 will purchase about the same as $52.5k will today. (See inflation figures above - which actually show that it is closer to 1/3 so $105k in 2040 would be like $105k/2.78 = $37,769 today if inflation is identical to 1980-2010)

This assumes between 2010 and 2040 the OP does NOT re do the plan. Meaning when expenses change they do not update the $2.6 M target.

My #1 issue is that there is NO WAY to predict how expenses change because the inflation percentage is not the #1 input or factor into the expenses changing.
#1 is lifestyle- meaning paying off debts or taking on new ones, and adding or removing expenses to a budget (like moving to a place with no HOA fees decreases expenses)
#2 factor to expenses changing is behavior- meaning things like when gas prices go up, cutting back on long drives or going on vacation closer to home instead of cross country in a Winnebago.
#3 factor is life- getting sick, disabled or having to take care of a sick parent (this might be #1 or #2)
#4 is inflation

It is my opinion that #1-3 trumps #4 and the other thread shows this to be true to some extent.

If the OP followed your advice and retired when they reached 68 with $2,625,000 and 4% withdrawals, you would have cut their standard of living in half (or worse).

Which is terrible planning. And terrible advice.


So like I've been saying all along, $2,625k is fine if they want to retire TODAY. Not so much for in 30 years...

Please see my original reply for a much more realistic picture of what the OP will need.

Need implies you are looking into future
if you changed it to "target high" or "aim high" then fine. If OP waits to retire until he has that amount, his SWR will be lower because behavior will show he oversaved.

For example he pays off his mortgage- that drops your number down, but is not accounted for in your projection very well. In my projection it is accounted for (when expenses change, the math is redone).

[bluewaves]

Amazing dialogue in this thread. Are all of you financial analysts by profession?

[littleroc02us]

One method I have read about from the book "The Millionaire Next Door", is to take your Gross income and times it by your age and divide by 10. This will give you an idea of what your networth should be at this point. His point is that if you don't match the calculated amount than you are either an underachiver of wealth or just average. In order to be PAW (Predigious Achiver of wealth) you need to be were the numbers fall.

[jpg7n16]

Amazing dialogue in this thread. Are all of you financial analysts by profession?

I'm looking to be a financial planner. I passed the CFP exam in March and am looking for a new position.

I currently work as a financial analyst in private equity.

CFP Website: Certified Financial Planner Board of Standards Inc.

[jpg7n16]

oops!