How much to retire?

**feh** · 05-13-2011, 10:52 AM

We just received a forecast of our finances for the rest of our lives from our financial planner, so I'll play along...

My wife and I are 45. Retirement savings are currently just under $1M (about half tax-deferred and half not), and we own our home outright. Net worth is between 1.4 and 1.5.

Projections are that we could retire in about 5 years and keep our current standard of living. If we were to delay retirement another 5 years, we could live the rest of our lives pretty extravagantly (compared to our current frugal ways).

Of course, who knows what will happen with the market in the next 5 years, which could substantially alter those plans...

**KTP** · 05-13-2011, 11:02 AM

Originally posted by LivingAlmostLarge View Post

Our retirement balance is $245k and adding $26.5k @ 6% = $2.6M. Withdrawal @ 4% = ~$100k/year. But this assumes we don't start saving more or average better than 6%. Assuming 8% we're looking at $3.8M; 4% withdrawal = $152k/annually.

I think we're on track for retirement. Thoughts?

My thought is that you should probably start thinking about real returns instead of total returns. 6% real *might* be doable, but 8% real is probably not in the cards unless we get another 1990s prolonged boom to the economy (lol?)

I would lock in everything I have for the next 30 years for a 4.5% real return. IE, if TIPS ever got to the point where the fixed portion were 4.5%, I would sell everything and buy 100%TIPS! That is about how confident I am of seeing 8% real returns anytime soon.

When I mentioned we wanted a $60K/yr income, I meant in today's dollars, inflation adjusted for the future (so we may be looking at $120K a year in our 60s).

**Hector** · 05-13-2011, 12:00 PM

LivingAlmostLarge and feh, you guys are doing great. Congratulations!

**thekid** · 05-13-2011, 02:17 PM

The wife and I both have defined benefit plans. While we don't fully count on those, they are pretty solid. My wife is a teacher (we are canadian and the public sector pensions situation here does not have the funding deficits experienced in the US) and I'm a lawyer working for a quasi-public investment fund (which has some 8 billion in net assets, with the pension plan pretty much the sole potential creditor if it was to ever close).

We try not to count on those, but if all "goes according to plan", we should be able to retire at 55.

The equivalence factors on the plans also eat up almost all our tax deferred retirement savings space (I'm allowed a wooping 500$ contribution next year). We have all but maxed previous space (from my past work) and have about 120k$ in there. Future savings are in taxable acounts (other than home equity). That greatly impacts our ability to save in a tax efficient manner. We are currently 33 and 32 and have a net worth in the mid 500s, mid 200s outside of home equity. At our current savings rate and with a 6% return our non home equity net worth in 22 years (when I turn 55) should be a bit over 2M$ (in today's dollars). Adding that to the pensions, should make for a very nice retirement. Should the pensions be reduced, we will of course have to reevaluate retiement age depending on the particulars.

**LivingAlmostLarge** · 05-13-2011, 04:20 PM

Feh, how much more extravagently for the extra 5 years? What interest rate are you using to calculate?

KTP, I think 6% is very doable with a conservative 25 year investment frame. I'm 31 and my DH is 33. Idea being that we'll probably shore up taxable accounts with more conservative cash so we have a big window. We really started investing in 2006, so all of this was saved and invested since that point. Has the market been good? eh. Appears NYSE was 8k and now it's 8k and sp the same thing.

Thekid, how do you calculate pensions? Do you know what you are due to get?

**thekid** · 05-13-2011, 05:30 PM

Originally posted by LivingAlmostLarge View Post

Thekid, how do you calculate pensions? Do you know what you are due to get?

With defined benefit plans (as opposed to defined contributions plans), you are generally entitled to x% X number of years served. My plan grants me the right to 2% of my average salary for the best 3 years of my career per years of service, indexed at a max of 2% per year. For any retirement under 60 years, you are docked 3% of your pension for years retired prior to 60 (so 15% if you retire at 55).

If I was to stay at my current job til retirement, I would get about 50k$-60k$ (hard to say exactly, as I do not know for sure what my salary for my top 3 years will be) per year as of 55 years of age (indexed up to 2% per year). If I move prior to 55, I get a lump sum of the actuarial value at moment of departure or take a pension for years served when I hit required age.

My wife's plan is a bit less generous, but works the same.

These plans are funded by fixed employee contributions (the employer makes mine as per agreement, but I get taxed on it as income) and variable employer contributions (as per actuarial projections to meet benefit obligations). The key for these plans to work is to not accrue large actuarial deficits (the downfall of the state pensions and large corp pensions in the US is to have allowed large deficits to go unfunded). It's not much different that the compound effect on individual savings (1 dollar in retirement income will cost you much less the earlier you save for it and invest it).

**KTP** · 05-13-2011, 07:03 PM

Originally posted by thekid View Post

The equivalence factors on the plans also eat up almost all our tax deferred retirement savings space (I'm allowed a wooping 500$ contribution next year). We have all but maxed previous space (from my past work) and have about 120k$ in there. Future savings are in taxable acounts (other than home equity). That greatly impacts our ability to save in a tax efficient manner. We are currently 33 and 32 and have a net worth in the mid 500s, mid 200s outside of home equity. At our current savings rate and with a 6% return our non home equity net worth in 22 years (when I turn 55) should be a bit over 2M$ (in today's dollars). Adding that to the pensions, should make for a very nice retirement. Should the pensions be reduced, we will of course have to reevaluate retiement age depending on the particulars.

Wow, I had no idea Canada was so much more fair with retirement than USA.

Here, there are no equivalence factors and you can have things like a city manager getting a pension AND being able to shelter money in a retirement account (and also an IRA or Roth). It is a bit ridiculous, and the private sector for the most part just gets the single 401K retirement account (unless they work for themselves, in which case they get up to 3 times as much shelter space! Make sense? I didn't think so.

Just read in the paper today about a sheriff deputy in our county who is spiking his pension with overtime and earned something like $226,000 in 2010. A deputy. This is one reason our county is having severe budget issues. They are solving it with things like $500 parking fines and increasing the number of red light cameras, plus increasing property taxes.

Here is the article if you feel the need to throw up a bit:
List: The 25 Highest-Paid King County Employees For 2010 - News Story - KIRO Seattle

**thekid** · 05-13-2011, 07:11 PM

The flip side is of course if there is some default on your benefit (company goes bankrupt, government defaults or passes special law to reduce benefits), you are left out to lunch...having lost out on your tax sheltered space and finding yourself with reduced benefits. A double injustice.

I'm actually not quite sure how they set the equivalence. It comes with my employment tax slip at year's end. I believe it's an actuarial equivalent to what needed to be contributed that year to meet benefits (and not necessarily what was contributed).

**feh** · 05-14-2011, 04:44 AM

Originally posted by LivingAlmostLarge View Post

Feh, how much more extravagently for the extra 5 years? What interest rate are you using to calculate?

The plan they ran through their simulator has us retiring in 10 years, and estimates a 7% return. According to that simulation, we would have a net-worth of $3M in 2021, which would allow us to live pretty nicely off interest alone.

They actually didn't run a simulation for retirement 5 years from now - that's my own estimate, using a different tool.

**disneysteve** · 05-14-2011, 06:42 AM

We are on track to accumulate about $2.3 million by age 62. At a 4% withdrawal rate, that would give us $92,000/year in income which would be roughly equal to what we earn now after our savings are taken out (and before taxes are taken out). Since about a quarter of that will come from Roths and be tax-free, we should be in good shape to maintain our lifestyle and have money to do extra stuff like travel and such.

**KTP** · 05-14-2011, 06:57 AM

I just ran the calculator at 7% (although I am not sure we can get this) and it shows us reaching our goal of $1.7 million in 7 years at age 48. If we waiting until 62 like DS, we could have a tad over 7 million. Hmmmm

At 4% SWR we could spend $280,000 a year. That is ridiculous. $60,000 a year is plenty.

**kork13** · 05-14-2011, 08:27 AM

I'm planning/anticipating a military pension by the time I retire. However, I'm saving enough as it is to easily cover myself without it. By my (rough) estimates, I'll save up about $3 million by age 60, which would provide $60/yr just in interest/returns, which would probably be enough as it is (let alone actually drawing down principle, or any pension that I end up with). Technically, I could use double that (4% withdrawal) and still be fine for a good 30 years or so.

So really, I'm not terribly concerned about having enough to retire when I eventually want to, as long as I keep along approximately same path I'm already on.... making projections like this (and having such a positive outlook) really makes you grateful for being in a good situation financially.

**LivingAlmostLarge** · 05-14-2011, 04:12 PM

KTP why don't you think 6% is reasonable estimate for retirement? And why 8% is not reachable? Is it because you think most people have only 10 years or less? If it's over 20 years is it more reasonable?

I wonder if the US pensions aren't underfunded because people aren't contributing enough to them?

How much to retire?