Retirement planning

[Anton James]

Sipps

In the UK we have something that is called SIPPS. I wondered if anyone could share with me their thoughts on whether they are worthwile or not. I know they are tax efficient but my main worry is the government changing the rules to suit themselves at the appropriate (or perhaps inapproprate) time.

Look forward to hearing your views.

Ant

[rennigade]

Id like to have between 3M - 5M...assuming the market returns around 7% for my lifetime we should be able to hit that number before 60...again assuming nothing crazy happens. (lot of assumptions)

[Anton James]

10 mill?

I would love to have 10 million upon retirement but that is probably an idle wish what with the way stocks, bonds etc have all performed so badly since the credit crunch hit.

It would be good in a way to see a little inflation coming back as bank deposits are not without their risks nowadays and aslo provide pitiful returns. Gold and Silver weren't the no-brainer everyone thought either!

[feh]

I would love to have 10 million upon retirement but that is probably an idle wish what with the way stocks, bonds etc have all performed so badly since the credit crunch hit.

?

Bonds and stocks have performed extremely well the last 4 years.

[Anton James]

Pleased to hear that, mine haven't - must have been in the wrong place at the wrong time.

In the UK the AIM market (Alternative Investments MArket) has been truly shocking, many have been left without their shirts. Tread carefully, we are not out of the woods yet imo.

All the best.

[feh]

Pleased to hear that, mine haven't - must have been in the wrong place at the wrong time.

In the UK the AIM market (Alternative Investments MArket) has been truly shocking, many have been left without their shirts. Tread carefully, we are not out of the woods yet imo.

Ah, I see. I was referring to the US markets.

[NetSkyBlue]

I'm kind of "buying into" Mr Money Mustache's recommendation of 25x your annual expenses (or, annual money you want to withdraw in retirement) assuming a safe withdrawal rate of 4%.

1) I want to have a paid off house
2) I want to draw at least 30k (around 1875/mo after taxes, I think, which is what I take home now)

So according to that formula, I would need 750k in investment accounts to retire.

But I'm doing a very bad job of seeing if I'm actually on track My all-consuming goal right now is saving a 10k emergency fund plus a 50k house downpayment. My contribution to 401k plus my employer's contribution only adds up to about 8% of my gross income.

Once I get the downpayment saved up though, I intend to start maxing out a ROTH.

Edit: Okay, tried to do the math. I'm shooting for getting the downpayment saved up in 2018, so if I start putting 5,500 in an account in 2019, in addition to what I'm saving now (hopefully I'll get a better job and this will be more), and assuming a 6% rate of return (who knows what it will really be), I could make my number around age 60.

[riverwed070707]

I'm kind of "buying into" Mr Money Mustache's recommendation of 25x your annual expenses (or, annual money you want to withdraw in retirement) assuming a safe withdrawal rate of 4%.

1) I want to have a paid off house
2) I want to draw at least 30k (around 1875/mo after taxes, I think, which is what I take home now)

So according to that formula, I would need 750k in investment accounts to retire.

But I'm doing a very bad job of seeing if I'm actually on track My all-consuming goal right now is saving a 10k emergency fund plus a 50k house downpayment. My contribution to 401k plus my employer's contribution only adds up to about 8% of my gross income.

Once I get the downpayment saved up though, I intend to start maxing out a ROTH.

I'm not familiar with his formula. How does he estimate annual expenses? If I calc 25x my current annual salary, its roughly 1.25m. But then you see a lot of calculators emphasize your "pre-retirement income" which, to me is so arbitrary when you're 30 years from retirement that there is no way it can be estimated. How am I supposed to know what I might make 25 years from now?? Also think its safe to assume when I'm ready to retire I will no longer have a mortgage payment and my savings rate can decrease (ie I won't be saving for retirement in retirement so there's 12% of my income back there). With just my mortgage payment and retirement savings removed, that brings me down to $30,800 annually, which means I would only need $770k -- kind of a huge difference! Of course I'd rather over shoot than under but I think its interesting how a few minor adjustments (like having a paid off mortgage) can drastically impact the amount you might need.

[smk]

for about $200, you could go to the esplanner web site and get a professional grade system that is better than what most financial planners use. then you wouldn't need to speculate on how much you need. you could also use a free system called tipster, which is much simpler and misses some key elements. but the math you guys are doing is kind of out there...

[NetSkyBlue]

I'm not familiar with his formula. How does he estimate annual expenses? If I calc 25x my current annual salary, its roughly 1.25m. But then you see a lot of calculators emphasize your "pre-retirement income" which, to me is so arbitrary when you're 30 years from retirement that there is no way it can be estimated. How am I supposed to know what I might make 25 years from now?? Also think its safe to assume when I'm ready to retire I will no longer have a mortgage payment and my savings rate can decrease (ie I won't be saving for retirement in retirement so there's 12% of my income back there). With just my mortgage payment and retirement savings removed, that brings me down to $30,800 annually, which means I would only need $770k -- kind of a huge difference! Of course I'd rather over shoot than under but I think its interesting how a few minor adjustments (like having a paid off mortgage) can drastically impact the amount you might need.

Here's his post outlining his formula: http://www.mrmoneymustache.com/2012/...or-retirement/

As a non-expert, I think it rather makes sense, but I'm a little fuzzy on how a number that I spend yearly now translates to what I will spend then, after 30 years of inflation??

[feh]

I'm kind of "buying into" Mr Money Mustache's recommendation of 25x your annual expenses (or, annual money you want to withdraw in retirement) assuming a safe withdrawal rate of 4%.

Be careful with these rules of thumb. Remember:

• you need to take inflation into account
• the 4% rule assumes you're retiring in your 60s
• many people are saying 4% is not conservative enough

[NetSkyBlue]

Be careful with these rules of thumb. Remember:

• you need to take inflation into account
• the 4% rule assumes you're retiring in your 60s
• many people are saying 4% is not conservative enough

That's true. But if I am able to retire at 60, that's young enough that it wouldn't be so difficult to work part-time somewhere that I don't hate.

And I guess I don't really understand inflation. "They" say 3% a year, but we don't receive raises at work, and I don't really feel it gets harder and harder to get by. It's less than I want to be making, but that's because I want to be saving more than I do. My annual expenses haven't gone up, with the possible cost of food and/or gas, but 3% of that last year would be $141. That's the difference between a good year of couponing, strategic bulk buying, or using CC rewards. Not a big, palpable change in things.

But 3% of 30,000 is $900. I certainly haven't noticed a $900 hike in my spending over the last year. I just don't "get" it.

[smk]

Be careful with these rules of thumb. Remember:•you need to take inflation into account
•the 4% rule assumes you're retiring in your 60s
•many people are saying 4% is not conservative enough

a recent survey by the cfa institute showed most cfa's don't believe the 4% withdrawal rate will work due to the low level of interest rates currently in place. to use this method, you need to do a new study to forecast a safe withdrawal rate.

when you create a portfolio and try to maximize return for a given level of risk and you define risk traditionally as the potential for a loss, your analysis will cause you to make inefficient decisions. your objective is not to maximize your wealth today, but pay for your retirement tomorrow. that would mean inflation would be a better measure of risk than nominal loss.

if you look at treasury bonds vs tips in a simplistic way, the tips have a nominal yield plus an implied inflation return that is equal to nominal treasuries. so the returns are the same. the risk of immediate loss due to duration may be higher for the tips, but the risk of loss due to inflation will be higher for the nominal bonds. so if you use risk of loss today as your measure, you will tend to favor the nominal bonds, but you substantially lower your ability to pay for retirement. recall that the returns are the same, so there is no reason to favor nominal bonds due to higher expected return. in fact you substantially lower your risk of failing to pay for retirement with the tips an give up nothing.

why would you monotonically continue to follow a tradition that causes you to substantially increase your risk of failing to meet your objective without any increase in return? are these just thoughtless, zombie like habits or is there actually a mental process behind it?

[kv968]

That's true. But if I am able to retire at 60, that's young enough that it wouldn't be so difficult to work part-time somewhere that I don't hate.

And I guess I don't really understand inflation. "They" say 3% a year, but we don't receive raises at work, and I don't really feel it gets harder and harder to get by. It's less than I want to be making, but that's because I want to be saving more than I do. My annual expenses haven't gone up, with the possible cost of food and/or gas, but 3% of that last year would be $141. That's the difference between a good year of couponing, strategic bulk buying, or using CC rewards. Not a big, palpable change in things.

But 3% of 30,000 is $900. I certainly haven't noticed a $900 hike in my spending over the last year. I just don't "get" it.

The 3% inflation is just an average estimate of what inflation might be over the long term. Its like the 10% average return on the stock market over time. You can't expect to get 10% every year but over time that could be true.

And not really feeling that extra $141 for your cost of food and gas for you this year might not be a big deal but compound that out over several years and it starts to add up especially if you don't get a raise.

And you said you didn't feel a $900 hike in your spending over the last year and you most likely didn't spend an extra $900 but look at this way...Say you want to buy a car that's $30k right now and you have the money but you don't want to buy it for another decade since you have a very reliable car so you stick the money under the mattress. In 10 years, with the car price rising 3%/yr, you go to purchase the car with the $30k you had but find that you're $10,318 short because the price of the car is now $40,318. That's inflation over time. You might not have really "felt" even the $900 increase much if you had bought the car a year later, just like you didn't feel the $141, however over time it starts to make a huge difference.

Its the same thing with retirement. I could have $1M dollars right now and think that I'm set without the need to invest it but say I've got 30 years until I actually retire. Well if you discount (what that $1M will be "worth" in today's dollars 30 years from now with 3% annual inflation) you'd see that in 30 years that $1M would be equivalent to having $411,989 today in spending power. Still not a bad chunk of change but FAR from the $1M you thought you had.

Of course not everything will go up 3%/year (some more/some less) but overall it gives you an idea of what your money will "worth" in the future.

[LivingAlmostLarge]

It assumes for 30 years of retirement which is short if you retire in your 40s or 50s. Plus healthcare costs aren't factored into living expenses if you retire early and have to pay for the premium yourself versus employer coverage.