Retirement income generation (RE and Others)

[creditcardfree]

Personal finance should be taught in our schools.

Where is the love button on this? This is so true. Not all parents have the knowledge.

[DaveInPgh]

Where is the love button on this? This is so true. Not all parents have the knowledge.

I did a Google Image search to post a love button.

Word of caution. Never do that search unless "Safesearch" is ON!!!

[DaveInPgh]

[scfr]

Our plan will continue to evolve until we hit (and in) retirement, but is coming in to focus the closer we get. Anticipated retirement is in 7-12 years. But there is always the chance that one or both of us may decide to continue part-time work longer. Or do a little side business. I'm ruling nothing out. (I believe that work provides more than financial benefits - mental and social . . . but that is a topic for another thread.)

We will use our nest egg (investment strategy = capital preservation). The current plan is for an initial withdrawal rate of 2.5%, which I considered a moderately conservative figure, but lately I've been reading that may be too high. We may ratchet that down to something in the 2-2.4% range.

The hope/plan is that nest egg withdrawals will cover basic necessities, and SS will cover any "extras."

If we were overly optimistic people, we might look at our current nest egg and our current basic expenses and decide that we could retire now. But we won't do that because we know our basic expenses are going to go up. The biggest increase that you already mentioned is medical; that it WILL increase is known, by how much is unknown. A big unknown and potentially a H-U-G-E increase to our basic expenses is that DH would like to relocate to a VHCOLA. Another increased expense is the need to provide parental assistance (something that we have already begun to experience). Also, I would like to continue having some "extras" and would like to increase our spending on extras (specifically, travel) starting in about 10 years.

In retirement, we will cut back to one car. We do not plan to use our home to fund any portion of our retirement, though we may move from a house to a condo for quality of life (less upkeep). I'm more a fan of the condo lifestyle than DH, but if we make the move to the VHCOLA then I think he would be on-board . . . in fact, I think it's the only way we could make that move work comfortably.

We've already begun a "gradual descent" to retirement. DH is not pursuing any new business, and I've started to cut back my hours worked a little bit. I have less appetite for gobbling up all the overtime I can get.

[scfr]

Ideally I'd like DH to have the option in 7 years to stop working at 45 no matter what.

It's a great goal to have. Just keep in mind a couple things.

It is easier to stay in the work force than to try to get in to the work force after being out for a long time. If he likes his work, it might be better to work a couple years longer than necessary than to retire too soon.

You may find yourself facing expenses down the road that you can't even imagine now. When I was in my 30's and 40's I would have said "definitely not" if asked whether my in-laws would be needing financial assistance. I'm grateful beyond my ability to express in words that we have done what many would consider "over-saving" for a longtime so that we are now in a position to help them out a little.

In the past 2 years, we've known 3 instances of people (either friends or people in our community) who have faced rather devastating setbacks. I know you can't prepare for everything, but I believe in being really prepared.

[kv968]

We will use our nest egg (investment strategy = capital preservation). The current plan is for an initial withdrawal rate of 2.5%, which I considered a moderately conservative figure, but lately I've been reading that may be too high. We may ratchet that down to something in the 2-2.4% range.

I would say a 2.5% withdrawal rate should be no problem. I know the "4% rule of thumb" rate has come under some scrutiny as of late but haven't heard anything that 2.5% should be a problem.

[feh]

I would say a 2.5% withdrawal rate should be no problem. I know the "4% rule of thumb" rate has come under some scrutiny as of late but haven't heard anything that 2.5% should be a problem.

+1

That's the dividend on a medium duration bond fund. A withdrawal rate of 2.5% is extremely conservative.

[LivingAlmostLarge]

And the 4% withdrawal assumes that you are never dipping into principal. I would say 2.5% definitely doesn't touch principal.

but honestly what is the worse that would happen if you did touch principal?

[feh]

And the 4% withdrawal assumes that you are never dipping into principal.

No, this is not true. If you're referring to the Trinity study where the 4% number originally came from, 4% means you won't run out of money in 30 years, not that you won't touch principal.

[disneysteve]

what is the worse that would happen if you did touch principal?

The worst case scenario is that you run out of money.

We recently had this conversation with my mother. Due to years of ultra-low interest rates, her nest egg just hasn't been generating enough income for her. I ran the numbers and convinced her to start dipping into principal. She's 86 years old. I showed her that she could take out a certain amount every month and would still have enough to last her until she's 117 years old. And that assumes that interest rates never go back up. She's never had to touch principal before but I think I helped her to see that there is a point where it's okay to do.

The problem is you don't want to be doing it too early into retirement and risk running out of money.

[97guns]

I ran the numbers and convinced her to start dipping into principal. She's 86 years old. I showed her that she could take out a certain amount every month and would still have enough to last her until she's 117 years old..

this is one aspect of retirement that ive never given much thought about until now that i read your post, the thought process has always been saving and earning to reach retirement

[disneysteve]

this is one aspect of retirement that ive never given much thought about until now that i read your post, the thought process has always been saving and earning to reach retirement

Most people don't think about it until they need to.

I showed her how much she had in principal and how much she could take out each month for the next 20+ years before she would spend it all. I don't remember the exact numbers but that doesn't matter. The amount she could draw is way more than she actually needs. All she was looking for was an extra $50-100/month. That's only $30,000 over 25 years. She has a 6-figure portfolio. Spending principal is not going to be a problem.

[LivingAlmostLarge]

But if you make 4% on your investments wouldn't you not touch principal ever? Just live off the interest. Of course right now it's sort of hard to live on interest as DS pointed out. But wasn't that the theory of that study?

[feh]

But if you make 4% on your investments wouldn't you not touch principal ever? Just live off the interest. Of course right now it's sort of hard to live on interest as DS pointed out. But wasn't that the theory of that study?

You don't earn 4% every year. 4% withdrawals covered the worst 30 year periods over the last 100 years (or whatever the study examined, which I know covered the great depression).

But, I repeat, the 4% figure includes withdrawing principal.

https://en.wikipedia.org/wiki/Trinity_study

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

[scfr]

The "4% rule" was designed to insure that a nest egg would (in theory) last 30 years. It doesn't mean not touching principal.

Remember that it's an INITIAL withdrawal percentage. That's the amount you withdraw just the first year. In subsequent years, you increase it for inflation. So, if 4% of your nest egg is $30,000 and inflation is 3%, the first year you take $30,000, the 2nd year you take $30,900, the 3rd year you take $31,827, etc, etc. But that's NOT "taking" principal. It's taking from your nest egg, including the income which it is continuing to generate.

If someone has the goal to never touch their principal, then they couldn't "consume" all of their nest egg's earnings, because they'd need that nest egg to keep growing so that it could produce more income every year to keep up with inflation. Either that or face a declining standard of living every year. So you can't say that you can retire and live off of only passive income if you'd need 100% of that passive income to meet your expenses the very first year of retirment.

Personally, I DO plan to use (by which I mean consume) my nest egg in retirement. But as I said before with an initial withdrawal rate of 2.5% (or perhaps less). I don't think 30 years is long enough, and I prefer a more conservative investment mix than what the 4% rule was based on. Also, I'm NOT one of those folks who plans to consume every last dollar, just because I'd prefer to have a bit left at the end of my life than to risk running out of money. But I'll definitely use it! For awhile after retirement, it will continue to grow, but eventually it will start to drop off. I'm sure that will feel a bit uncomfortable, but it's something I'll have to emotionally prepare myself for. And I'll need to prepare DH as well because I think it will freak him out even more than me.