Another retirement question

[SAJ-99]

I think the fact the you are thinking about how to plan for retirement means you are ahead of about 75% of Americans. The responses are all solid, but that just means they are in the 25% with you. Set a plan and execute. You will be fine.

 

[Lawnboy]

I watched my father (a wonderful man) nearly in tears when he realized his kids had to start paying his bills due to a questionable early retirement decision - it took part of his soul and totally screwed my mom who is still with us - so circumstances vary.

We can all agree this is not how we would want retirement to end up. That's tough

 

[Lawnboy]

I don’t know what the numbers are, but I’ve never heard a single person ever say they wished they would have retired later.

I heard the same thing about getting out of the snow plowing business. Never met a single guy who regretted it. Randy finally talked me into it last winter. Best winter I've had. Im thinking retirement would be similar assuming you have planned accordingly. Great to hear from you Dink! We need to share more "smiley" fruit snack picts in the future. I miss those.

 

[schmalts]

Just one more factor to consider is the type of retirement accounts that you have. You could retire on much less if it’s mostly Roth because you don’t have to pay Uncle Sam.

Here is a tip very few "advisors" will give you because they do not think about it. If you plan on retiring before 65 you NEED TO GET MONEY IN A ROTH. Here is a good example. My buddy at work just retired last week, his pension is 32K a year. Standard deduction is 24800.00 So that puts your taxable income at around 9K. He will take 35K a year out of his ROTH. On the OBAMACARE exchange his reportable INCOME is 9K and he will get health insurance for 150.00 a month and it is half the out of pocket and deductible that he had when employed! Many financial advisors are clueless when they tell you that you need to save a ton for health care if you retire before Medicare kicks in but they never think about the ROTH advantage. Keep in mind this!! you need to start early on the roth because you cannot use it as non-reportable income unless it has been at least 5 years if I recall.
So if you are 55 and want to retire at 58 and have no roth started and just start now you cannot use that advantage until you are 60.
Again, ROTH distributions do not count as income on the health care exchange.

 

[peterk1234]

The magic number for most people that live a normal middle class life is 2.5mil. Assuming things don't go to hell, it allows you to preserve capital.

I have done the analysis and I also just retired and moved to a new state at age 54 so we can enjoy life. I have also spoken to a lot of people and everyone who has pulled the trigger agreed that 2.5 is the number.

 

[schmalts]

The magic number for most people that live a normal middle class life is 2.5mil. Assuming things don't go to hell, it allows you to preserve capital.

I have done the analysis and I also just retired and moved to a new state at age 54 so we can enjoy life. I have also spoken to a lot of people and everyone who has pulled the trigger agreed that 2.5 is the number.

That 2.5mil number is only one person's lifestyle and doesn't include major questions. An example is: Do you have any pension? Do you have Roth in that 2.5 number? Will you be working part time or have hobby income? Is your home paid off? What do you spend a year now?
One thing I have been doing the last few years is avoid paying with cash and use the credit card as much as possible. The reason is i can get an end of year statement showing what I spent and it classifies it on what it was spent on. This is helping me to decide what I need to live on a year.

 

[rwc101]

I remember going to the papermill where my dad worked and hearing an old timer talk about how he was retiring soon with a whole $35,000. Talked about how he was going to buy a bass boat with it. At 10 years old that gave me anxiety.

 

[Bullshot]

I’m not much help regarding what one “actually” needs but I am saving a good percentage of my income and constantly running forward-looking excel scenarios with that 1-3 million standard talking head advice in mind. I won’t receive a pension, and all my savings are in roth and 401k (and home equity). Please don’t mistake
my goals with what I actually have in my “pocket” today. None of what I am saying here is a brag about my bank account today... but maybe someday.

The 3 million number is RAPIDLY slipping or has slipped from my grasp (mathmatically). Was never able to chart a believable path to it. If I was 30 or under, that would still be my brass ring goal. But now, the investment return would have to be very unrealistic (or lucky) or I’d have to have a windfall injection of savings. 2 million is still “theoretically” possible just from saving the max over the long haul and getting a really good annual return. Still, that will be a challenge and a lot has to go right. I am at the point where someday amassing a 1 million retirement sum seems very doable. I am 45, so there is a lot of time left if I have to keep working. I’d retire anytime after 55 if I can, but not before. But I don’t think 1 mil would be enough to retire young without big change in lifestyle and living expenses. With inflation running rampant and the extremely high cost of living in NJ, I am intentionally aiming high and if I fall somewhat short, which is likely, I will continue to work until the math hopefully balances. Obviously the older I am at retirement, the smaller nest egg I theoretically will need.

 

[SAJ-99]

I don’t know what the numbers are, but I’ve never heard a single person ever say they wished they would have retired later.

I know a lot of people who plan to work until they are dead. I think most of the people on this site have an activity that can occupy them well past retirement age. A lot of other people do not. Retirement means giving up something that has been a big part of your life for many years. Sometimes that is a positive, and sometimes it isn't.

 

[VikingsGuy]

The magic number for most people that live a normal middle class life is 2.5mil. Assuming things don't go to hell, it allows you to preserve capital.

I have done the analysis and I also just retired and moved to a new state at age 54 so we can enjoy life. I have also spoken to a lot of people and everyone who has pulled the trigger agreed that 2.5 is the number.

That just means for them they have decided that $100k + SS + any pension they have is enough for them. Could be more, could be less depending on each person's circumstances.

That aside, as an extension of a number of thoughts in this thread, people really need to understand the tax treatment and inflation effects of each asset class. SS payments are often lower than many pensions at the start, but most non-govt. pensions are not inflation-adjusted so their value erodes quickly while SS hangs in there as it is inflation-adjusted. The money out of a Roth comes out tax-free but money out of a 401k is taxed as ordinary income and other personal investments will be taxed in various ways (dividends one way, short term gains a second, long term gains a third and ordinary income a fourth). Depending on other income streams SS gets taxed at various levels. etc etc etc.

If you really wanna go down the rabbit hole, no one number is of much use to any one person. To really make an educated guess you need to project (1) a long term inflation rate - history and the fed suggest 2.5% (I am planning for 3.5% some fear much worse), (2) a long term blended investment return rate - history says 7-9% (I am planning for 6.5%), (3) a long term effective tax rate for your income mix - anywhere from 5%-40% is common so you have look at your own position but it is safe to say taxes are not going down, (4) your life expectancy - I suggest you follow the indefinite life expectancy guidelines of 4% or 5% withdrawal rate discussed above and don't guess the date of your death, (5) your risk profile - what stock/bond mix are you up for at various age points (I was 80-20 young and am moving towards 60-40 as I get closer to retirement, I will not go further than 50-50 even in my 70's unless bond returns dramatically improve), and (6) your expected monthly after tax income needs - that is truly personal but I would make your best guess, agree with your spouse and then at 20%.

 

[mxracer317]

Here is a tip very few "advisors" will give you because they do not think about it. If you plan on retiring before 65 you NEED TO GET MONEY IN A ROTH. Here is a good example. My buddy at work just retired last week, his pension is 32K a year. Standard deduction is 24800.00 So that puts your taxable income at around 9K. He will take 35K a year out of his ROTH. On the OBAMACARE exchange his reportable INCOME is 9K and he will get health insurance for 150.00 a month and it is half the out of pocket and deductible that he had when employed! Many financial advisors are clueless when they tell you that you need to save a ton for health care if you retire before Medicare kicks in but they never think about the ROTH advantage. Keep in mind this!! you need to start early on the roth because you cannot use it as non-reportable income unless it has been at least 5 years if I recall.
So if you are 55 and want to retire at 58 and have no roth started and just start now you cannot use that advantage until you are 60.
Again, ROTH distributions do not count as income on the health care exchange.

It’s all I talk to my clients about every day. The five-year rule that you are referring to, principal is always able to come out of a Roth IRA any time without any penalty or tax. A Roth IRA has to be established for at least five years before you can take out any interest and be over 59 1/2 without penalty or tax.

 

[schmalts]

Something a lot of people forget when trying to figure what they need a year to retire is that you need to subtract the amount of what you are putting away in the 401k off your estimate. Even more so if it is Roth. I look at what I make vs what I take home and its a little shocking since I am 100% Roth. Basically me and the wife live on 52k less a year than our net income since we max out on catch up contributions. That's not going to be an expense once we retire like it is now. I'm with Lawnboy, I think I could retire on 60-70k a year and be happy vs. Working another 5 years and not having health enough to do the things I want when I retire. I'd rather run out of money and be a Walmart greeter at 70 than be 70 and have a million I can't spend because I'm dead or can't get around anymore. Everyone is different. I rarely pay anyone to do anything so that helps too. I fix my vehicles, do my own home repairs, gave myself a heart transplant, you name it. I'm too much of a busy body to ever stop making a living, so I'll retire and do things to earn cash here and there.

 

[VikingsGuy]

Something a lot of people forget when trying to figure what they need a year to retire is that you need to subtract the amount of what you are putting away in the 401k off your estimate. Even more so if it is Roth. I look at what I make vs what I take home and its a little shocking since I am 100% Roth. Basically me and the wife live on 52k less a year than our net income since we max out on catch up contributions. That's not going to be an expense once we retire like it is now. I'm with Lawnboy, I think I could retire on 60-70k a year and be happy vs. Working another 5 years and not having health enough to do the things I want when I retire. I'd rather run out of money and be a Walmart greeter at 70 than be 70 and have a million I can't spend because I'm dead or can't get around anymore. Everyone is different. I rarely pay anyone to do anything so that helps too. I fix my vehicles, do my own home repairs, gave myself a heart transplant, you name it. I'm too much of a busy body to ever stop making a living, so I'll retire and do things to earn cash here and there.

I am not disagreeing, but will point out that you are one unplanned medical event from not being able to do it all for yourself - and every year older you are that much more likely to have such and event. A little extra in the nest would then be essential.

If life was just 100% OK followed by immediate death I would look at my retirement funds very differently, but for many there are years of partial disability and in that situation being poor isn’t just about giving up eating out or a skipping a few vacations. Being poor when you have your health is not great, but there are lots of ways to cut costs and add a little side income. Once disabled your costs go up in a way you really can’t control and your ability to add extra income can evaporate. YMMV.

 

[schmalts]

I am not disagreeing, but will point out that you are one unplanned medical event from not being able to do it all for yourself - and every year older you are that much more likely to have such and event. A little extra in the nest would then be essential.

If life was just 100% OK followed by immediate death I would look at my retirement funds very differently, but for many there are years of partial disability and in that situation being poor isn’t just about giving up eating out or a skipping a few vacations. Being poor when you have your health is not great, but there are lots of ways to cut costs and add a little side income. Once disabled your costs go up in a way you really can’t control and your ability to add extra income can evaporate. YMMV.

That's when I'll take up skydiving.....maybe forget to pull the rip cord..lol

 

[VikingsGuy]

That's when I'll take up skydiving.....maybe forget to pull the rip cord..lol

Seems like a bad Monty Python skit where they throw old people in wheelchairs out of a plane

 

[BackofBeyond]

I guess I've just got a different take on the whole "magic number" conversation. But first the why - my wife's grandfather was never a rich guy, he worked his entire career as a geologist for different mining companies. Comfortable, but not excessively so. Most importantly he always saved money. He always lived below his means. When he passed away his will stipulated that the entirety of one of his investment accounts be liquidated and divided up between his grandchildren. My father-in-law told me that Grandpa had never taken a withdrawal from that account. He literally saved and invested money for 40+ years so he could pass it on to his grandkids, to the point of starting the account before he even HAD any grandkids.

That inheritance, which wasn't huge - roughly equivalent to a year's income for my wife and I - had such a huge impact on our life. We put a healthy principle only payment into our mortgage, gave a healthy start to my kids' 529 college saving plans, nice little bump into our retirement, and some new living room furniture that my wife really wanted and really deserved.

So that's OUR goal now - the creation of generational wealth. We both make good money, but not so much we can out earn our stupidity if it came to it. We live on ~ % of our income - the rest gets dumped into Roth 401(k), the 529s, our individual Roth IRAs, and a TD account called "Grandkids." We both started the retirement savings early. Hypothetically, using the "double every 7 years" rule of thumb, we could probably stop all retirement savings now, and still be comfortable in our retirements. Not going to do it, but could. We've got goals of sending our grandkids through college. We want to be able to give our kids a 6 figure check as their down payment for their first house. Most importantly, we want to teach our kids to carry on that Grandpa Norm legacy.

Norm started pushing that generational wealth fly-wheel. My wife's folks kept it going, adding to the momentum when they could. We keep pushing, and adding. That fly-wheel is spinning a whole lot faster than when Norm first started and the effects will just keep carrying on.

TL;DR - numbers are just numbers. You're the master of your own fate on that. If you can live off what you got, and want to do it, do it. I'll keep plugging along because I've got other goals.

 

[VikingsGuy]

"double every 7 years" rule of thumb

Without distracting from your great message, I do want to point out to others that "double every 7" is based on an assumption of 9% annualized compounded growth and does not count for the inflation effect on the actual value of that money when you need it.

It is a possibly misleading shortcut to the mathematical truth that an amount compounded will double every number of years determined by dividing 72 by the expected annual growth rate ("the rule of 72). The historical norm for stock growth is 7-9% but assuming you have some assets in bonds or other more stable funds, that reduces your number. So if you have 80-20 stocks to equity at the start, and move towards 60-40 as you age that alone take a bullish 9% estimate and pushes it to 7ish. And if you want to start with the conservative range of 7% that gets closer to 5.5% annualized return. Now you have to throw in inflation effects - if you say 2.5% (the historical average and Fed stated target) you are actually doubling the buying power of your current savings every 24 years (72/net 3%). That leads to a very different view of what is needed.

Of course, you may have a different view of inflation, of stock/bond mix, of expected market returns, etc. But on a real dollar basis (meaning accounting for inflation) almost no one will realize a doubling of assets every 7 years over a period of 20-30 years. And we haven't even talked about tax drag on yield. So, it is great so many people are starting to take charge of their finances at earlier ages and in doing so to fit their own wishes and values. I just caution folks about some of the oversimplified and overly rosy advice floating around these days.

If you have to keep it super simple I suggest a version of @ElkFever2's advice. If you are conservative take your needed annual retirement income times 33, if you are middle of the road take your needed annual retirement income times 25, and if you are bullish take your needed annual income times 20. This one calculation will get you as close to determining your nut as any overly-simplified "black box" number can.

 

[brownbear932008]

I think the answer to your question @Lawnboy just really can't be a one size fits all. Tons of moving factors here for everyone. I live in a really low cost of living area and some people survive on 20k a year. I think I could retire and make it just fine on 50k and put money away. I feel I can probably live on much less than most people. The wife and I plan on doing most of the bucket list things before we retire and if we can still do them after retirement than that's great. If not I'm fine with that and happy. There will always be more than I can catch and deer than I can chase available around my house.

I know after this covid mess it really has me thinking of how I can go ahead and hang it up early. Just can't find a good route without kicking myself in the nads. I've got 8 more years to have my 20 in for the gov. I will be 55 and if things look good I plan to go then and delay my pension until age 60. I would like to find a good way around health insurance cost between 55-60. May end up working a partime gig for insurance. That seems to be the big hurdle now days for most people.

I thank God every day for a position that allows a good pension and continued health benefits after 60. I hated the fact of being solely dependant upon a 401k so joined the gov knuckle draggers to make a living. Probably my best decision ever at this point. Worst case scenario I leave at 60.

 

[BackofBeyond]

Without distracting from your great message, I do want to point out to others that "double every 7" is based on an assumption of 9% annualized compounded growth and does not count for the inflation effect on the actual value of that money when you need it.

It is a possibly misleading shortcut to the mathematical truth that an amount compounded will double every number of years determined by dividing 72 by the expected annual growth rate ("the rule of 72). The historical norm for stock growth is 7-9% but assuming you have some assets in bonds or other more stable funds, that reduces your number. So if you have 80-20 stocks to equity at the start, and move towards 60-40 as you age that alone take a bullish 9% estimate and pushes it to 7ish. And if you want to start with the conservative range of 7% that gets closer to 5.5% annualized return. Now you have to throw in inflation effects - if you say 2.5% (the historical average and Fed stated target) you are actually doubling the buying power of your current savings every 24 years (72/net 3%). That leads to a very different view of what is needed.

Of course, you may have a different view of inflation, of stock/bond mix, of expected market returns, etc. But on a real dollar basis (meaning accounting for inflation) almost no one will realize a doubling of assets every 7 years over a period of 20-30 years. And we haven't even talked about tax drag on yield. So, it is great so many people are starting to take charge of their finances at earlier ages and in doing so to fit their own wishes and values. I just caution folks about some of the oversimplified and overly rosy advice floating around these days.

If you have to keep it super simple I suggest a version of @ElkFever2's advice. If you are conservative take your needed annual retirement income times 33, if you are middle of the road take your needed annual retirement income times 25, and if you are bullish take your needed annual income times 20. This one calculation will get you as close to determining your nut as any overly-simplified "black box" number can.

I'm a knuckle dragging, mouth breather that's been in the construction industry for far to long; you're much smarter than I am and use big words with lots of numbers. You are absolutely right. I just use the "7 year" thing just to roughly SWAG numbers on figuring out is it remotely possible to get to where I want to be.

You're method is a surgeon's scalpel, mine is a 32 oz. framing hammer. Both have their place when applied correctly.

Also, the little kid in my wants to giggle and say "he said nut."

 

[VikingsGuy]

I'm a knuckle dragging, mouth breather that's been in the construction industry for far to long; you're much smarter than I am and use big words with lots of numbers. You are absolutely right. I just use the "7 year" thing just to roughly SWAG numbers on figuring out is it remotely possible to get to where I want to be.

You're method is a surgeon's scalpel, mine is a 32 oz. framing hammer. Both have their place when applied correctly.

Also, the little kid in my wants to giggle and say "he said nut."

As I tried to say, was not debating or questioning your post - I was just trying to provide additional context for others who may want it.

I think reliable shortcuts (framing hammers) are super valuable. I just don't want somebody to grab for a framing hammer and get a staple gun by accident. Simple can be powerful - if you want simple go with the @ElkFever2 framing hammer rather than the 7yr doubling staple gun.

Take care!