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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46811  
Subject: Retirement pondering Date: 7/4/2003 1:09 AM
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The previous thread that discussed retirement calculations ( http://fireboards.fool.com/Message.asp?mid=19276313&sort=whole ) got me thinking about retirement again, something that has been getting funded on 'autopilot' as I've taken to more immediate and pressing financial concerns.

Here is the way that I guesstimate my retirement needs, along with the relevent simplifying assumptions (listed at the bottom). The actual numbers have been changed to protect my privacy, but the concepts are still the same.

1) Figure out the total cost of living today.
Okay, that's easy, a budget of $2000 per month.

2) Figure out the average tax rate on income.
Okay, that's easy again. Look at last year's tax returns, add up federal, state, and local. Throw in Social Security and Medicare, for good measure, because I have an ugly feeling that 'unearned income' may not remain exempt from those taxes forever. The number comes up to about 30%.

3) Figure out the pre-tax cash flow necessary to support living, today.
Simple enough, take the number from step 1, divide by what's left when step 2's result is subtracted from 100%. For this example, it works out to $2000/(1-.3) = $2000/0.7 = $2857.14 .

4) Guesstimate a personal inflation rate for the rest of the working career.
Sure - since we're throwing around numbers, let's say 3%.

5) Decide how many years until retirement.
30 sounds like a good number.

6) Figure out the cash flow needs that will be necessary to sustain an eqivalent lifestyle just prior to retirement.
Okay, easy enough. Take step 3's result, multiply it by what you get when you raise the quantity of one plus step 4's result to the power of step 5's result.
In math terms: $2857.14 * ((1+0.03)^30) = $6935.03

7) Guesstimate the average tax rate in retirement.
Well, I'm betting that, since I want to maintain an equivalent lifestyle and I don't trust that investment income will remain immune from social security and medicare taxes, my tax rate will be pretty similar to what it is, now. So, I'll say 30%.

8) Adjust the pre-retirement cash flow needs by the tax rates assumed in retirement.
Well, in this example, it's kind of silly, because they're both the same, but I'll do the calculation anyway, for the sake of those with different presumptions. It's a two step calculation. Part A: Take the answer to step 6, multiplied by what's left when step 2's result is subtracted from 100%. Part 2: Take the answer to part A, and divide that by what's left when step 7's result is subtracted from 100%.
A) $6935.03 * (1-0.3) = $4854.52
B) $4854.52 / (1-0.3) = $6935.03

(Note: You can, prior to step 8, omit the tax conversion, then adjust the tax conversion value accordingly, but I like to do my calculations all with either pre-tax or post tax money whenever possible, to help keep the values straight in my head.)

9) Guesstimate a post-retirement personal inflation rate
Because medical expenses tend to increase with age, and medical expenses in general are increasing faster than the general rate of inflation, I believe that my overall inflation rate will be higher in retirement than before. So I'll guesstimate 5% post retirement inflation.

10) Guesstimate how long you'll live, in retirement.
Primarily for the reasons I expressed in this post: http://fireboards.fool.com/Message.asp?mid=19277726 , I guesstimate a 'forever' timespan in my retirement.

11) Guesstimate a post-retirement total return on investment
Well, I like what Table 2 from this post: http://fireboards.fool.com/Message.asp?mid=19186922 is telling me. At the same time, I'm wary of the short term income risks alerted to in the table from this post: http://fireboards.fool.com/Message.asp?mid=19159187 . So I probably won't be invested totally in income producing stocks in retirement. The cash, bonds, or other 'parking lot' places for a portion of my money will be used to supplement income for the 'down' years in the dividend flows from the income producing stocks, but their presence will detract from my total potential return. It's a trade off that I'm willing to make, in order to retire. So I'll take an overall moderate to aggressive risk position (still cash-generating stock heavy, with some other assets to balance/insure) in retirement and guesstimate 8% compounded return on investment in retirement.

===

At this point, we've guesstimated how much monthly pre-tax income will be needed at the beginning of retirement, how much the cost of living will increase over time during retirement, how long the money will last, and how much return is anticipated with a moderate risk level during retirement. We still need to figure out how much of a nest egg will be needed at the beginning of retirement to make it work, and then work backwards from there to figure out how to get to that point.

===

12) Guesstimate the cost of 'self-perpetuating' the retirement account, to protect it from inflation, and the 'spendable cash flow' after paying for the inflation protection.
Okay. Here's an estimate that is close to reality, and really easy to visualize. If your personal inflation is rising X percent per year, then your investments have to produce X percent more each year, just for you to keep pace. If your investments return Y percent per year, and you need to keep pace with X percent annual inflation, then your base needs to increase X percent per year. So a good rough guesstimate is that X percent per year needs to be added to the account balance, leaving Y minus X percent for spendable cash. The financial planning calculations are actually (1+Y)/(1+X), which, for small values of Y and X, approximate.

For the purposes of this discussion, the 'cost of inflation' is the result of step 9, and the 'spendable cash' is the difference between step 11 and step 9.

To do the math: With an 8% annual return and a 5% personal inflation rate, the balance needs to grow by 5% to keep protected, leaving 3% of the balance as 'spendable return' every year, per the simplifying assumption, or 2.857% per the official calculation. Note that since the balance is increasing, the value represented by the 2.857% number is increasing, as well.

13)Guesstimate the portfolio balance that will initially generate that kind of return.
Here's where the math gets funky for those expecting to draw their assets down over time. Because I'm presuming a 'forever' account, this calculation is simplified. In order to not complicate matters further, I will continue with that presumption and just ask that those who want to spend down their assets just bear with me.

Okay, in this example, we're talking a 'forever' account, where 2% of the balance is spendable on an annual basis (from step 12). We're also looking at needing $6935.03 per month initially (from step 8).
$6935.03 * 12 = $83,220.36 (Monthly expenses, year 1, times 12 months in a year)
$83,220.36 / 0.02857 = $2,912,858.24 (Annual pre-tax income needed year 1, divided by the percentage of the account that is spendable = total account balance ).

So. We've now calculated that in order to maintain an equivalent lifestyle in retirement and keep up with inflation ($2000 after tax dollars per month, in today's dollars), a nest egg of $2,912,858.24 will be needed, thirty years from now.

14)Guesstimate a 'working years' compound annual rate of return on investment.
Okay I said 8% in retirement, and that's because I plan to diversify into some parking places once I retire. Since I plan to retire young, I can adjust my retirement date accordingly if I don't meet my total return. As a result, I can remain pretty aggressive up until just before retirement. I'll go with a round 10% return, between now and then.

15)Figure out the starting line for the retirement investments.
Okay - I'm looking online in my 401(K) plan, my Roth IRA statement, and my employer's retirement account. I add them all together and come up with a total balance of $20,000.

16)Figure out how to get from here to there
Okay, we have a starting line ($20,000). We have an ending point ($2,912,858.24). We have a timeframe to get there (30 years). We have a presumed pre-retirement rate of return (10%). At this point, it's just a matter of plugging the numbers into an Excel spreadsheet or a Financial Calculator and getting a final monthly payment amount:
For those using an HP 10BII calculator, the settings are as follows:
P/YR (payments per year) = 12
PV (Present Value) = -20,000
(The negative sign is an artifact of 'outgo' versus 'income'. In a nutshell, it makes the math work out.)
FV (Future Value) = 2,912,858.24
(Again - the sign is an artifact of 'outgo' versus 'income.' It makes the math work out.)
N (Number of payments, total) = 360
(Thirty years of 12 payments per year)
I/YR (Interest Rate per Year) = 10
Solve for PMT (Payment)

The result is -$1113.08.

That means that, to reach these goals $1113.08 will need to be paid out (invested) monthly, for the next 30 years, at 10% annual compounding, on top of the current $20,000 balance (which is also compounding at 10% annually), to get to the $2,912,858.24 value needed to make these plans work. Let's see - that's less than the sum both of the current maximum monthly 401(K) contribution ($1000) and the current maximum monthly IRA contribution ($250) (Total potential: $1250/mo). Which makes assumption 8 (below) a realistic assumption.

===

Again, these numbers are not the same numbers I'm using to estimate my retirement needs, but the principles and calculation steps, and the overall model are. Anyone who chooses to use a similar model to build his or her own retirement plan is free to do so, but I make no guarantees, warranties, promises or assurances that the future will work out according to the model, or that the model itself is accurate. The model is available for your use at your own risk. Remember, there are several simplifying assumptions, guesstimations, hand-wavings, and presumptions built in throughout the model, plus (I'm sure) a few that I forgot to mention. Also, since it's late at night and I'm starting to go bug-eyed in front of the computer, I may have made a few arithmetic errors along the way. If so, I apologize in advance.

Additionally, understand that small changes in many of the numbers (including, but not limited to: pre-retirement inflation rate, post-retirement inflation rate, pre-retirement return rate, post-retirement return rate) can turn into LARGE changes in the values needed to make the model work. Anyone using this, or any similar model to calculate their retirement needs should regularly review their status and readjust their assumptions and savings rates accordingly.

Good night!
-Chuck
===

Simplifying Assumptions
1) Social Security will either be defunct or be means tested to the point where I will not qualify for benefits.
2) Smooth returns.
3) Steady personal inflation rates.
4) Medicare will either be defunct, be means tested to the point where I will not qualify for benefits, or continue to be such a poor program that I will need to buy private insurance to either supplement or replace Medicare coverage.
5) I will not receive a pension. (Which is true - my employer uses a defined contribution, not a defined benefit retirement plan.)
6) Retirement funds are separate from emergency funds, when something happens, the emergency fund will cover the difference between expectation and reality.
7) Tax rates will remain relatively stable throughout life.
8) Money can be invested, on average, like a 401(k) account. Tax deferred during accumulation, taxed as income during withdrawls. This assumption smooths over things like Roth IRAs, which are never taxed on withdrawl, and 'traditional brokerage accounts' which incur annual dividend taxes and capital gains taxes on holding turnovers.
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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21583 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 1:20 AM
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I knew I had some bugs in there... Here's the first:

What I said:
The financial planning calculations are actually (1+Y)/(1+X), which, for small values of Y and X, approximate.

What I meant:
The financial planning calculations are actually ((1+Y)/(1+X))-1, which, for small values of Y and X, where Y is greater than X, approximates Y-X.

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Author: paperkut Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21584 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 2:28 AM
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that is absolutely terrifying. i am so you-know-what. quick question; how is someone with a $2,000 budget per month supposed to come up with over a grand to save? or are you assuming they make at least twice as much as they are budgeting? just asking, b/c i find it exceedingly difficult to save more than 20% of my income <and that's no one grand either> plus have it ONLY be for retirement. it's all so disheartening. *paperkut

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Author: haywool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21585 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 7:25 AM
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that is absolutely terrifying. i am so you-know-what. quick question; how is someone with a $2,000 budget per month supposed to come up with over a grand to save? or are you assuming they make at least twice as much as they are budgeting? just asking, b/c i find it exceedingly difficult to save more than 20% of my income <and that's no one grand either> plus have it ONLY be for retirement. it's all so disheartening. *paperkut

Yee Gads ! I'm never gonna get to retire...and I'm 58 already!
wooley

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21586 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 8:43 AM
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Before anyone panics, please read the 'simplifying assumptions.'

They include things like 'no social security', 'no medicare', 'no pension'.

If you expect Social Security and Medicare to be marginally useful when you retire, which they likely still will be for people currently in their 50s or older, the savings numbers get smaller and much easier to reach. Additionally, if you have a pension, the numbers get smaller and easier to reach.

Also, in the calculations, I presumed spending habits post-retirement that exactly matched the spending habits pre-retirement, justified by replacing some costs with others. Some people can and do cut back. I also presumed that taxes were essentially equivalent pre and post retirement, which they may not be, especially with the use of tax-free savings vehicles like the Roth IRA.

But yes, in general, the numbers can provide a nasty shock, otherwise.
-Chuck

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Author: Chinwhisker Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21587 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 9:10 AM
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Before anyone panics, please read the 'simplifying assumptions.'

They include things like 'no social security', 'no medicare', 'no pension'.


Hi Chuck and all,

Can I throw even a brighter light on you retirement plans?

With 30 years to go, and a little discipline, you have an opportunity to increase you savings while reducing your dependence on your income.

I'm going to start you out with 10% savings now, just because it sounds like a good generic savings rate for an average Fool with 30 years worth of wealth building capabilities.

Considering a 4% increase in earnings per year, which is about half of what I have managed over the last 30 years, and increase your savings by half that amount each year.

At an average of 4% each year, you'll be increasing your savings by 2% each year. By the end of the 30 years, you'll be living on only 50% of your earnings.

Throw this in a spreadsheet, and check my fifth grade math. I'm fairly sure it will come out about right. While your at it, consider the possibilities you could do better than a 4% annual increase in earnings, which shouldn't be hard for a bright Fool. Wow! It gets even better.

Cut your retirement needs in half, and see if that improves the long-term picture a bit.

In the meantime, have a great Independence Day.

Chin


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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21588 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 9:19 AM
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paperkut

that is absolutely terrifying. i am so you-know-what.

Well, I may disagree with babyfrog's assumption of no Social Security and that difference has a powerful impact on the principal amount needed to fund retirement, nonetheless these retirement planning calculations and their import are indeed frightening.

The move over the last 10 or so years of corporate America away from defined benefit (pension) plans to defined contribution plans (401K) has been, IMO, vastly understated in its impact for the average American.

I would say, as a group, Boomers can discard the notion of retiring at 65. With longer lives, being the first generation in a while to have to fund our own retirements, increasing Social Security solvency issues, a poor return from the "professional" money managers (mutual funds), and a very likely hostile overall economic climate between now and when we would hit age 65, I am personally planning not to retire before 70 (and, who knows, perhaps not fully then).

Having looked at this several years ago, one of the decisions I made was to move to a profession that I absolutely love. It took a few years of lower income, but now I'm firmly established and settled in for the long haul.

These retirement planning exercises, when done in a way that is believable for the individual, often do force one to view (and review) one's assumptions from quite a different paradigm. Some of the assumptions I was forced to review: Retirement age; What to do with windfalls (like inheritance); Savings rate; Needed return on investment; How best to achieve a higher rate of return without assuming any more risk; career (can I really work another 20 years doing this?

It is not too soon, no matter what one's age, to learn which formula (for how to calculate your retirement income needs) best suits you and your situation. It is not too soon to then perform the calculations. It is not to soon to then determine what has to happen for the goals to be achieved.

This is a perfect discussion for Fools and is correctly engaged in any forum in Fooldom.

PosFCF

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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21589 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 9:24 AM
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<<Considering a 4% increase in earnings per year, which is about half of what I have managed over the last 30 years, and increase your savings by half that amount each>> My own personal experience casts doubt on this scenario. I am retired now. During my professional career my earnings peaked within my first 5 working years, remained fairly steady for most years, and tailed off in the last few years of my working life. What line of work was I in??...physician. Your scenario also does not take into account periods of disability or unemployment......bottom line: too rosey a projection imho.

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Author: admiraltroll Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21591 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 10:03 AM
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Hi Babyfrog,

Good post. My only changes would be the assumed returns of 10% and 8%. You may be able to achieve those rates but I would use 8% and 6% for planning purposes even if I thought I could achieve the higher rates.

Regards
Philip

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Author: Chinwhisker Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21592 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 11:52 AM
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My own personal experience casts doubt on this scenario. I am retired now. During my professional career my earnings peaked within my first 5 working years, remained fairly steady for most years, and tailed off in the last few years of my working life. What line of work was I in??...physician. Your scenario also does not take into account periods of disability or unemployment......bottom line: too rosey a projection imho.

Hi missash and all,

I can understand where you are coming from, and will have to agree. This is too rosy a picture for some. I imagine I am one lucky old country boy.

This goes to prove, what works for one may not work for everyone. In 1974, I thought I was on top of the world making a whopping $4.29 per hour as a mechanic in a textile plant. (called a cotton mill down here:) Now, I have to ask how could I have lived on $4.29 per hour, or $8k per year? This was a huge improvement over the prior years.

In 2001 my income had grown by 9% CAGR, but I was missing time with my family. I now make only 56% of what I made in 2001, and am saving 36% of that. I now look at my deposits in my checking account and have to ask, How am I living of that? The answer - quite well, thank you.

With the move I made in 2001, I reduced my earnings potential, forced myself to work at least 3 more years than I would have otherwise, but have never been happier.

I look around me, and see the people I became friends with back in 1974 losing their jobs to NAFTA, and wonder how they can make it? Their answer? "A country boy can survive." Some of them are going to meet at my sister-in-law's house this evening, and we'll be sucking down burgers, ribs, hot dogs and beer. I'll bet there will be not a frown in the crowd.

What does my rambling have to do with defending my rosy scenario? Nothing:)

I still remember my brother telling me back in 2001, after a day of riding the backroads in SC; "We used to have fun like this. We make good money, but we used to have fun."

I just want to wish you, and everyone a Happy Independence Day. I hope each and everyone of you enjoy yourselves as much as I will.

Have fun!!!

Chin

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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21597 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 12:22 PM
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Here is the way that I guesstimate my retirement needs, along with the relevent simplifying assumptions (listed at the bottom).

The historical, annualized, post-tax return of the contemporary (post WWII) U.S. stock market is 8 - 10%, depending on whose numbers you use. I usually use 8% because it's on the low side of reasonable.

The historical, annualized inflation rate is 4%; I usually use 4% because there's agreement on that particular number.

I usually assume future tax and monetary policy will be similar to today's policy. Guessing future tax and monetary policy is too hard. Also, taxes are incorporated in the post-tax stock market return.

Interestingly, when I run these calculations on me, my wife, and the two of us together (with a wide range of input assumptions), I keep coming up with numbers in the $2,000,000 to $3,000,000 range for the two of us together.

My Dad, who's very affluent and has access to pricey advisors, thinks my numbers should be closer to the immediately sub-$2,000,000 range. However, he assumes I can boost my investment returns on my portfolio with covered calls, and I find that strategy too risky for my tastes. He also assumes I can spend down my portfolio in retirement, and I insist on leaving my principal intact.

If you really wanted to do a rigorous analysis, you'd have to do a Monte Carlo Analysis and vary inflation rates, return rates, and tax rates. You can do these multivariate analyses with brute force, or you can use Teguchi methods (industrial design of experiments). There are software packages that make Monte Carlo Analysis (relatively) easy. The three market leaders are @Risk (http://www.palisade.com/), Crystal Ball (http://www.decisioneering.com/), and Risk+ (http://www.cs-solutions.com/). I prefer @Risk, but all three products are good products, and the three vendors watch each other closely.

Alternatively you could research journal articles. The American Association of Individual Investors (http://www.aaii.com/) is an EXCELLENT source of these kinds of journal articles.

If you do the research, you'll discover the simple analyses are as good as the complex analyses. The reason for this phenomenon is a combination of Newton's Third Law of Expertise (for every opinion, there's an equal and opposite PhD) and the First Law of Thermodynamics (the chaos of the universe is constantly increasing).

If you have a financial calculator or a spreadsheet, try this demonstration. First calculate the effect of saving $2,000 per year every year from your 18th birthday for eight years at 8% per year, and then never saving another penny until you're 65, but allowing your savings to compound. Then calculate the effect of saving $2,000 per year starting from your 26th birthday until you're 65, again allowing your savings to compound at 8% per year. Compare the total amount invested ($2,000 per year times eight years vs. $2,000 per year times 39 years) and the final values of the two portfolios at age 65. If this demonstration doesn't convince you to save early and often, I have no idea what will.

To enjoy a comfortable, timely retirement, most investors must save at least 15% of their gross incomes every year starting in their early 20s. Investors who start late, want to retire early, or want to retire in luxury must save more. If you look through posts on TMF's retirement discussion boards, you'll discover many TMF subscribers claim to save 25% of their annual gross incomes, and a few claim to save over 50% of their annual gross incomes -- in addition to what they save for houses, cars, vacations, and other immediate needs.

The real crux is how much you really need to retire. I know there are people who think retirement would be grand if they could have a mobile home on the wrong side of the train tracks, and they'd spend their days with a bamboo fishing pole between their toes.

That perspective on life is a little too close to subsistence living for my tastes. I want a nice home. It doesn't have to be the fanciest and most expensive house in town, but I'd like to be comfortable. Until America comes to its senses and gets a decent public transportation infrastructure, I want to buy a car that's no more than two or three years old and hold it for seven or eight years, when I'll replace it with another car that's two or three years old. I've lived in four countries on three continents and visited many other countries on business and vacation, but the vacations I enjoy the most are the ones where I stay at home and work on my job jar without the distractions of earning a living. I absolutely insist on a new computer with current versions of my preferred software applications every two or three years, and a broadband internet connection.

Some people argue in retirement your income needs are less than when you're working. You're not saving for retirement anymore. You're not paying Social Security or Medicare taxes. Your children probaby are on their own. Your requirements for a business wardrobe are substantially reduced. You probably can get by with one car, rather than a motor pool.

However, in retirement, your medical expenses almost certainly will be higher. You'll probably want to spoil your children or grandchildren. You'll probably want to enjoy some of the things you denied yourself while you were working (e.g., frequent meals at restaurants and exotic vacations). You may even take up one of those hobbies notorious for consuming money (e.g., chasing a small, white ball across the countryside or trying to outwit an eight pound, 12-inch fish).

Investors can safely withdraw about 4% per year from a well-performing, well-balanced investment portfolio without cannibalizing their principal. They can withdraw a little more in years with good returns, and a little less in years with poor returns. Lower withdrawal rates are better, and much lower withdrawal rates are much better.

Another way to look at that 4% number is you must have 25 times your gross annual income in savings to retire. You can retire with less money, but you'll have to cannibalize your principal, reduce your standard of living, or reduce your expected lifetime to do it.

Retirement income needs and the timing of those needs vary from person to person, but when you do the research and crunch the numbers, you'll probably discover you have to max your 401(k)/403(b), max your IRA (and spousal IRA), and still make additional retirement investments in non-retirement accounts.

However, the key is a timely, comfortable, secure retirement is within the grasp of everybody IF THEY INVEST EARLY AND OFTEN. Yes, the highly compensated technical specialists (e.g., doctors and lawyers) will earn more than laborers (e.g., tradespeople and TMF writers), and those higher earnings will be reflected in their retirement incomes, but our country was founded on a principle of equal OPPORTUNITY, not equal lifestyle. If you prefer to live in a country where everyone has an equal lifestyle, I can suggest several candidate countries you may want to visit for field research.

One potential complaint is getting a decent investment vehicle does take a minimum initial investment, and it does take an investment above the minimum initial investment to get rid of some pesky fees. For example, most Vanguard funds have a $3,000 minimum initial investment, their index funds have a $10 per year ($2.50 per quarter) low account balance fee for accounts with a dollar value less than $10,000, and they have a $20 per account annual IRA custodial fee for investors whose total invesments with Vanguard are less than $50,000. However, I worked for minimum wage, part-time when I was in high school, and I accumulated several thousand dollars by the time I entered college; I opened my first Vanguard IRA with $3,000, and I got rid of that low account balance fee in three years; and when I consolidated my investments at Vanguard, I got rid of the annual custodial fees. If you don't like my approach, you can find mutual fund companies, TIAA-CREF comes to mind, that open accounts with very low minimum balances, although they don't have Vanguard's very low cost structures or excellent customer service departments.

David Jacobs
TMFDj111

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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21598 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 12:44 PM
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http://dowtheoryletters.com/dtlol.nsf click on "rich man poor man" for an example (math already done)of what TMFDj111 is talking about

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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21600 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 1:21 PM
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. . . click on "rich man poor man" for an example . . .
[http://dowtheoryletters.com/dtlol.nsf]


Hey, that's cool!!! I knew the idea wasn't original, but it's still fun to see the argument laid out so neatly (and conveniently).

David Jacobs
TMFDj111

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Author: KennyO Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21607 of 46811
Subject: Re: Retirement pondering Date: 7/4/2003 7:41 PM
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...how is someone with a $2,000 budget per month supposed to come up with over a grand to save?

An excellent point, paperkut! For those of us who can it's a challenge to remember that we're not all alike and some genuinely and honestly can't. For years my suggestion has been to begin right now saving an amount you can comfortably handle. Begin with five or ten dollars a week. The idea is that you're setting it aside to grow long term so it has to be money you aren't soon likely to need. Make the savings the first thing to come out of your paycheck then live on the balance. Here's the kicker: each time you get a raise watch how much your paycheck changes then up your savings by half the net increase. Your savings (investment) account now grows a bit faster and your pocket money goes up as well!

I did this for quite a few years and I had two years when I just shoveled the whole net raise into savings because I was living just fine on my current take home pay. It didn't make me rich but it sure felt good to compare the growing balances each January.

KennyO

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Author: FanoPlane One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21650 of 46811
Subject: Re: Retirement pondering Date: 7/5/2003 10:30 PM
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TMFDj111 writes:

 ...
If you do the research, you'll discover the 
simple analyses are as good as the complex analyses. 
The reason for this phenomenon is a combination of 
Newton's Third Law of Expertise 
(for every opinion, there's an equal and opposite PhD) 
and the First Law of Thermodynamics 
(the chaos of the universe is constantly increasing).
...


Oops, you meant the Second Law of Thermodynamics.

In brief:
1st Law: Energy is conserved.
2nd Law: Entropy increases.
3rd Law: Absolute zero exists.

Fan


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Author: admiraltroll Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21656 of 46811
Subject: Re: Retirement pondering Date: 7/5/2003 11:59 PM
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Hi FanoPLane,

Welcome to the Foolish Collective. I hope that you make yourself at home here

Best Regards
Philip

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Author: 1000 Big funky green star, 20000 posts Top Recommended Fools Feste Award Nominee! Coverage Fool Supernova Phoenix 1
Mission Team Member CAPS All Star SN Explorer 1 Mission Team Member Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21662 of 46811
Subject: Re: Retirement pondering Date: 7/6/2003 12:42 AM
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Hi Fan,

Welcome to the Foolish Collective! You are the 380th person to post on this message board. And we hope you will continue join in our discussions.

Welcome again

tom

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Author: BunnyClark Big red star, 1000 posts Old School Fool Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21682 of 46811
Subject: Re: Retirement pondering Date: 7/6/2003 4:34 PM
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babyfrog and all FC,

Two retirement threads are going, I chose to jump in here and prospose an additional consideration that I have spoken to before and would like to remind folks about.

It doesn't directly have to do with retirement or money, but it could cost a bundle if not thought out and that is having a (1)Durable Powers of Attorney for Finances and a (2) Healthcare Directives which includes a Durable Power of Attorney for Healthcare. You think you are too young? Think again.

Why is it important? How many patients have you stood by the bedside of, totally incapacitated with anything from an automobile/motocycle accident to a stroke, with family members who are bewildered by the situation much less the financial or end of life or healthcare implications.

Healthcare directives. Under what conditions: do you want to be kept alive on life support, do you wish to have dailysis, do you wish to have tube feedings started and/or terminated? It does not take an attorney to accomplish these documents but these days it would be a good idea. The cost of end of life care can be astronomical in an intensive care unit.

"If you become incapacitated and you haven't prepared a durable power of attorney for finances, a court proceeding is probably inescapable. Your spouse, closest relatives or companion will have to ask a court for authority over at least some of your financial affairs.
If you are married, your spouse does have some authority over property you own together -- to pay bills from a joint bank account, for example. There are significant limits, however, on your spouse's right to sell property owned by both of you."

How can you be certain that decisions about your health and your money will be made by someone you trust, and not by someone appointed by a court?

Durable Powers of Attorney for Finances and Health Care Directives, scroll down about three-fourths of the way.
http://www.nolo.com/lawcenter/ency/index.cfm/catID/FD1795A9-8049-422C-9087838F86A2BC2B#EDC82D5A-7723-4A77-9E10DDB947D1F801

A second consideration might be to consder the donation of your body to medical science. In Nebraska, for example:
Cost to Family, Heirs, or Estate
The Nebraska Anatomical Board will reimburse a mortuary $1.00 per mile for transportation to Omaha. The mileage is limited to a radius of 250 miles from Omaha. Maximum reimbursement is $250.

Body's Final Disposition
Body will be cremated, and cremains will be interred in an Omaha cemetery with a ceremony.
By request, cremains will be returned in a suitable container, at school's expense, to the family for final disposition.

Other states vary.

Tissue/organ donation is discussed in these links also.
http://www.funeralplan.com/funeralplan/alternative/donate.html
http://www.sciencecare.com/?source=overture
http://ask.yahoo.com/ask/20030624.html

Organ donation: Anyone can decide to become a donor. If you want to become an organ and tissue donor when you die, indicate your wishes by signing a donor card. The most important thing you can do is to tell your family about your decision. By discussing your decision with your family, you empower them to give the permission required to have your wishes carried out after you die. I think most states include a statement on the drivers license. Sudden death is always traumatic for a person's family.
Canada http://www.giftoflife.on.ca/english/qanda.html

Having been a nurse in an operating room, the gift of sight from the donation of an eye's lens, the proper operating procedure in an orthopedic case using donated bone are small donations that are greatly in need. Of course, you all know about total organ donations.

The gifts you hold in your body are quite to precious to many recipients, living humans as well as medical science.

Ro




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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21725 of 46811
Subject: Re: Retirement pondering Date: 7/7/2003 4:36 PM
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TMFDj111 (David),

That's a very interesting analysis, and it seems to conform pretty closely with the values I presented in my model, as well.

Consider:

TMFDj111 babyfrog
Total assets $2 - $3 $2,912,858.24
needed million

Inflation 4% annually 3% annually pre-retirement
Estimates 5% annually post-retirement

Return 8% - 10% after 10% annually pre-retirement, tax deferred
Assumptions tax, annually 8% annually post-retirement, taxable as income

Protected 4% annually 2.85% annually
Withdrawl Rate Note: The difference appears to be mostly due to
different post-retirement inflation assumptions

It's nice to know that two different people can approach the same problem independently and with different perspectives, yet come up with dramatically similar results.

However, the key is a timely, comfortable, secure retirement is within the grasp of everybody IF THEY INVEST EARLY AND OFTEN.

That is probably the most key statement that anyone has ever made in the Great Retirement Debate.

If you have a financial calculator or a spreadsheet, try this demonstration. First calculate the effect of saving $2,000 per year every year from your 18th birthday for eight years at 8% per year, and then never saving another penny until you're 65, but allowing your savings to compound. Then calculate the effect of saving $2,000 per year starting from your 26th birthday until you're 65, again allowing your savings to compound at 8% per year. Compare the total amount invested ($2,000 per year times eight years vs. $2,000 per year times 39 years) and the final values of the two portfolios at age 65. If this demonstration doesn't convince you to save early and often, I have no idea what will.

I wish I had started at 18! I think I was 22 or so before I opened my IRA, and I wasn't able to contribute to a 401(k) much before my 23rd birthday. Now that I know better, the catching up is impossible within the retirement accounts and extremely difficult to do outside of the accounts. One of the best things that President Bush has done has been to convince Congress to raise the ceiling on retirement account contributions to at least blunt the pain of missing so many key early years!

-Chuck


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