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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75824  
Subject: What is the "safe saving" rate for ret Date: 2/29/2012 11:34 PM
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Latest article from the REHP website.

http://www.retireearlyhomepage.com/safe_saving.html

intercst
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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70255 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/1/2012 2:09 PM
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Something about his math just isn't working for me. To paraphrase, he solved for 50% income replacement and found that it would take at least 10.+% but I did not see that he accounted for SS.

Either way, I would generally agree that 10% is not going to be enough.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70256 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/1/2012 2:51 PM
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I'd also like to see numbers for a longer accumulation period. If you start work at 23 and retire at 63, that's a 40 year accumulation period, not 30. My hypothesis is that those additional 10 years would make a noticeable difference in the required accumulation rate.

--Peter

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70257 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/1/2012 4:59 PM
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>> I'd also like to see numbers for a longer accumulation period. If you start work at 23 and retire at 63, that's a 40 year accumulation period, not 30. My hypothesis is that those additional 10 years would make a noticeable difference in the required accumulation rate. <<

True. But I suspect that most people who know from a ypung age that they really want to "retire early" want out long before age 63. I suppose 63 is "early" in that it's before full Social Security retirement age or Medicare eligibility, but I sure know I want out well before 63 if I can swing it.

Having said that, 30 years of working and 30 years of retirement drawdown? If we assume the working starts at (say) age 23, this takes you to retirement at 53 and death at 83 -- a very aggressive retirement age that leaves you at considerable risk of outliving your money (especially with no pension).

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70258 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/1/2012 5:50 PM
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Hawkwin writes,

Something about his math just isn't working for me. To paraphrase, he solved for 50% income replacement and found that it would take at least 10.+% but I did not see that he accounted for SS.

That's true. Prof. Pfau did not include SS or pension income in his example. An income replacement of 50% plus SS (and possibly a pension) would be a luxurious retirement for most people.

intercst

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Author: MajorMajor78 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70259 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/1/2012 8:17 PM
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ptheland wrote: I'd also like to see numbers for a longer accumulation period. If you start work at 23 and retire at 63, that's a 40 year accumulation period, not 30. My hypothesis is that those additional 10 years would make a noticeable difference in the required accumulation rate.

The Retire Early Home page that is linked to in the OP's post is a very abreviated synopsis of Dr. Pfau's full academic article which can be found here: http://www.fpanet.org/journal/CurrentIssue/TableofContents/S...

Wade Pfau has a great chart for various scenarios including 20,30, and 40 year accumilation phases and compares these sccumilation phases with differing lengths of retirment; again 20, 30, and 40 years. Your hypothisis agrees with Dr. Pfau's research. A safe-minimum historical savings rate for a 40 year accumilation period and a 30 year retirment is between 7.39% and 12.42% depending on you asset allocation.



Hawkwin wrote: Something about his math just isn't working for me. To paraphrase, he solved for 50% income replacement and found that it would take at least 10.+% but I did not see that he accounted for SS.

I've had the pleasure of engaging Dr. Pfau on another forum a while back where he answered questions/concerns about his work. he was quite clear that the 50% income replacement was a benchmark for those expecting to have their retirment income supplimented through SS and/or pensions. If you read the full academic article in the link posted above you will see that he also does the same calculations for those that want to find a safe-minimum savings rate to provide themselves a 75% income replacement at retirement. For those of us who do not wish to count on other institutions for our livlihood in our twilight years.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70271 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/2/2012 4:53 PM
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Because this kind of planning is dealing with an uncertain future, it requires making REASONABLE estimates in this forward projecting, and then redoing the projection each year, adjusting savings rate based on how variables actually performed. This is an actuarial process, involving the ability to perform time value of money calculations based on cash flow projections and is quite similar to determing funding levels for defined benefit pension plans.

Each person will be different, due to assumptions and income assets they have available to them (such as a pension), as well as lifestyle expectations at retirement. General formulas or charts, in my experience, can be close for some and a mile off for others.

Retirement savings need is a 3-step actuarial calculation, that once understood, really isn't all that difficult. Not sure why these web sites that purportedly speak to retirement, don't take the time to explain this and build a savings calculator that shows each step in leading to the final savings number.

BruceM

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70272 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/2/2012 8:23 PM
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BruceM writes,

Because this kind of planning is dealing with an uncertain future, it requires making REASONABLE estimates in this forward projecting, and then redoing the projection each year, adjusting savings rate based on how variables actually performed. This is an actuarial process, involving the ability to perform time value of money calculations based on cash flow projections and is quite similar to determing funding levels for defined benefit pension plans.

</snip>


How many defined benefit plans are underfunded?

The only safe approach is to save like crazy -- early and often. You can retire early if you happen to do most of your saving during a period of good investment returns.

intercst

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70282 of 75824
Subject: Re: What is the "safe saving" rate for Date: 3/5/2012 8:03 PM
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How many defined benefit plans are underfunded?
The only safe approach is to save like crazy -- early and often. You can retire early if you happen to do most of your saving during a period of good investment returns.


How much financial self-abuse must one undergo to save like crazy? How much of life's best experiences must be foregone in the interest of saving when this kind of aggressive saving is not necessary? And then if that person dies prematurely and never uses his/her large savings cache?

With DB Plans, there are multiple actuarial factors that affect pension capital that would not relate to an individual, such as changes in mortality tables, forfeitures, PBGC insurance (which has jumped substantially over the past few years)...but what makes pensions the most different from most savers is the way pensions are funded. Every plan I've ever seen used the acrrued benefit method, which is a kind of pay-as-you-go method that is relatively cheap in the years of a young workforce, but gets progressively more expensive each year as the workforce ages. This is the primary reason many government and private pensions today are underfunded.

Individuals tend to save using more of the 'projected benefit' or roughly a level payment method. This has the effect of frontloading some of the future savings need through long compounding periods. This is why many (but certainly not all) 401(k), profit sharing, IRA and other retirement savings accounts have returned to near or above their 2006 levels, while so many pensions are lagging.

Saving for retirement should be a household 'expense' within the household budget, just like any other expense. If you use the actuarial 'level payment' or perhaps more accurately, the 'serial payment' method of saving (which almost everyone does), and recalculate at least annually, while using proper asset allocation and rebalancing in their savings accounts, you can hit your capital need or hit very close to it by the time you reach retirement. This way, one is not undersaving nor oversaving.

BruceM

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