Doug Carey had a post at Seeking Alpha titled How Much Do You Really Need To Retire? The article crunches some numbers for a 40 year old couple with $200,000 already saved, assumes $5,000 of annual savings but with no mention of salary or expected salary growth. The author uses some software to determine they need $656,000 to generate enough income, combined with $25,000 in Social Security to meet a $40,000 post-retirement income need. The product of the author's scenario and software has the couple running out of money at age 107.
Then the assumptions are revised to assume cuts to Social Security of 10%, 15%, 20% and 25% and has them running out of money at 91 with that 25% reduction in benefits. As I read, I wondered what about a cut of 100%?
I've never thought the program was going to disappear, but the payout for some of us will be zero. Things need to change radically with Social Security and Medicare, and I think that means zero benefit coming down the wealth scale and clipping some folks that actually aren't all that wealthy. While I have no idea what this will actually look like, I personally do not expect to accumulate mid-seven figures, but I also don't expect to get much in the way of a benefit either.
By now it is fairly obvious that people below a certain age, maybe around 50 or so, should not count on the number they see on their annual social security statement. If it pays out as it says, and you saved assuming there would be nothing, then you'll have a pretty good margin of safety.
There are all sorts of other tips that people can do, like not spending your raises (assuming you get raises) but saving them instead; really the list is endless. And while these sorts of money saving tips can help, I will continue to bang the drum about finding your own innovative solution to creating some sort of income from something you love doing, and keep that income flowing in as long as you can.
If you can get your mortgage paid off early, reduce or eliminate other debt, and ratchet down the lifestyle some, then I think it would be pretty reasonable to have a $3,000-$4,000 monthly lifestyle. Using the 4% rule, a $48,000 income need would require $1.2 million, assuming zero Social Security benefit. Obviously not all of us are going to accumulate that much. Delaying retirement and then generating $2,000 from hobbies/things you love doing, which is not unreasonable with sufficient planning, brings the portfolio need down to $600,000. While that is not an insignificant number, it is achievable for people who make decent money and are good savers.
I want to stress that pulling this off will probably take years of planning. I would also stress the importance of being innovative. I've mentioned my neighbor with backhoe dozens of times. Another neighbor up here who is at least 75 is working on a high-speed internet service up here. I think it is WiMax, but he is working for the entrepreneur who started the service. It will probably take them a year. It is a finite project, won't make him rich but would relieve some of the burden of his portfolio for the year (if he has a portfolio, I have no idea, this is just an example for an innovative income idea).
Revenue Content
Wednesday, March 14, 2012
Working With Your Retirement Number
Yes No
Io
Sent from my iPod
Subscribe to:
Post Comments (Atom)
1. Do not carry debt, other than a 15 year maximum mortgage.
2. Save a minimum of 20% of your income, preferably focused on equities, because as more and more debt gets monetized, inflation will occur, and equities withstand inflation better than debt instruments.
3. Do not focus on a retirement age - set a goal of seeing your investment cash flow cover your living expenses, and then choose to retire if you wish after reaching that point.
4. All financial planning you do should be done with the expectation that you will not receive social security benefits. It is far better to be pleasantly surprised, than to be horribly shocked.
I found the best way to save is to agree with your partner the percentage and take it out of the budget first. Then you can buy as many shoes or take as many cruises as you want with what's left. Takes the stress out of the budgeting process. Most people wait until December to decide how much is left over and of course it's already been spent by then.
This is wrong and it IS GARBAGE!! I am sick and tired of this concept being bandyed about. I, and my employers, paid into MY Social Security account for over 25 years. My paystub always identified it as payment for 'Social Security'..not welfare program. This is MY MONEY...that I WORKED FOR. If what you suggests happens THAT WILL BE THEFT pure and simple...and I will not stand for being stolen from..and I am sure that there are many others. And don't give me this garbage that we are not owed OUR Social Security if we have an IRA or whatever. Again..that is something I worked for and contributed to. Me...and the same goes for everyone else.
I expect to get my Social Security. If it is stolen..then there will have to be some severe reckoning to be done by the American people regarding government. I am sick of this nonsense.
What should be done is to kick out all the illegal aliens in this land.
Chill.
How much did you pay into SocSec? How much do you expect to get out? How much did the first recipient pay in, and how much did she get out?
If you expect the government to keep their promises, you aren't very good at math.
My first socsec deduction was in 1976 and I still have a few years before I turn 50! Over 30 years ago my grandparents told me that social security was a fraud and everything I've learned since then has confirmed their opinion.
Plan for the worst, hope for the best. You can live with a nice surprise, but a disappointment could be fatal.
I'm 70, and have been retired since age 53 in 1995 (and didn't inherit anything), I saved and invested started in the 70s.
I'm not the sharpest knife in the drawer--if I did it, others can do it.
Instead of targeting a 'minimal retirement existance' on $600k or even $800 or $1,000k...target the kind of 'financial independence' that will survive market crashes like those of 1987, 2001, and 2008 without causing you to consider a dogfood diet, skipping medications, or asking your children for help.
However, to attain financial independence and a satisfying retirement requires finding a balance in your working years--a balance between immediate and deferred consumption...I've known many people who just cannot find that balance...they MUST have all those 'adult toys' someone else has.
Have you considered that each $1 spent on a new toy today can be $5, $10, or maybe $15 less in your retirement years?
What does it mean to not settle for a minimal retirement?...it can mean renting a condo in a warmer-climate in which to spend the 3 worst winter months...enjoying world travel...promising a new car as a graduation gift as an incentive for your grandchildren to get an education...and leaving a 'head-start fund' to the retirement of your children.
If you should have started investing 5 or 10 years ago, you have made your climb steeper...get to work now, it ain't gonna get any easier! As Roger says, you may have to work longer, you may have to work a job in semi-retirement.
Dividend-growth stocks work well to build wealth slowly (especially for those who don't have the time/interest in being close to the market), but there are many successful strategies.
You are going to be retired for a long time...done right, it can be a reward for a life well-lived--find that balance!
BTW, why minimal, why is it no one writes an article on having a really satisfying retirement?
But to be fair. Us older people had it easy to make the trade-off. We were saving in an era of high (even double-digit) CD rates - even when actual inflation had fallen back to normal. Saving gave us instant pats-on-the-back.
Today, rates are so low there is no reinforcement of a decision to defer consumption. Quite the opposite. There is no cost to borrowing, nor it seems any need to ever pay back the debt, so people do the reverse of saving.
There are many excellent low-beta dividend-paying stocks yielding 4% and 5% in essential, near recession-proof, industries like consumer staples, utilities, and healthcare; as well as REITs and BDCs yielding around 10% (and I do not mean the mREITs yielding 14+%). All of these comprise a conservative Growth & Income portfolio (persons with more knowledge, time to closely monitor their portfolio, and a higher risk tolerance, will do much better).
But in the bigger picture, my general view is that someone with a $80k standard of living is not going to be satisfied with a $40k standard in retirement...but another person with a $40k standard of living will be quite happy to continue that same $40k standard in retirement (there may be a few exceptions--my wife is not one of those).
Thus it is quite likely that a person with a $40k standard of living can do a FAR SUPERIOR job of preparing for retirement, compared to the another person with an $80k living standard...and the difference most probably goes to the one of them that was able to find the balance between immediate and deferred consumption.
_______________
Finally, for anyone who might say it is impossible to save in this economic climate, or while a democrat is in the White House, or until their kids graduate college, or until they pay off their mortgage, or any of 99 other excuses ...get a copy of "Richest Man In Bablyon", written in 1926 by George S. Clason. If you read the book, you will find the truth is you don't really want to save!
My wife and I both owned townhouses before we lived together, and kept them as rentals as we traded up, I acquired one duplex back in the old RTC days. In the early 00's, we rolled them into two commercial properties, office/industrial at ten cap plus yield, utilizing 1031 exchanges. Then rolled one property into a small strip center with credit tenants, and the other into another office/warehouse, with medium term lease in place, again via 1031 exchanges.
All along, most dollars that were earned went into cash, or securities investments. We drive our cars into the ground.
The first properties we owned were mortgaged at 9.25% and 7.+% interest rates. So for the gentleman who said it was easier for us older types--well, in your earlier years, you are more of a borrower than a "lender", so to speak. You might have made more on your liquid assets, but to buy property, your loan constants were much higher . So, it is never 'easier' in one period than another. You just have to be flexible.
So why is it the insurance keeps going up? *sigh*
I knew I'd never be wealthy, but come time for retirement, I waited until my standard of living would be pretty darned close to what I already had (fairly modest, so it wasn't hard, but hardly poverty level!) I'm fortunate that I have a pension and might even qualify for some SS if it's still around in a few more years when I'm eligible.
Only recently thanks to the SA folks have I realized that the 457k I took advantage of while working and the small Roth I added to and haven't needed yet might very well raise my standard of living in a few years once I get all those lovely dividends working in my favor to create an income stream.
What a concept - a higher income in retirement than while working!
I just might be able to pay off the mortgage in half the time it has left and finally kill off the credit card payments -- both moderate but still there!
Bonus points - I might be able to help seed my daughter's retirement since she has nothing at the moment. Since hooking up with all the bright folks over here, my enthusiasm has infected her, and we now have a plan we're working on. :)
it would be pie in the sky to assume that poor savers who have deftly reduced their expenses are in the same position as those who have saved AND reduced expenses......the implied arguement here, is that the choices one makes will determine the quality of the retirement....you know my stance.....save as much as possible, cut expenses where they will be less than what you have coming in, adjust accordingly, and spend everything.
What is a satisfying retirement? It is quite different for everyone, yet for those who heed the expense/income ratio, it will be secure...and THAT is a great start.
RS
"rich.....as long as one spends less than their expenses [income?], they can enjoy the highest standards of retirement that their past choices allow them."
Thus you have said a person whose pre-retirement lifestyle required $80k annually, would "enjoy" a lifestyle of $40k so long as their income was $41k.
That is exactly the 'minimal' retirement I discussed...and it is where people are very likely to find themselves if the choices they make in their working years do not 'balance' immediate and deferred consumption.
As for what constitutes a 'satisfying retirement', I agree its definition is in the minds of each of us...and each of know what it would be for them when they contemplate it.
Frankly, I expect few readers aspire to a 'minimal' retirement that includes a significantly reduced standard of living due to their failure to save and invest to support their needs and wants.