Hello!

[carlg1977]

newbie here to the forum!

Quick background: I am 29, would like to retire before 50.

I have a question: how did you decide how much you would need to retire? Can I just sit down, calculate my expected expenses after retirement today, adjust for 20 years of inflation, and use that as my target nestegg amount?

carl

[SteveR]

Quote:

Originally Posted by carlg1977 newbie here to the forum! Quick background: I am 29, would like to retire before 50. I have a question: how did you decide how much you would need to retire? Can I just sit down, calculate my expected expenses after retirement today, adjust for 20 years of inflation, and use that as my target nestegg amount? carl

Welcome Carl. Nice to have you here.

Quick answer to your question is you can only estimate your expenses at this point. Each year they will change and while inflation is one factor that you will have to deal with other things also enter in to the picture like...kids, cars, homes, spouses, illness, insurance, travel, life-style choices and a hundred other things that will change your expenses both ways. You will need to get a very rough idea and then figure around 25X your annual expenses (including taxes) to determine how much of a nest egg you might need. Of course pensions, inheritances, part time jobs, windfalls and other stuff will affect this too.

Don't try to put too much in the numbers you get today. They won't be the same 20 years from now and they won't be the same 20 years into retirement. It is all a moving target.

[Nords]

Welcome to the board, Carl.

In our case we track our expenses and know how much we're spending each year as well as what we wouldn't be spending money on in ER. (For example, no commuting expenses or shopping for office attire.) Some go so far as to project out the costs of a fantasy vacation, a new roof, replacement vehicles/appliances, and kid's weddings.

The short version of estimating one's portfolio is to save enough for a 4% safe withdrawal rate-- Steve's 25x factor over your expenses.

The long version is to add up all your pensions & Social Security income, tally up your savings (both taxable & tax-deferred), and enter it all into FIRECalc to see if your cashflow & assets can handle your expenses.

The longest version is to read the last couple month's posts on "How much is enough", "What are you saving it for?", "Should I pay off my mortgage?", and Bob Clyatt's book "Work Less, Live More". If you have other questions, they might have already been answered for your reference by using the "Search " button at the top of the page to look for keywords.

[carlg1977]

Thanks for the replies.

As a recent graduate, I am just beginning to work. Therefore, I am at least 20 years from retirement.
So, I am just fooling around and trying to get a ballpark to plan for the future, pick out how aggresive to be, etc.

I figure my living allowance before takes will be 138k/year, and 80k/year after (including taxes). Therefore, 80K * 25 = 2,000,000 nestegg needed.

Assuming I retire at 50, this will be eqivilant to a 3,000,000 nestegg.

Is this how you do this??

Carl

[cute fuzzy bunny]

Yep. Either you figure out how to come up with $3M or figure out how to live on less than 80k after taxes...

[Gumby]

Carl:

Why would you assume such a high tax bracket? Even if you are single, at $138k per year, your marginal tax rate is only 28% and your average tax rate is 24%. That would imply that you need only $105k pre-tax, which could be generated with $2.6 million (if every dollar withdrawn is taxable as ordinary income -- which it won't be). Admittedly, this ignores state taxes, but they are unlikely to be high enough to put you into the tax bracket you are modeling.


Best wishes,
Gumby

[carlg1977]

Sorry about the confusion. What I meant was that my cost of living will be 138K before retirement, and that i will need to withdraw 80K/year after retirement. I predict that I will make ~350K/year, will live on 138K, and the rest will go to taxes and savings.

Without the mortgage, student loans, private school tuition, etc I calculate I could live the same lifestyle on 68K/year. I figured 15% taxes, so got ~80K per year (68K + 12K taxes).

I am new at this stuff, and am just trying to get a overall big goal to shoot for.

[laurence]

Welcome to the board! If I may ask, what is your chosen profession? How much schooling do I have to take to land a job making 350k?

So there is a lot of figuring on what kind of lifestyle you'll need to be happy, but definitely sock away as much as you can now. It will have two positive effects, the first being maximum use of compounding over time, early dollars are worth more than later dollars. Second is, if you are investing the money, you aren't spending it, and you aren't getting used to having it to spend! A Bible of sorts on this board is The 4 pillars of investing.

Looks like you could put away 100k a year easy, that's 2 million at age 49 if you just stuffed a mattress, ~3.3 Million if you got 5% on your money. So in short, mission accomplished with that plan. Now the question is, can you save more/live on less/get a better return/retire earlier? We young dreamers spend a lot of time on that!

[Nords]

Quote:

Originally Posted by carlg1977 I am new at this stuff, and am just trying to get a overall big goal to shoot for.

Admittedly ER budgets are all over the map, but $2K-$4K/month is probably where more than half of the bellcurve ends up.

Now that you're out of school, it's a good time to start tracking your spending on Quicken or Money or any other software that lets you sort & categorize your expenses. As the months go by you'll have a finely-tuned grasp on what spending is important to you (and what isn't) as well as what your ER expenses look like.

[MooreBonds]

Quote:

Originally Posted by carlg1977 newbie here to the forum! Quick background: I am 29, would like to retire before 50. I have a question: how did you decide how much you would need to retire? Can I just sit down, calculate my expected expenses after retirement today, adjust for 20 years of inflation, and use that as my target nestegg amount? carl

Welcome Carl, from a fellow 29 year old FIRE hopeful.

At first I would suggest ignoring the SS contribution in your rough ballpark estimates. That would help give you a little bit extra slack in your crude budgeting, and then when you reach 40 (and have a more updated view on your potential ER budget), you can start adding in projected SS contribution amounts.

However, given that you're maxed out on SS taxable income, I suppose it wouldn't hurt to factor in half or so of your estimated SS benefit as a SWAG in your preliminary budgets - which should make a reasonable dent in your required stash (although you will need additional funds to bridge from age 50-age 67).

[Rich_by_the_Bay]

Carl,

You've gotten good advice here but IMHO your horizon is too far off to allow projecting the numbers. Just get a grip on the principles involved.

More importantly, at your age I would focus virtually exclusively on setting up an automatic savings plan (hopefully auto-wired right from your account) and dump it into one of the target retirement funds from Vanguard, Fidelity, etc. You can worry about fine-tuning your investments some other day. Contribute as much as your lifestyle needs allow, ideally up to 15% of gross or more. Of course max out your tax shelters first.

Just do it, set it, and forget it. Then wake up 20 years from now and be rich. Almost everyone here wishes the would have or could have done that, and a few lucky ones like yourself actually pull it off.

[carlg1977]

Thanks for the replies!

Laurence, my choses profession is medicine (oncology in particular). So, higher starting salary than many, but a heck of a long time to get there. I will be 32 when I finally earn 350K. In the meantime, I will not even earn half that because I am completing training for my disicple. This is why I feel behind the eight ball here. I am just trying to start saving now, though, for the future.

I have actually looked at the Vanguard and Fidelity funds. Both seem good and low maintenence. In all honesty, I do not have much time to watch my investments, and the more I read the more confused I get. I may just do what many have recommended: have money automatically taken from my checks to one of the above mentioned funds and just forget about it. Luckily, I have never developed any expensive tastes or hobbies, so will not feel like I am missing out on too much by saving more.

[laurence]

Ah, two close friends are Doctors (married to each other), one is a Pulmonologist, the other a Pediatrician. It's not a bad thing when you have a 20 month old daughter with high risk of pulmonary hypertension!

Doctors earn every cent, congrats on making it through (most of) the crucible, and thanks for choosing a speciality that is so critical (I'm not saying plastic surgeons aren't valuable or anything! : ).

So do you have to start paying those student loans now? I'm guessing 100k conservatively, right? Did you lock in a nice low rate for 20 years on that? Looking at ~8k a year in payments on that? (Guesstimating off zero information here).

So you won't be earning even half that, let's see, that means less than 175k, and you say you have 138k in expenses including loans and mortgage, so you have somewhere between zero and 37k to invest. So Vanguard Roth IRA (check your eligibility due to income) for the max of $4000, and since you want to retire in 20 years, you can just do Target Retirement fund 2026 (I would probably suggest pushing out that year a bit so that you are more weighted in equities, you're a young man!). That's the simplest thing to do now, if swimming through all the financial stuff isn't something you have time for this second.

Getting that set up now and contributed every year gets you your first 250k towards your $3 million. Hey, it's a start.

Will your employer/association have a 403b/401k with matching? That's the next bucket to pump money into.

[Ed_The_Gypsy]

Free advice:

1. Live cheap. Forget the BMW.
2. Pay off your debts.
3. THEN save.

OR, 50% x 2. + 50% x 3. BMX x 0, still.

[carlg1977]

yeah, the loans are steep. I owe 136K all together, locked that in at 3.3%, which will go down to 2.3% if I make the first 36 months payment on time. If I pay 1000/month, it will be payed off in less than 15 years.

In all honesty, medical school probably is not a good financial decision in many ways. Reimbursment is declining, and in many specialties the reimbursement is not proportional to the workload. You lose a lot of earning years and rack up the debt. I would love to compare the final networth of a physician (with all the loans et al) to that of a person with a four year degree that began investing and saving 8 years prior. My guess is the gap would not be that much, and might even favor the 4 year grad.

Does Vanguard allow you to have a certain PERCENT of your checks automatically invested?? Could I just have, say, 30% of my gross put into the retirement account every paycheck, so that my savings goes up and down with my salary??

[Jay_Gatsby]

Quote:

Originally Posted by carlg1977 I would love to compare the final networth of a physician (with all the loans et al) to that of a person with a four year degree that began investing and saving 8 years prior. My guess is the gap would not be that much, and might even favor the 4 year grad.

I've seen this type of calculation before, but instead of an 8-year gap, I would assume an 11-12 year gap (e.g., 21 years old versus 32 or 33 years old). Although I don't necessarily doubt your numbers, the oncologists that I know didn't earn $350k right out of their residencies. They did end up earning that kind of money after about 5 years of private practice (around 38-40 years old). I would assert that a new 4-year college graduate who gets a few years under his/her belt and then opens up a business will do better than a physician based primarily on the time differential. Unfortunately, very few college graduates are: (a) willing to do that, and (b) have the necessary business knowledge from their undergraduate majors (English and History are not the hotbeds of entreprenuers). This is not to say that there aren't exceptions to the rule....

In the legal profession, the law school graduates who attend state schools (low debt or no debt), do well (top 5-10%) and go to the big firms paying $135,000 for 5-6 years may end up beating most people in the financial race (other than your dot-com type millionaires). In 5-6 years, a young lawyer (starting at age 25) can save roughly $50k a year, increasing by $10k every year as his/her salary increases. At the end of 5 years, s/he will probably have somewhere in the neighborhood of $400k by age 30!

[Coach]

Quote:

Originally Posted by Ed_The_Gypsy Free advice: 1. Live cheap. Forget the BMW. 2. Pay off your debts. 3. THEN save. OR, 50% x 2. + 50% x 3. BMX x 0, still.

Among a lot of excellent advice, this is IMHO the most important. Spending is the factor you have the most control of. There will be a lot of temptation and a lot of social pressure to spend.

But don't forget to have fun either!

Oh, and keep a close enough eye on the finances that you don't have to just take some advisor's word on things. I think this is a danger area for docs especially.

Coach

[Rich_by_the_Bay]

Quote:

Originally Posted by carlg1977 In all honesty, medical school probably is not a good financial decision in many ways. Reimbursment is declining, and in many specialties the reimbursement is not proportional to the workload. You lose a lot of earning years and rack up the debt. I would love to compare the final networth of a physician (with all the loans et al) to that of a person with a four year degree that began investing and saving 8 years prior. My guess is the gap would not be that much, and might even favor the 4 year grad.

I agree, compared to other high-paying jobs or professions, cognitive physicians for sure will lag behind their lawyer/executive/accountant colleagues most of the way - the debts on top of the deferred starting age just burn up too much early compounding time to ever catch up.

The surgical and procedural subspecialties such as ortho, ophth, radiology and such probably surge ahead pretty quickly. If they save well (a big "if"), they are golden by age 45 or 50.

My last loan repayment: age 40. Finished formal training: age 30. Still can't complain - for all of this, the income is more than ample in the end, and it has been a great ride in a noble (if a bit bruised) profession.

Shoptalk digression: BTW, I would also guess that even 5 years out $350K/year in adjusted dollars might be a bit optimistic. Most of the in-office chemo options will have been regulated away by then. Just a guess but I wouldn't count on it.

[carlg1977]

The toughest thing will be to keep the spending in check. I can only speak for myself, but being in school so long kind of seems like a financial diet. Unless you are already independently or dependently weathly, you spend so many years living on just student loans that you become impatient. The financial diet can easily lead to binges, and it is hard to resist the temptation. Did you feel this Rich in Tampa, if so how did you control it?? I am hoping that having the money automatically invested before seeing it will be the ticket!?

As far as the cashflow projections, I am confident in my numbers. The average salary for oncologist starting out in my neck of the woods is 250k/year, and I already have that offer from the CEO of a hospital that my mother is on the board at. I just have to match the fellowship next year.I am hoping that increased reimbursement for office visits will offset the declining payments for in-office chemo. But, I also have other assets in the works (patents, hopefully publications) and my soon to be wife makes 6 figures in her career now (attorney). So I am confident that I can reach my projected income level in 4-5 years.

Then I hope to keep the savings on track for 15 years, and hang it up!!

BTW, Rich in Tampa, have you read "Rich Dad, Poor Dad"? I just finished it and he made me feel like a chump for going to school so long! He specifically mentioned physicians and their financial troubles 2 or 3 times in the book.

[Rich_by_the_Bay]

Quote:

Originally Posted by carlg1977 The toughest thing will be to keep the spending in check. ... Did you feel this Rich in Tampa, if so how did you control it?? I am hoping that having the money automatically invested before seeing it will be the ticket!?... BTW, Rich in Tampa, have you read "Rich Dad, Poor Dad"? I just finished it and he made me feel like a chump for going to school so long! He specifically mentioned physicians and their financial troubles 2 or 3 times in the book.

You and your DW ("dear wife" around here) have awesome financial potential. You stated the situation the best I have ever heard it: a financial diet easily leading to binges . Here is what I prescribe, Doctor:

1. Binge for a while. It won't kill you. Take a cruise, buy a nice (but not too nice) car. Get some of it out of your system. There is a life before retirement that needs to be fun, too.

2. Where you really need to be careful is your long term fixed expenses, i.e. house, debts, etc. Be disciplined there, both in terms of not over-buying, and not slacking on repayment by taking an aggressive ARM mortgage, etc.

3. I know it is a cliche, but set up an AUTOMATIC withdrawal from your gross paycheck -- obviously into your tax deferred accounts, but also into a taxable investment such that 15% of your gross is saved each year. Really. Trust me.

4. After debts, tax shelters, and self-inflicted savings are AUTOMATICALLY taken care of each month, then you will know how much you really make (from a FIRE standpoint). Select your house, vacation, spending, etc. accordingly.

5. Enjoy your wife's earning power, but consider it all gravy, extra savings and play money. That way, if or when you have kids, you won't get thrown off track.

As for Rich Dad, yes he feels we are "suckers" for going to school so long. It is sad that he views this as a predominantly financial decision. In reality, our payback is the privilege of caring for patients, having them trust their lives to us, helping them die, whatever. If you lose focus on that, you will be unhappy. If you don't,* you'll be rich no matter how much you earn.

From where I stand, you sound pretty together on all of this. Nothing but bright future for both of you.