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Pre-Retirement Household Budgets & ER $ targets
Old 12-27-2010, 05:35 PM   #1
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Pre-Retirement Household Budgets & ER $ targets

I was inspired by MDJO sharing his household expense in another thread.

We're looking to retire at age 55. There's a 4 year age gap between us:

One of us will be 43 next week and works in traditional employment earning ~$130K/year (with health benefits, employer-paid life/short term/long term disability with employer) and the other will be 39 next week and is self-employed with variable earnings ~$70K-$100+K/year while also serving as primary caretaker for our toddler son. Our family's health insurance is through the employer's insurance plan.

I tallied up this year's estimated expenses - we're in the last week of December - what is below is pretty representative of the yearly "financial outflow" in the household.

I realize that pre-retirement and post-retirement household budgets will change. But sharing this pre-retirement budget is to give you an idea of our general household expenses, then we can start making assumptions about what post-retirement expenses to consider.

Here goes:

BASIC HOUSEHOLD EXPENSES - ANNUAL ~$35,000
[unlikely to fluctuate in the next 5 years]


$3,724.39 Running the Car
Expenses include: DMV Registration, Gas, Repair/Service

$8,965.38 Feeding the Family
Expenses include: Grocery incl. Costco, Restaurant

$2,275.00 Giving to Causes We Believe in
Expenses include: 501c3 charitable orgs

$4,385.45 Insuring the Family's Health/Future
Expenses include: estimated Term Life insurance premiums, fire insurance for home, auto insurance, non-covered healthcare Copay, Meds, Dental/vision [medical insurance covered by employer so that $ is not added in this total]

$3,039.78 Running the House
Expenses include: Cell phone, Electricity, Natural Gas, Internet, Telephone, Water

$10,717.65 Maintaining the House
Expenses include: Gardening, Home maintenance/repair, Target Store purchases, and $9,016.04 in Property Tax

Clothing the Child
$299.06 Kids Clothing

~$1500 cash for misc. expenses and cash-purchases.

CONDITIONAL ANNUAL EXPENSES - COLLEGE, PARENTS
[likely to fluctuate from year to year] ~$12,800.
College Fund for Child
$5,000.00 contribution/year
3year old's 529 is currently at $46K

Helping out Parents
$7,800.00 Parents Living Expenses


Additional info:
  • $550,000 Current combined retirement savings (401K, SEP-IRA, Roth, taxable investments)
  • No debt including mortgage
  • $46,000 in son's 529

$70,000-$100,000 is our target annual savings to put into investments. But again, given the self employment status, plus the variable tax rate because of this, this number fluctuates year to year.Ideally, we want to support all general & conditional household expenses using the self-employment income, and save all of the traditional employment income into retirement & taxable investments/savings. We used this approach to pay off our house in 5 years, so we want to continue using this approach to fund our retirement.

Here's My Question: Is estimating $90,000 target annual income from retirement too high?

We would need to have about $4.7M in retirement funds by age 55 to draw this amount based on the Kiplinger retirement calculator. Assumptions include NO social security or pensions (these would help but we don't want to have to count on them), a 6% ROI, 35% stock allocation during retirement (we may drop this lower to 20 or 25%), with lifespan of 92.

I can knock this number down by $1M if I factor in our home equity (since it's all paid for), to make it $3.7M not $4.7M.

I know that by age 55, we'd be paying for our health insurance - there'd be a "gap" between when social security and medicare would kick in.

To err on the side of caution and to factor inflation, I used a really high # like $90,000 - which in 15 years may be around $60K in today's purchasing power.

I want to have enough where we don't have to touch the principal, but we can live comfortably off the dividends. We also are considering a family trust that would take care of future generation's education & higher educational expenses, which is why we would prefer not to "empty" out our retirement savings/taxable investments upon death, if at all possible.
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Old 12-27-2010, 05:56 PM   #2
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Jstriding,

Is there some reason you don't include income taxes in your annual expenses? Your income is a bit higher than ours; your living expenses aren't far off from ours; but we pay about 40% of our gross income in taxes, a percentage that probably won't go down very much in retirement unless we move. Income taxes are the primary reason we can't save as much as we'd like.

Amethyst
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Old 12-27-2010, 06:10 PM   #3
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Hi Amethyst: I was not sure if I needed to include income taxes, but yes - "paying the government" will continue to be one of our highest expenses.

The W2 is relatively straight forward - income tax, health insurance, plus 401K that's taken out - drops the $130K income down to around $70K.

The self employment tax is trickier because it depends on that year's business expenses: we've paid about $22,000 in estimated self employment tax (federal plus state) this year. I'd like to owe a bit rather than getting a big refund.

Past few years our tax bracket have been around 28-33%. We also live in California with a high cost of living.
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Old 12-27-2010, 06:10 PM   #4
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Quote:
Originally Posted by jstriding View Post

We would need to have about $4.7M in retirement funds by age 55 to draw this amount based on the Kiplinger retirement calculator.
Have you run your numbers through FIRECalc? It will tell you how your portfolio/planned withdrawal would have fared during the last 140 years.

More information on how the calculator works here.
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Old 12-27-2010, 06:17 PM   #5
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Quote:
Originally Posted by REWahoo View Post
Have you run your numbers through FIRECalc? It will tell you how your portfolio/planned withdrawal would have fared during the last 140 years.

More information on how the calculator works here.
Not sure if I did this correctly - but I put in $90,000 - tweaked the sum (this would be how much we had to save) and then put in 30 years.

The # that came out with a 99.1% success rate was $2.5M. Making this $2.7M made it a 100% success rate, which I assumed meant we won't run out of money at the end of 30 years by drawing $90K/year.

Now anything above $2.7M that we can save, means that will be left over for future generations (again, after paying the government).
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Old 12-27-2010, 06:18 PM   #6
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Where does the $90K come from?
The $4.7 million seems way high to me.

Given your current living expenses are $35K, if you maintain the same lifestyle that you have today, at 3% inflation it would be about $50K annually at age 55.

Assuming a 4% safe withdrawal rate and 15% in taxes, if you had a $1.5 million portfolio, you could withdraw $59K at age 55, pay 15% in taxes and have $50K annually for expenses. If you really wanted $90K for expenses, you would need a $2.7 million nestegg.
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Old 12-27-2010, 06:26 PM   #7
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Hi, jstriding.

I can't think in inflated dollars, so in my head I keep everything in current dollars. I think your income goal in retirement of $60K sounds pretty reasonable.

I'm not familiar with the Kiplinger calculator, but I'd be surprised if it wants your retirement spending in inflated dollars. Did you really tell it you were looking for $90K in current dollars?

How important is it to you to leave a legacy of a specific amount? Retirement planners I've seen generally give you a range of probable portfolio ending values. Even if you're willing to plan based on a zero ending balance, if you're looking for a pretty high probable success rate you're likely to leave a sizable balance.

At this point disregarding Social Security may not be bad planning. But I'll bet it will be around in substantially similar form and will allow you to lower your savings target as you approach retirement.

I suppose on the plus side, wanting to leave a legacy actually simplifies the problem a bit. Many of us would like to die broke and that's tricky to plan. Dying with $X plus should be easier to achieve :-)

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Old 12-27-2010, 06:39 PM   #8
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Sorry j, it looks like my reply and your report on the firecalc result crossed in the etherspace. Interesting that the results were the same $2.7 million.
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Old 12-27-2010, 07:00 PM   #9
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Our income is fully taxable and will still be fully taxable after retirement, so I include taxes when running Firecalc. Makes a big difference. If the mortgage is paid off, we could live on a good bit less than we pay in taxes. Rather awful, when you think about it - we're paying the government more than we spend on us.

I consider 401K and pension deductions to be part of savings, rather than taxes. However, I naturally factor in "no 401k or pension deduction" when running retirement projections in Firecalc.

Good luck!

Amethyst

Quote:
Originally Posted by jstriding View Post
Hi Amethyst: I was not sure if I needed to include income taxes, but yes - "paying the government" will continue to be one of our highest expenses.

The W2 is relatively straight forward - income tax, health insurance, plus 401K that's taken out - drops the $130K income down to around $70K.

The self employment tax is trickier because it depends on that year's business expenses: we've paid about $22,000 in estimated self employment tax (federal plus state) this year. I'd like to owe a bit rather than getting a big refund.

Past few years our tax bracket have been around 28-33%. We also live in California with a high cost of living.
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Old 12-27-2010, 09:11 PM   #10
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Thank you all for responding so far.

The reason I set the $90K goal is because I tend to think of worst case scenarios where we may end up having expenses that would potentially hemorrhage the nest egg. "What if one of us get a stroke, become un-insurable, need in-home assistance, etc." You can buy insurance for that, of course, but I'm also thinking of those "gap" years (age 55 to 59.5 for example) that can potentially change the course of one's "early retirement" to "out of early retirement". By then, medical insurance can become one of the highest expenses.

Another reason is to "shoot for the stars" and if we don't reach the stars we may very well end on top of Mount Kilimanjaro.

I've tried Firecalc before and wasn't sure if I understood how to interpret the results - from everyone's feedback it sounds like I have the right idea of what the results mean!
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