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Old 06-06-2009, 09:55 AM   #1
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Simple Thoughts

Hi all, I have really enjoyed reading all the fantastic information and perspectives from this group. I am currently 51 and I think getting close. There are so many math rules that people and publications use to determine if they are ready or not, but doesn't it come down to these basic questions:

1) how much do you need per year to live the lifestyle you want
2) how much (if any) do you want to pass on to your children or others
3) how long will you live, or better said, what is the longest you think you will live.

If you can answer these questions with reasonable accuracy, then it seems to me that there are very conservative approaches to "how much is enough".

My take is this:

If I have enough in todays dollars to take #1 above times #3 plus #2, then that conservatively should be enough, right? As an example, if I need $100k per year and I could live 40 years and I want to leave $1 million to my children then I need $5 million today. I am assuming that I can always average more return on my "nest egg" than inflation over time, so this should be a very conservative approach.

Am I missing something? My numbers are slightly different but I am basically about 2-4 years away from that math working for me.

Thanks in advance and again, I really enjoy this forum and am dreaming of the freedom retirement will someday bring me.
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Old 06-06-2009, 10:03 AM   #2
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In the end, it's as good a method as most. "Reasonable accuracy" is sort of meaningless here, the are too many variables and too many uncertainties.
  • Can you determine how long you will live? You can go with longest possible, but you are consciously leaving a large chunk of $ on the table, conceivably depriving yourself until then - a tough call we all have to make.
  • What your rate of return will be and what the pattern will look like (high early, low later or vv)? A change of even 1% projected over 40 years is signficant, and it could easily be more.
  • What inflation will be? Again, a change of even 1% projected over 40 years is signficant, and it could easily be more.
  • What will your taxes be? Could be much more than you're anticipating.
  • What unusual expenses might come up, like health problems? And many more...
All any of us can do is make the soundest plan we can, build in whatever safety factor we're comfortable with, and be prepared and expect to adjust along the way. It's a very personal set of assumptions/decisions that no one else can answer for you.

There have always been uncertainties and surprises in all our lives, that won't stop just because you retire - and you'll be less able to adjust (income) once you hang up your spurs.
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Old 06-06-2009, 10:37 AM   #3
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Quote:
Originally Posted by mdowl View Post
...these basic questions:

1) how much do you need per year to live the lifestyle you want
2) how much (if any) do you want to pass on to your children or others
3) how long will you live, or better said, what is the longest you think you will live.
Of all three questions, I think #2 is the easist to answer. It can range from "whatever is left after my needs" to "I will set aside X amount now and never include it in my own retirement calculations". This is a highly personal choice.

#1 would be whatever is affordable within COL (inflation) and personal desires. One of the things I did before FIRE-ing was to get a firm grasp on my own income and expenses. I created a customized spreadsheet using a template found online and really buttoned down current expenses. Then I did the same solo exercise for my fiance, then for both of us added together. It was only then that I made the decision to FIRE, based on my numbers only. He is not eligible to retire for 10 years, but it gave him a baseline of where he was and where he needed to get to.

#3 - if you can figure that one out, inquiring minds want to know.
From direct experience, Retirement Plan A had to be rapidly adjusted in real time. Retirement Plan B became the backup plan that a CFP firm had w*rked out for LH and I, modelled along the lines of "what happens if 2 incomes become 1 income?".
My point here is to make sure you incorporate worst-case scenarios (death, divorce, loss of pension, loss of medical insurance, etc) in your planning.
Life happens and you need to have that Plan B in hand and ready to implement, sometimes right now.
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Old 06-06-2009, 11:06 AM   #4
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Quote:
Originally Posted by mdowl View Post
As an example, if I need $100k per year and I could live 40 years and I want to leave $1 million to my children then I need $5 million today. I am assuming that I can always average more return on my "nest egg" than inflation over time, so this should be a very conservative approach.

Am I missing something? My numbers are slightly different but I am basically about 2-4 years away from that math working for me.
your example has a 2% WD rate so yes this is a very conservative approach and you should be able to achieve it with a very conservative portfolio (do i hear laddered CDs and/or alot of TIPS?). and seeing as it is such a small WD rate you will probably end up with more than $1 million to leave to your children. you may very well be able to leave them the entire nest egg because if you invest in TIPS with a real rate of atleast 2% you will be living off the interest only of an asset that is increasing with inflation. however some people dont want to keep working till they have that much money as, based on other calculators (including FIRECalc), they could safely retire alot earlier.
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