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What am I missing?
Old 09-14-2007, 01:25 PM   #1
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What am I missing?

I am 43 years old with a wife and a son. I have a Smart 529 in place for my son's college. I have $450,000 in a retirement account; and have $450,000 in equity in my home. I could downsize to a $250,000 home, which would give me $200,000 in cash; no home mortgage. I can live pretty comfortably on $3,000-$4,000 per month. Is that enough money - given the rate of return (5-10%?) and amount of withdrawals - for the $200,000 to get me and my wife to age 65 (even if the principal is gone when we get to 65), which is when the $450,000+ (after 22 years of growth) plus social security would be available to draw from?
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Old 09-14-2007, 01:28 PM   #2
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You're missing a few hundred thousand dollars more.

Doing some quick and dirty math:

You say you need $4,000 a month X 12 = $48,000 annually X 25 = $1,200,000
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Old 09-14-2007, 01:52 PM   #3
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I spend a bunch now, but it would be a lifestyle choice. Not sure I can, but assume I could live off of $20,000 per year if I have zero debt (family health insurance would be the biggest question mark here). But, if I earned 10% ROI then that is roughly $1,600/month. So let's assume I set up an automatic draw down of $1,600/month. If I earned the 10%, then I'd still have the $200,000 at age 65. But let's say I only earned 5% - that's pretty conservative, right? - then it would still be almost 21 years before the $200,000 principal is completely gone. I would be within a year of retirement (at which time I would draw social security and whatever my current $450,000 retirement has grown to).
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Old 09-14-2007, 02:07 PM   #4
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...But, if I earned 10% ROI...
Good luck with that. I would set a goal of about 7%, not 10%.
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Old 09-14-2007, 02:46 PM   #5
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Test your plan out on Firecalc (link at bottom of the page).
You need to try to live on your proposed budge for a while--you might be surprised at how much "frugal living" can still cost. We are pretty darned frugal and still expect to spend $3000 a month with taxes and health insurance. And that is with zero debt.
We expect to draw 4.5% from our investments in retirement.
Good luck with your plan. I don't plan to rely on SS at all, too risky.
Sarah
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Old 09-14-2007, 02:46 PM   #6
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You're missing a few hundred thousand dollars

$4,000 a month X 12 = $60,000 annually
uh....isn't 4 x 12 = 48 ... or did they change it?
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Old 09-14-2007, 02:49 PM   #7
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wsw, the other thing that will be a problem is t hat over time inflation will eat you alive. Its possible you could live on 1600 a month now, but in 5 or 10 years that 1600 isn't going to go very far.
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What am I missing?
Old 09-14-2007, 02:51 PM   #8
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What am I missing?

True enough. I think the $60,000 includes the taxes, fees incurred when drawing down $48,000 for living expenses.
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Old 09-14-2007, 03:02 PM   #9
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One thing you're not accounting for is inflation. I think most people would plan on 3% at the minimum, and lots of folks would plan on at least double that for their medical-related expenses. Over the 22 years you're talking about, this makes a drastic difference. Even at 3%, your living expenses double over that time frame.

You've thrown out several different numbers ($3,000, $4,000, and $1,666 ($20K/12)) which are wildly different standards of living. This tells me you don't really know what your expenses are and don't know if you'd like living at those levels of expense. If I were you I'd try to live on whatever retirement budget you are planning for for at least 6 months to get a feel for things. If you stay in the $450K home during this time, you'll have to extrapolate on some of your budget items, but it would still be a good exercise.

If you invest in anything that gives you a 10% return, be aware that modeling a 10% constant return in a spreadsheet is far different from the 10% average return that you might get in the real world. The volatility of any investment that returns 10% average over the long term - US stocks, for example - means that when the bad times hit and you're still taking your $X out of your portfolio, that amount is a larger chunk which damages your portfolio's ability to survive. FIREcalc (FIRECalc: A different kind of retirement calculator) can give you a good idea of how your portfolio can survive. A shortcut many use here is the 4% rule, which would mean you could count on a $200k portfolio throwing off $8k per year in spendable money -- clearly a lot less than what you think you need.

Also, you mention a wife and son in your original post but your follow-up post you only refer to yourself. If your wife and son are not already 100% on board I would begin talking with them about your ideas and feelings. If they do get on board, you'll have help and support to bounce your ideas off of. If they don't, you'll need to decide which is more important (retiring early or your family) or begin working on persuading them to your point of view.

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Old 09-14-2007, 03:13 PM   #10
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All good thoughts; thanks! I currently put around $40,000 a year in my retirement plan and earn in excess of $300,000/year; but I work a lot. Of course, I could semi-retire now or work part-time in a government position, if for no other reason than the health benefits. I could continue what I'm doing now for another five years, but I don't really want to do so. We shall see; thanks, again to all.
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Old 09-14-2007, 04:43 PM   #11
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A familly heath insurance plan will probably set you back at least ~$500-600 a month (even with high deductible). That's already a huge chunk of your $1600 monthly budget. BUT, the premium on your health insurance plan is likely to increase much faster than inflation (if recent history is any guide), while the puchasing power of your $1600 budget will be decimated by inflation. Even with a fairly mild 3% inflation over the next 22 years, your $1600 a month will be worth only about $800 in 2007 dollars when you reach 65. Your entire monthly income would barely cover your health insurance premiums... Plus I agree with others that counting on a 10% annual return on your investments might be overly optimistic...
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Old 09-14-2007, 04:55 PM   #12
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uh....isn't 4 x 12 = 48 ... or did they change it?
Yup, I was thinking of my budget of $60K a year while I was typing that. Thanks for the correction. Doesn't change the main answer by much though.
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Old 09-14-2007, 05:06 PM   #13
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But, if I earned 10% ROI then that is roughly $1,600/month. So let's assume I set up an automatic draw down of $1,600/month. If I earned the 10%, then I'd still have the $200,000 at age 65.
As someone else already pointed out, the problem is inflation. After 20 years, that $1,600 is worth a lot less.

The second problem is volatility. If you hit a few bad years at the beginning, then you would run out of money a lot sooner, even though the average ROI is 10%.


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But let's say I only earned 5% - that's pretty conservative, right? - then it would still be almost 21 years before the $200,000 principal is completely gone.
This, on the other hand is too conservative, unless you're considering CDs or the likes.
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Old 09-15-2007, 09:29 AM   #14
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All good thoughts; thanks! I currently put around $40,000 a year in my retirement plan and earn in excess of $300,000/year; but I work a lot. Of course, I could semi-retire now or work part-time in a government position, if for no other reason than the health benefits. I could continue what I'm doing now for another five years, but I don't really want to do so. We shall see; thanks, again to all.

If you make $300k/yr and have a $450k house + $450k in savings... You must spend an awful lot of money.

You must spend a huge amount of money every year. Yet you indicate that you could live on $20k/yr.

I must be missing something.
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Old 09-15-2007, 03:44 PM   #15
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If you make $300k/yr and have a $450k house + $450k in savings... You must spend an awful lot of money.

You must spend a huge amount of money every year. Yet you indicate that you could live on $20k/yr.

I must be missing something.
My thoughts exactly... if you try to go from $300k/yr to $20k/yr maybe you could make a reality tv show out of it and earn some extra $ on the side.

How will your family feel when they go from being comfortably upper middle class to just above the poverty line?
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Old 09-18-2007, 09:59 AM   #16
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Even with putting away $40k per year into a retirement account, the drop from $260k/yr gross (net of the retirement savings) to $20k would be shock therapy. Even after considering the elimination of high(er) income taxes while working, and all the associated expenses and deductions that would go away, there is still huge disparity between the 2 numbers.

I would recommend you live the 'after tax' budget you can afford after retirement for a few years before retirement to see if you can manage. Seldom are people very happy when they have to adjust their lifestlye that significantly upon retirement.
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