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Annualized Withdrawls in 2046 and Inflation - YIKES!
Old 12-30-2015, 10:37 PM   #1
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Annualized Withdrawls in 2046 and Inflation - YIKES!

Hi Gang,
Long time lurker and first time poster. Wanted to make this short and sweet.

After running through a few very conservative calculations I'm hoping to have a bare bones minimum of $4MM of fun money (after taxes) come 2046-ish. When I take all things into consideration i.e. Roths, 401k's, taxes, etc a 4% withdrawl rate on that $4MM will equate to roughly $160,000/year in 2046. I simply ran the numbers based off of today's federal contribution limits (did not take into consideration future 401k/ROTH increases, again, took the conservative road). Certainly nothing to high five about but it's not a drop in the bucket either.

Now the scary part (which i'm hoping you all can debunk). By running some quick inflationary numbers, in 30 years that $160k will be worth about $66k in today's dollars (YIKES). In other words, one would need 388k/year in 2046 to equate to $160k/year at today's value.

If this is indeed the case, it's pretty disheartening! I'm hoping everyone (especially the older generation) can provide some insight as to how inflation has impacted the reality of your retirement funds. Additionally, i'm hoping that everyone can find a few flaws in this thinking.

I certainly appreciate your insight!

Thanks,
3rd
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Old 12-30-2015, 10:43 PM   #2
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Welcome aboard. I didn't check your math but those numbers sound plausible.

When I ran projections 30 years ago the end-game numbers sounded huge too but they're just digits. Grow your investments at a rate that exceeds inflation it'll work out OK.
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Old 12-31-2015, 02:53 AM   #3
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What inflation rate are you using?

Inflationdata.com has historical inflation rates by decade.
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Old 12-31-2015, 03:25 AM   #4
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The "4%" withdraw rate rule usually assumes that you increase with inflation every year... thus you'd hypothetically have inflation built into your withdraw rate. That is why you can't just leave the money is cash.
Some these days thing 4% inflation adjusted may be too optimistic. Others will shift their withdraw with market performance (variable withdraw rate) so that in bad years you don't pull too much out of investments.
Run your estimations through firecalc or fidelity's RIP... or other retirement estimator.

Also the old 4% rule of thumb was for a 30 year retirement. Longer may require lower withdraw rate.

But yes. inflation bites.
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Old 12-31-2015, 05:34 AM   #5
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Quote:
Originally Posted by 3rd_N_Long View Post
Hi Gang,
Long time lurker and first time poster. Wanted to make this short and sweet.

After running through a few very conservative calculations I'm hoping to have a bare bones minimum of $4MM of fun money (after taxes) come 2046-ish. When I take all things into consideration i.e. Roths, 401k's, taxes, etc a 4% withdrawl rate on that $4MM will equate to roughly $160,000/year in 2046. I simply ran the numbers based off of today's federal contribution limits (did not take into consideration future 401k/ROTH increases, again, took the conservative road). Certainly nothing to high five about but it's not a drop in the bucket either.

Now the scary part (which i'm hoping you all can debunk). By running some quick inflationary numbers, in 30 years that $160k will be worth about $66k in today's dollars (YIKES). In other words, one would need 388k/year in 2046 to equate to $160k/year at today's value.

If this is indeed the case, it's pretty disheartening! I'm hoping everyone (especially the older generation) can provide some insight as to how inflation has impacted the reality of your retirement funds. Additionally, i'm hoping that everyone can find a few flaws in this thinking.

I certainly appreciate your insight!

Thanks,
3rd
When you are trying to project 30 years down the road, your assumptions can drastically impact your results. Like you, 30 years ago, I would plug in the most conservative plausible numbers: low rate of return, high inflation etc...and when I would compound that over 30 years, the results were totally disheartening.
If I plugged in the most optimistic numbers I could dream up, my results were ridiculously optimistic...
The reality is likely somewhere in between, obviously.
My recommendation: Live below your means, maximize your tax deferred saving options, don't try to "time" the market (follow some reasonable AA, rebalancing when things get out of whack)..

Living below your means does not mean eating cat food. You have a lot of living to do over the next 30 years. Don't make yourself miserable trying to chase the day you can retire. But don't dig a hole chasing expensive stuff that won't make you happy for very long.
The fact that you are even paying attention to this now is a good thing.
Enjoy the ride, and good luck.
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Old 12-31-2015, 07:48 AM   #6
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...I certainly appreciate your insight!
Yup. $166,000/(1+3%)^(2046-2016)= $68,390 .... would be $79,139 at 2.5%
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Old 12-31-2015, 11:41 AM   #7
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Inflation data can vary widely US Inflation Long Term Average
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Old 12-31-2015, 01:53 PM   #8
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Quote:
Originally Posted by 3rd_N_Long View Post
...

If this is indeed the case, it's pretty disheartening! I'm hoping everyone (especially the older generation) can provide some insight as to how inflation has impacted the reality of your retirement funds. Additionally, i'm hoping that everyone can find a few flaws in this thinking.

I certainly appreciate your insight!

Thanks,
3rd
Agree with other posters on inflation and those numbers sounding right. An anecdote that may help.

In our very early 30s, in 1991(2?), we had two meetings with a "financial advisor" recommended by a friend. He asked us what we needed in retirement and gave us a bound "plan," which I filed away. When cleaning out boxes last year, I unearthed it. We had projected/guestimated a spending amount in retirement that, when adjusted for inflation, was within 5% of the spending number that we are sniffing around right now. If anyone had told us then that we would need that HUGE amount of money, we would have laughed at them. As it was, the real return on our investments and our savings rate did the job.

TL.DR? Focus on the real numbers, not the nominal numbers.

P.S.--in hindsight, his "plan" was as bogus as I thought at the time....
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Old 12-31-2015, 03:44 PM   #9
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I simply ran the numbers based off of today's federal contribution limits (did not take into consideration future 401k/ROTH increases, again, took the conservative road).

Additionally, i'm hoping that everyone can find a few flaws in this thinking.
Let's assume your salary merely stays even with inflation. If so, you will be earning $____ in the years immediately before you retire.

Why would you assume you'll only save the current 401k limit, when you have that salary? I'd assume that my annual savings would go up as my salary goes up.

I'd suggest that you back inflation out of your assumptions regarding investment returns. Then everything is in current dollars. I think that's a more realistic way of thinking about this.
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Old 12-31-2015, 04:24 PM   #10
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Why would you assume you'll only save the current 401k limit, when you have that salary? I'd assume that my annual savings would go up as my salary goes up.

I'd suggest that you back inflation out of your assumptions regarding investment returns. Then everything is in current dollars. I think that's a more realistic way of thinking about this.
+1. I use 1-3% real returns in my projections. With a 25-30 year span, the initial withdrawal and portfolio required can seem mind-boggling so I just switched to using real returns instead of nominal. The IRS increases retirement contribution limits to adjust for inflation anyway so that part's taken cared of, too.
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Old 01-01-2016, 06:37 AM   #11
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Save what you can, live below your means. Try to minimize the really bad financial decisions. Make prudent investment decisions. Watch your health. Other than that, don't worry about it too much. Live your life and enjoy it.

I was making $21k a year 33 years ago when I graduated from college. If you would have told me that I would need something like $70k a year to live after retirement, I would have laughed and told you "you're nuts".
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