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Old 01-01-2010, 10:41 PM   #21
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Yes, that is 7% annual. It's the result of a long stint with the spreadsheets and loads of historic return/std deviation/correlation data
Yeah, but that's an average you can use only for long term. Long being 20-30 years. Even a period of 10 years isn't "loing term", as witness that the S&P500 is now about the same as it was 10 years ago.

"Everyone has a plan 'till they get punched in the mouth." -- Mike Tyson

Sorry, but $158K or $259K isn't enough. Not unless you want to risk having to get a job as a Walmart greeter when you are 70. All that needs to happen is a 45% loss in your investments. Like the S&P500 has done in the last decade.

The true magic number is $2,000,000. Because 5% withdrawal rate is $100K per year.

You can count only on money that is in your name, that you have control over. You can NOT depend on SS. You can _probably_ depend on getting at least 50% of your pension.

"Investments, IRAs, and 401(k) to live on;
company pension for trips to Europe or Bahamas;
Social Security for lap dances."
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Old 01-02-2010, 12:01 AM   #22
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Yeah, but that's an average you can use only for long term. Long being 20-30 years. Even a period of 10 years isn't "loing term", as witness that the S&P500 is now about the same as it was 10 years ago.

"Everyone has a plan 'till they get punched in the mouth." -- Mike Tyson

Sorry, but $158K or $259K isn't enough. Not unless you want to risk having to get a job as a Walmart greeter when you are 70. All that needs to happen is a 45% loss in your investments. Like the S&P500 has done in the last decade.

The true magic number is $2,000,000. Because 5% withdrawal rate is $100K per year.

You can count only on money that is in your name, that you have control over. You can NOT depend on SS. You can _probably_ depend on getting at least 50% of your pension.

"Investments, IRAs, and 401(k) to live on;
company pension for trips to Europe or Bahamas;
Social Security for lap dances."
Two million dollars may be your Magic Number, but it ain't mine, even if I did assume, as you appear to, that I'm only going to get half of my pension, no SS, and no replacement income from the PBGC and/or state pension guarantee funds. And I thought I was conservative earmarking half of SS for a cushion!

I've never made six figures in my life. I don't need even half that much income to live on quite comfortably—you did notice the $36K estimated annual budget in my original post, didn't you?—and I absolutely don't plan on waiting to retire until I can draw a six figure income from my retirement accounts, which, given my age and possible savings rate would be sometime between when the Devil goes ice skating and when pigs fly.

I hope you were trying to be irritating. If so, you've succeeded admirably, especially with that remark about lap dancing. Faugh! What a repellent thought!
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Old 01-02-2010, 07:19 AM   #23
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Originally Posted by kyounge1956 View Post
I've never made six figures in my life. I don't need even half that much income to live on quite comfortably—you did notice the $36K estimated annual budget in my original post, didn't you?—and I absolutely don't plan on waiting to retire until I can draw a six figure income from my retirement accounts, which, given my age and possible savings rate would be sometime between when the Devil goes ice skating and when pigs fly.
Don't make it complicated:
Figure out how much you need to withdrawal per year
Make sure you have a good cushion in your estimates
multiple by 25
invest wisely

TJ
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Old 01-02-2010, 07:29 AM   #24
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Well, we live in a small community where probbaly 3/4 of the people are retired. A significant percentage of them have financial problems because the income they retired on is no longer enough to support them comfortably. A few years ago we went to a talk where the FA related to us that he had a lot of clients who retired early----and now had to re-enter the workforce in their late 50's because their plan crashed due to the economy.

We have a neighbor who is a retired airline pilot. He had a generous pension---until the airline went belly-up. PBIC replaced about half of his pension, but PBIC itself is having financial problems. We have other neighbors who have said that if one spouse dies, the other will have problems making ends meet, because they need _both_ SS checks to live on.

How long are you planning to live after retirement? Maybe you've never made 6 figures in your life (actually, neither have I), but 20 or 30 years of inflation will see the poverty level being 6 figures. For example, when I started my last job my starting salary was $18K/yr. When I retired 29 years later, the starting salary for the same job was $55k.

It's hell if you run out of money in your 60's or 70's. What kind of job can you get then? Greeter at Walmart. Bagging groceries at Safeway. Yuch.
Hence my Mike Tyson quote.

The SS quote was someting I ran across years ago. Crude though it may be, the thought behind it is sound. You can count only on money that's in your hand, in your name. That's your base. That's your food & housing money.

Pension income is money that somebody else is supposed to give to you. It may disappear or be reduced----companies go out of business all the time. You have a right to that money, but they might not be able to pay you. That money is for goodies over and above what you need to live on.

Social Security money is money that the government gives to you, unless and until Congress changes the law. You do *not* have a legal right to receive it. That money is for frivolities. Fill in the frivolity of your choice.

When you are planning for retirement, you really have to account for disasters. In my lifetime the stock market has dropped by nearly 50% several times. There's been periods where inflation pushed the prime rate to 20%, and mortgages to 15%. COLA helps, but never covers it all. Heck, this year there is no SS COLA---yet costs of food, insurance, gas, etc. have all gone up. So what do you do when your SS stays the same but your health insurance goes up $100/mo? I'll tell you what our friends did----she quit her volunteer bookkeeping at the church and got a part time job. He stopped going fishing on weekdays and got a job as janitor.

So......$2m gets you $100K at 5%. When/if that gets cut in half, $1M at 5% gets you $50K.
But if you plan it too tight---like all too many people did in the early 2000's---and have only, say, $300K, when a downturn happens, your income stream dries up.

$2M is a magic number because it's large enough so that it's a virtual certainty that you'd be able to live off of it forever. EVen if things go really pear-shaped, you could take the remaining $1M (after your account gets cut in half), put it in a passbook savings account earning negligible interest, and take out $50K/yr for 20 years.

Want to take on more risk? Start at $1M.

Want to take on huge risk? Start at $300K. Two or three bad years in a row, and you start shopping for groceries in the dogfood aisle. Now that's a repellant thought!
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Old 01-02-2010, 01:17 PM   #25
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I agree with rayvt in general about how much of your FIRE stash is under your control and therefore how much of it you can count on.

However, I think that the annual withdrawal rate matters much more than the absolute portfolio value. In my case, I calculate FI at about $430K. But my projected annual budget that has to support is right around $17K, which is a 3.95% withdrawal rate.

I don't rely on a pension; I do include 25% of my projected SS benefits. I also exclude the value of my house and a possible inheritance.

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Old 01-02-2010, 03:47 PM   #26
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Originally Posted by rayvt View Post
Well, we live in a small community where probbaly 3/4 of the people are retired. A significant percentage of them have financial problems because the income they retired on is no longer enough to support them comfortably. A few years ago we went to a talk where the FA related to us that he had a lot of clients who retired early----and now had to re-enter the workforce in their late 50's because their plan crashed due to the economy.

We have a neighbor who is a retired airline pilot. He had a generous pension---until the airline went belly-up. PBIC replaced about half of his pension, but PBIC itself is having financial problems. We have other neighbors who have said that if one spouse dies, the other will have problems making ends meet, because they need _both_ SS checks to live on.
I have heard some of the horror stories about what happened to pilots for various airlines. However, I work not for "MegaCorp" but for a local government. Retiree pensions are paid out of a separate fund, not a line item on the City budget, but it is at least theoretically possible for the City not to put in the money it is supposed to, or for the Pension fund to be wiped out. "What happens if the Pension fund goes bust?" is on my list of questions to ask at the "Get Ready to Retire" class, and depending on the answer the Magic Number might get revised upwards.

Quote:
How long are you planning to live after retirement? Maybe you've never made 6 figures in your life (actually, neither have I), but 20 or 30 years of inflation will see the poverty level being 6 figures. For example, when I started my last job my starting salary was $18K/yr. When I retired 29 years later, the starting salary for the same job was $55k.(snip)
I have assumed a life expectancy of 100 years. Both of my parents and my two aunts are still living in their mid-eighties, and as I have never married I have no kids to fall back on as a last resort. That works out at a retirement timespan of between 40 and 45 years, depending on the exact date I pull the plug. But I still don't see any circumstances in which I would need $2 million to retire. That amount would support a starting withdrawal which I actually wouldn't need until after ten or fifteen years of inflation, even if I were living entirely on my own savings. If I actually did keep working until I had that much saved, I'd be (at a rough estimate) between 75 and 80 years old, and I wouldn't need that much money to fund a retirement lasting only 20-25 years instead of 40-45.
Quote:
Pension income is money that somebody else is supposed to give to you. It may disappear or be reduced----companies go out of business all the time. You have a right to that money, but they might not be able to pay you. That money is for goodies over and above what you need to live on.

Social Security money is money that the government gives to you, unless and until Congress changes the law. You do *not* have a legal right to receive it. That money is for frivolities. Fill in the frivolity of your choice.

When you are planning for retirement, you really have to account for disasters. In my lifetime the stock market has dropped by nearly 50% several times. There's been periods where inflation pushed the prime rate to 20%, and mortgages to 15%. COLA helps, but never covers it all. Heck, this year there is no SS COLA---yet costs of food, insurance, gas, etc. have all gone up. So what do you do when your SS stays the same but your health insurance goes up $100/mo? I'll tell you what our friends did----she quit her volunteer bookkeeping at the church and got a part time job. He stopped going fishing on weekdays and got a job as janitor.

So......$2m gets you $100K at 5%. When/if that gets cut in half, $1M at 5% gets you $50K.
But if you plan it too tight---like all too many people did in the early 2000's---and have only, say, $300K, when a downturn happens, your income stream dries up.

$2M is a magic number because it's large enough so that it's a virtual certainty that you'd be able to live off of it forever. EVen if things go really pear-shaped, you could take the remaining $1M (after your account gets cut in half), put it in a passbook savings account earning negligible interest, and take out $50K/yr for 20 years.

Want to take on more risk? Start at $1M.

Want to take on huge risk? Start at $300K. Two or three bad years in a row, and you start shopping for groceries in the dogfood aisle. Now that's a repellant thought!
Your suggestion boils down to this: ignore defined benefit promises from two governmental entities—both of which have the power to tax, and one of which also has the power to print money—benefits which remain the same (including COLA adjustments) independent of market performance, and continue for the remainder of my life regardless of how long that is. Instead, depend on a personal portfolio which is subject to all the risks you have described, and to others you haven't mentioned. To me, that sounds like a formula for increasing my risk of destitution, not decreasing it. It's true that the Pension fund could go bust, and my Social Security benefits could be reduced or taxed away and the PBGC provide no backup and state pension guarantees fail to take up the slack, all of which would have to happen before I would have only my own savings to live on (and even if all those things did happen, I would still be able to fall back on a reverse mortgage before I started shopping for dinner in the pet-food aisle). I think it's vastly more probable that a self-managed portfolio would be zapped by market gyrations, wiped out my own incompetence (either age-related or just zigging when I should have zagged), or even rendered inadequate by medical advances that result in my living ten or 15 years longer than I expected to.
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Old 01-02-2010, 08:25 PM   #27
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Your suggestion boils down to this: ignore defined benefit promises from two governmental entities—both of which have the power to tax, and one of which also has the power to print money—

Yeah, pretty much. It's no secret that many (most?) state & local gov't pension plans are headed for a brick wall. Gold-plated benefits have been given, but they plans are seriously underfunded. And if taxpayers get angry enough at stories about civil service employees retiring at 55 with a 6 figure pension, those plans will get re-defined.

As far as "power to tax", how well is that working out for places like California, Detroit, Gary Indiana, etc?

SS cannot continue on as it currently is. Everybody knows that. All it will take is 2 votes in Congress and one presidential signature to means-test SS.

"Nobody here gets out alive". Jim Morrison
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Old 01-02-2010, 09:45 PM   #28
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Your suggestion boils down to this: ignore defined benefit promises from two governmental entities—both of which have the power to tax, and one of which also has the power to print money—

Yeah, pretty much. It's no secret that many (most?) state & local gov't pension plans are headed for a brick wall. Gold-plated benefits have been given, but they plans are seriously underfunded. And if taxpayers get angry enough at stories about civil service employees retiring at 55 with a 6 figure pension, those plans will get re-defined. (snip)
SS cannot continue on as it currently is. Everybody knows that. All it will take is 2 votes in Congress and one presidential signature to means-test SS.

"Nobody here gets out alive". Jim Morrison
Why on earth are you talking about a six-figure pension? The top benefit for the City retirees is 60% of your highest average two years' salary; the only way to draw a six figure pension is to have two years of salary averaging almost $170K/year. I don't know how many (if any) City employees that applies to, but it definitely doesn't apply to me. It is true the pension system is seriously underfunded at the moment due to the market drop, but I do not believe it to be headed for a brick wall. But according to the minutes of the Pension Board meetings, which are available online, it's on its way back to full funding as the market recovers. It survived the Great Depression, the Tech Wreck, and everything in between, without AFAIK ever missing a payment to retirees. I doubt the same could be said of many self-directed individual portfolios.

I also agree with you that the Social Security system has problems and that benefits might easily be reduced in the future (another incentive to start drawing ASAP rather than waiting). What I don't expect is that they will both evaporate completely, without any replacement whatsoever from either the PBGC or state guarantee funds. I'll have to go back and reread this thread. Maybe that will convince me that your pessimistic viewpoint is the prudent course. If you think evaporation is certain, or even the most likely outcome among many possibilities, and you need a starting retirement income of $100K/year, then your Magic Number is $2M, and I sincerely wish you success at acquiring it.
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Old 01-02-2010, 11:44 PM   #29
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It is important to understand the risk that you take if you assume that a pension will be there and that Social Security will be paid. I think that most of try to temper those assumptions somewhat. I do agree with rayvt that I prefer to have the money in my hands rather than that of anyone else. My DH when he retires can either have a generous pension (non-COLA private however) but will take the sizable lump sum instead. On the other hand SS is an important part of our planning. DH plans to start drawing it on retirement later this year. I am several years away but think it likely something will be there for me. I think that for someone who is mid 50s assuming 25% will be there seems reasonable.


There is a risk in being over confident of course and it can be prudent to save more. I would tell my own children that with the many years of savings they have available that saving enough to self fund their entire retirement is prudent.

But there is risk assuming that the money won't be there at all. The risk is that you don't retire when you could have. If I assume that SS won't be there for either DH or me then DH retires at 70 and I retire at 65.
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Old 01-03-2010, 01:04 AM   #30
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It is important to understand the risk that you take if you assume that a pension will be there and that Social Security will be paid. I think that most of try to temper those assumptions somewhat. I do agree with rayvt that I prefer to have the money in my hands rather than that of anyone else. My DH when he retires can either have a generous pension (non-COLA private however) but will take the sizable lump sum instead. On the other hand SS is an important part of our planning. DH plans to start drawing it on retirement later this year. I am several years away but think it likely something will be there for me. I think that for someone who is mid 50s assuming 25% will be there seems reasonable.


There is a risk in being over confident of course and it can be prudent to save more. I would tell my own children that with the many years of savings they have available that saving enough to self fund their entire retirement is prudent.

But there is risk assuming that the money won't be there at all. The risk is that you don't retire when you could have. If I assume that SS won't be there for either DH or me then DH retires at 70 and I retire at 65.
My original assumption was 25% of SS, too, a number pulled out of thin air with no supporting facts whatsoever. I haven't run any numbers with a no SS scenario, and I probably wouldn't like them if I did. I would expect to have to work long after I hit the maximum pension benefit level at 30 years of service (I will hit 25 later this month). As for the "risk" of assuming that neither pension nor SS will be there, it isn't a risk, it's a near-certainty that I'd never be able to retire 100% self-funded. I could get a combination of lump-sum plus a reduced benefit, but I don't know that that reduces my risk either. If I used the lump sum to buy an annuity, I'd be exposed to the risk that the insurance company fails, a danger I'm not exposed to now; if I managed the lump-sum myself, I'd be exposed to market perils and the possibility of portfolio exhaustion to a greater extent (i.e. for a bigger proportion of my budget) than I would be otherwise.

The fact of the matter is that if the Pension Fund, PBGC and state guarantee (if any) all fail, my goose is cooked. It all comes down to the question, how likely is it that all three of those things will happen?
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