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How close to estimating Retirement $ needed
Old 05-14-2011, 10:27 PM   #1
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How close to estimating Retirement $ needed

I read of many varied ways to calculate how much we'll need when retired as a % of what we are currently earning. I am interested in how close folks have come to estimating what they need and how they calculated it.
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Old 05-14-2011, 11:34 PM   #2
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We haven't retired yet, so I have been in the calculating phase. I have used a retirement calculator to see how much money we can spend and still outlive our money. I was fairly status quo with the inflation factor and very conservative with the ROI %. I did not include the value of our real estate which we could fall back on if we had to (we live in a VERY high cost of living area).

I have also looked at our actual living expenses over the last two years and padded them liberally to compensate for extra leisure activities (green fees, attending pro sporting events, and concerts) as well as dining out more often. There are simple ways that I can decrease spending if need be, but I didn't want to budget for a barer bones existence.

Time will tell how well I've done.
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Old 05-14-2011, 11:35 PM   #3
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Some do a detailed expense plan and project it with inflation. Their should also be reserves for unexpected events.

There are templates and software available for this type of planning.

A good starting point for certain expenses are current expenses. But when one retires, some of the expenses they had while working will stop. But there will be new expenses also.
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Old 05-15-2011, 02:09 AM   #4
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Pre-retirement income is largely irrelevant to post-retirement expenses/needs.

We have been keeping detailed records of our expenses for a few years. Those records with adjustments for things we will spend less or more on and an allowance for inflation and a margin for the unexpected is the basis for post-retirement expenses and our answer to the "how much" question.
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Old 05-15-2011, 03:52 AM   #5
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Never, ever, use income to calculate how much $ you need for retirement, it is irrelevant. The retirement money you need is entirely based on your expenses. The only thing income helps you calculate is how quickly you will be able to retire.
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Old 05-15-2011, 06:17 AM   #6
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I did it with a simple spreadsheet. Came up with an estimated annual amount. Guesstimate monthly/annual needs for food, shelter, clothing, entertainment, recreation etc.
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Old 05-15-2011, 06:53 AM   #7
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Never, ever, use income to calculate how much $ you need for retirement, it is irrelevant. The retirement money you need is entirely based on your expenses. The only thing income helps you calculate is how quickly you will be able to retire.
Exactly.

I've been retired four years, and in preperation to my "pulling the plug" at age 59 was a simple set of questions:

1. Were we (financially) happy in pre-retirement? In other words, did we earn enough net income to live the life we desired? The answer was yes, and our planning was based not on a percentage of pre-retirement income but rather 100% of post retirement expenses.

2. Was our pre-retirement expenses going to be modified in any manner - such as relocating (no), building a retirement home (no-we already did so and paid for it, in preparation for retirement), or would there be any expected reduction in retirement expenses? The answer was no.

Additionally, some "big ticket" items that folks say that they will "wait for retirement" to do (such as extensive CONUS/international travel) was part of our current "life plan" and budgeted expenses over the last two decades. There was nothing new here. We've traveled extensively over the past two decades and don't expect to stop/reduce until we can longer physically (not financially) able to do so.

I entered retirement (DW is expected to follow me within a year) with no expected adjustments to required income both up or down, since we were debt free before retirement and lived the life we desired.

Since I've been anal (I’ve been told by DW that I’m enough for the two of us ) to plan/budget for many years before retirement, I felt confident that I could maintain our "fiscal obedience" to a stated budget, adjusted for increases due to inflation.

The only things that we did do to modify our expected retirement income was to plan on several income options - such as who/when each of us would take SS (FRA - age 66 for DW, me at age 70, and my spousal claim against DW for 50% benefits when she claims, since we are the same age within a few months of each other). The other considerations was to establish a "gross income cash bucket" for each of us, within our respective retirement portfolios (includes future taxes due on withdrawls of TIRA funds) at a 3-4 year target, to avoid having to sell duing a down market period (like 2008, early 2009).

Another thing we did was to "convert" a portion of my retirement portfolio to an SPIA to act as a life pension for us, along with a minimum guaranteed period, and act as "gap insurance" since delaying SS. This reduces the risk of portfolio withdrawl and also insures that DW will get my full benefit (just under twice her age 66 benefit) assuming I die first. We removed 10% of our joint retirement portfolio to fund the SPIA preimum, which means the remaining 90% will grow (assuming long term market returns) and removing 10% of the portfolio from short term market flux.

BTW, if we both die before the SPIA guarantee payment period is reached, remaining payments go to our estate. OTOH, if we exceed the guarantee period (meaning that either/both are still alive), payments continue at 100%. In reality, it acts as the defined benefit (pension) plan I expected to receive early in my time with the company I retired from, but later removed and replaced by a cash balance plan. If the pension would have remained, it would have not been inflation adjusted and there was no guarantee term to ensure a certain value if I/DW would die earlier than expected.

We also opted not to go with an SPIA that was inflation adjusted. For our situation (and specifically for us alone) I mentioned that the SPIA was SS "gap insurance". We wanted to maximize payments in the early years and realized that the delay in SS means that we would be "trading up" to a superior long term, inflation adjusted product (e.g. SS). SPIA payments after age 66/70 would just be "icing on the cake", regardless of real purchasing power.

In retirement, cash flow is everything and your plans for ensuring that long term goal in retirement is, or more important than just coming up with a "number" before you decide to actually pull the plug...
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Old 05-15-2011, 07:06 AM   #8
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@rescueme Great post. We are at least as anal as you. I take it your employment did not provide pensons? What proportion of your spending requirement is covered by the SPIA?
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Old 05-15-2011, 07:23 AM   #9
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I agree with this.
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Originally Posted by traineeinvestor View Post
Pre-retirement income is largely irrelevant to post-retirement expenses/needs.

.
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Old 05-15-2011, 07:43 AM   #10
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@rescueme Great post. We are at least as anal as you. I take it your employment did not provide pensons? What proportion of your spending requirement is covered by the SPIA?
Currently, about 33%.

PROI (Personal Rate of Inflation), as computed against both of our expenses over the last four years) has run 2.1% annually, which is in line to the current 2.3% rate in the FIDO RIP forecast tool.

Major increases were due to dereg of local energy (electric - and our home is all electric) and slight property tax increases (of course) each year, and a cash purchase of a vehicle for my Meals on Wheels volunteer activity. BTW, I traded in an 18 year old vehicle (Olds) to buy the (used) SRX. I buy "cheap" and run them into the ground.

Since I have retirement health insurance (at the same rate I paid during employment) for both of us, a large drop is anticipated for the end of next year when I get on Medicare (supplement is still via retirement benefit, but at a much lower rate) along with DW who will be on Medicare in early 2013.

Travel expenses since my retirement are the greatest "flux factor", year to year. 2007 was a Danube cruise, along with a cruise from NYC to Canada (and return).

2008 saw us in the Benelux countries along with a CONUS west coast trip.

2009 was a month in Australia. This was one of our more expensive ventures.

2010 was a few days in London, followed by a 15-day Baltic cruise (Nordic countries, Germany, Russia, et al.) In September, DW went with her "travel buddy" (a women she met in Australia) for a few days in Cairo (before the "troubles"), followed by a Nile cruise.

2011? DW (again with her friend) spent a week on tour "down south" on an escorted tour and in September they are off for two weeks to Switzerland (we've already been there together, in the past).

BTW, our travel is not done on the cheap. Nothing wrong with that (and we did it that way to save $$$ at an earlier age), but since we're in our early 60's, and lucky to have the funds, we're willing to spend a bit for travel "quality". For instance, I always drove to the airport we used most often (Newark/EWR, about 75 miles from our home); now we let the car at home and use a limo. That's also a safety issue to be on R78 (much traffic) when we spent most of the day in the air, from another country.

Where am I this year? I'm taking a break and staying home with the "kids" (see my avatar )...

And no - no pension for me. The first company I wor*ed for back in the early 70's had one, but federal rules at that time said you had to be at the company for 10 years before you were vested. I left after eight years, for a much better opportunity at a company that I spent close to 30 years with. They also had a pension, but it was eliminated 2+ years after I started. DW will have two small pensions (couple hundred $$/month) in two years, at age 65. She will be taking single life only since it provides a few dollars more and I don't need the income if she would pass before me.
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Old 05-15-2011, 07:49 AM   #11
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new, for some? : medical insurance?
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Old 05-15-2011, 07:51 AM   #12
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Depends on your age, marital status, longevity expectations, desired bequest if any, inflation predictions & return predictions.

Here's some general guidance FWIW Never ending SWR & FIRECALC.

Retiring at age 57 in good health, I wouldn't be comfortable if I wasn't in the 2.5-3.0% WR range. If I was 70, single, in poor health with a family history of below average longevity - I would withdraw much more aggressively.
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Old 05-15-2011, 07:57 AM   #13
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Rescue. I agree travel is the big swing amount. It represents about 20% of our total spending as we are out of the country 60-70 days a year and don't worry much about this expense. My pension covers about 40% of our spending. I am early 60's DW is mid 50's
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Old 05-15-2011, 07:58 AM   #14
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We spent a few weeks in NYC where we will retire, and as we always do, kept detailed records of where every penny went. Here, we don't eat out, but after retirement will want to do some. We'll also want to attend concerts, the odd sporting event, etc. We can limit those of course if need be, but we wanted to know what we would LIKE to spend for planning purposes.
So we extended what we spent on those items, and made detailed comparisons on prices for our usual groceries between here (2 stores) and there (3 stores).
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Old 05-15-2011, 08:37 AM   #15
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RE: tracking current expenses we have used two methods.

1) very anal saving of all receipts, recording cash payments at end of day, etc., (e.g. $.25 to coffee can at work, etc.) in an attempt understand how we're spending our money (i.e. expenses categories).

2) Using monthly bank statements as a check on above and as a somewhat easier way to get to actual amounts (in the end, *all* our relevant expenses move through the bank account, except for payroll deductions for taxes and medical, but we lose the detail (and the PITA of tracking the detail).

Seems we are consistently missing some things with method 1, because method 2 always comes out higher. But between the two I think we have a good idea on both amount and types of spending.

We do not expect much reduction in work related expenses (no big commute, no special clothes, no professional tools/education, no daily lunch out, etc.). Reduced taxes can be estimated based on amounts and type of income. We will stay on company medical until medicare - same plan with same premiums as active employees. We will likely increase frequency of travel, more shorter US trips, but foreign trips will likely be of longer duration and with fewer participants (i.e. kids are grown), which I think may even out a bit (e.g. more longer term rentals, fewer hotels, reduced "daily" cost of airfare to gt there, etc.) . Probably some increase in hobby and leisure expenses generally. These "lifestyle" changes are admittedly difficult to quantify, so we'll just make our best estimates, see how it goes and adjust accordingly.
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Old 05-15-2011, 11:22 AM   #16
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Rescueme and others....When you did your SPIA did you do it for life, 10 years or 5 years or some other time frame?
Also did you factor inflation into the payment amount you need? For ex: If $3,000 is needed today to cover base expenses but know in future years more will be needed due to inflation (say 3% x 10 years = 30%, 30% of $3,000 = $,1000, $1,000 plus $3,000 = a future need of $4,000),...... Did you start your SPIA with the $4,000 payment?

Am seriously considering an SPIA ...in 3 years... to cover base expenses. I'll have other income sources but want to eliminate the unknown for at least that amount.
Right now I am thinking about doing it in 5 year increments ...since it appears...the interest rate environment may affect (in either direction) how much I need to cover the 5 years. If rates are high 5 years from now, less principle may be needed to secure the 2nd 5 year period of time. Or am I not understanding things correctly.? The question then becomes: How much does the interest rate environment affect ones decision for a SPIA and what can one do to avoid the pitfalls? Thanks for all input!!
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Old 05-15-2011, 01:11 PM   #17
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If DH and I had planned for retirement based upon those calculators saying you need 70 to 80% of pre-retirement income we would both we working full time. Instead DH is fully retired since about a year ago and I work about 1/4 time.

For us, we looked at each expense very carefully. I use You Need a Budget to keep track of spending so now exact expenditures for each category. Then I looked at the categories and figured what would go down and what would stay the same and what might go up over the next few years.

In our case the main categories of change:

1. House and household expenses - We had a large house, expensive to maintain with a mortgage on it. We looked at it and realized that it would be a long term drain on our finances if we kept it. We could keep it but we would need to work longer or have more money going to housing during retirement than I really wanted to spend on housing. We ended up selling the house (at a loss unfortunately but still glad to have done it). We are building a much smaller, much more energy efficient house and base future housing expenses on the new house.

2. Child related expenses - We used to have 3 kids at home, one is gone now and we have two at home. One is in college and the other high school. So those expenses we still have but will be going down in the future (the net effect is that our withdrawal rate for the next few years is higher than it will be later).

3. Work related expenses - Automobile and fuel related expenses are way down as DH and I had long commutes before. We anticipated clothing expenses would go down due to no need (DH) or reduced need (me) for "nice" clothing for work. Dining out expenses are down since very few lunches out compared to when working.

4. Expenses that might go up during retirement -- Basically 3 types. Utility costs, especially electricity due to being at home more during the day. Hobbies we could spend more on during retirement (in our case, we aren't huge on travel so that really hasn't changed much). The other was medical related. We are fortunate to still have health insurance through DH's employer but the cost did go up and, as we get older, it is likely to have medical expenses go up.

I've also calculated a certain minimum level of income we need to have. In DH's case, he took his pension as a lump sum so we have that, plus 401k money and SS. In our case, our projected retirement income is way less than what we earned working full time. However, we made the decision that we would rather live a more modest lifestyle during retirement and retire earlier than work several more years and have more money. We are willing to adjust our lifestyle accordingly.
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Old 05-15-2011, 01:23 PM   #18
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I read of many varied ways to calculate how much we'll need when retired as a % of what we are currently earning. I am interested in how close folks have come to estimating what they need and how they calculated it.
I categorized and tracked my expenses for several years while working.

Then I adjusted as follows:

(1) subtracted expenses that I thought I would not need in retirement (cost of gas for commuting, work clothes, etc.).

(2) added expenses that I might want to add in retirement (entertainment, shopping, etc).

(3) considered long term, planned expenses (my daughter's wedding during my last year of working, my new car right after retirement)

This gave me a pretty accurate idea of how much I would spend in retirement.

What surprised me was not my spending, but the fact that my taxes were so low in retirement - - 14% for federal and state combined. I had read this from others on the board, but really didn't believe it until I had the numbers in front of me.
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Old 05-15-2011, 02:53 PM   #19
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We too did the expense planning (expenses pre-retirement then project into retirement).

Most of our post-retirement planning was back-of-the envelope. We should have used a different envelope. We have had a number of expenses we never would have guessed. Big ones include 2 remodel jobs (3 really), taxes (to pay for unexpected 401(k) withdrawals for expenses and Roth conversions, local costs (Hawaii), inflation (our inflation rate is much higher than any of the "official" rates), maintaining living 'quarters' on the mainland, weddings and funerals.

Still, we had built in backups to our backups and have not had to adjust our lifestyle. I have to admit to a certain level of concern (okay, worry) as we have seen the unplanned cash burn. Still, we have more backups and income kick-in points. With this in mind, we have made it and will continue to do so.

Guess my take-away message would be to be certain of your expense planning or have sufficient backups to support you. As always, YMMV. Best luck!
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Old 05-15-2011, 04:21 PM   #20
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Rescueme and others....When you did your SPIA did you do it for life, 10 years or 5 years or some other time frame?
Also did you factor inflation into the payment amount you need?
In our case (and for us alone), we purchased a joint life policy with a guaranteed term payout. For us (purchasing it at age 59), it was calculated that we would be collecting for 28 years (336 monthly payments) minimum.

Why minimum? With our policy, if we both die before the end of the 28 year term, remaining payments (at 100%) or a one-time payment would be paid to our estate. However, if either/both live longer than 28 years, payments would continue (at 100%) untill both were gone.

We did not go with an inflation adjusted policy. Again, for our early stage retirement years, we were looking for a product that could act as a defined benefit (e.g. pension) plan, which for private (e.g. non-government) j*bs are usually not inflation adjusted.

In addition, we looked to the SPIA to act as "gap insurance"; that is to allow us to delay starting SS till it made sense for us. DW will take it at age 66 (FRA for her), I'll claim 50% spousal benefit at that time (we're the same age), and I'll delay SS till age 70 - both to accrue longevity credits along with ensuring upon my passing that DW will have a "stepped up" SS benefit that will be just about twice her age 66 rate.

That means we wanted to "front load" the SPIA and ensure we received maximum possible income in the early years, along with ensuring that we were protected (at least our estate) if we passed earlier than expected.

The SPIA payments will have less value, due to inflation and we're well aware of that. However, we will also be able to tap into a superior inflation adjusted "product" that will be worth more as we delay payments. That "product" is called SS.

Yes, I know the arguments against counting on SS for the future. However we're old enough (at age 63) that we believe the funds will be there during our lifetime.

One last thought. Since the SPIA was purchased with only 10% of our joint portfolio value (in early 2007), we still have 90% of our portfolio to "make up" for inflation loss. BTW, as of this point in time, our joint portfolio slightly exceeds its value of when I retired - even with the purchase of the SPIA.

I guess the plan is working. Once we have our respective SS payments starting, the SPIA (even if worth less) will just be "icing on the cake" when the time comes.
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