Need peer review of my retirement plan

[RetireAge50]

I agree with your approach of using expected returns instead of worst case. Like you said you will be continually adjusting. It is also ok to put low returns to get a peek at the worst case scenarios. So both are important.

[bobebob]

Quote:

Originally Posted by David1961 That gives you a net investment return of 2.5%, which I think is reasonable, but not necessarily pessimistic IMO.

I'm more than willing to be incorrect and be corrected by those in the know. But it seems like you would be counting inflation twice.

I.E. S&P500 100 year compound annual growth rate annualized without inflation included is 10% minus my 3.5% inflation assumption should be a net return of 6.5%. The accumulation portion of my spreadsheet doesn't apply inflation. So by my estimation, the 6% return would be just slightly pessimistic.

The spreadsheet applies the inflation assumption to my expenses in retirement during the drawdown phase on sheet 2.

Or am I missing something?

Quote:

Originally Posted by nun You can put in an interest rate that will tell you want ever you want, but is it appropriate. If you are ok with 6% then go with it. I'm a lot more cautious and use 4% return and 3% inflation. I suppose its the engineer in me, I design for the worst case scenario, not the best or even the average.

I am ok with the 6% return assumption for now. I am still in the accumulation phase and watching the account balances grow.

I may adjust it some more in the future before I retire and it goes from theoretical to real.

I seek to find a balance between being pessimistic enough to give myself a good chance of not running out of money before I croak and not waiting so long that I miss out on enjoying myself in the years I can be more active.

In FireCalc terms, I'm probably going to be happy with about an 85% number.

[bobebob]

Quote:

Originally Posted by RetireAge50 I agree with your approach of using expected returns instead of worst case. Like you said you will be continually adjusting. It is also ok to put low returns to get a peek at the worst case scenarios. So both are important.

I do put in some worst case numbers now and then, just to give myself a reality check.

But they make me scawed ("scared" in the voice of a little child) and sad.

Ultimately, I'm shooting at just having a little left when I shuffle off the ole mortal coil. I'll have enough wiggle room in my retirement to make some adjustments downward if needed.

If you base all your planning too "worst case" I'd think you'd end up working til 70 and leaving a fortune on the table when you finally kick it. - not my plan.

My philosophy is that were you to die at any point in your life, in your last few minutes on this planet you should be able to look back at your life and say "I did the best that I could with what I had and I truly experienced life and was happy."

If I worked my butt off and lived like a pauper until I was 70 because that's what I had to do to "guarantee" that my nest egg would outlast me and then happened to die soon after, I would be SO pissed!

[ERD50]

Quote:

Originally Posted by bobebob ... What percentage on FC do most of you consider acceptable? Getting all the way to 100% seems extreme. ...

Not sure what 'most' do, but many shoot for 100% and throw in a buffer.

My thinking is, once I'm too old to go back to work, I don't want to find myself in a position where I'm telling DW we have to cut way back, or I end up needed support from my kids.

Now, if I planned for the worst history has ever thrown at us, and included a buffer, I feel I was being conscientious. If the future is worse, we probably will all be hurting, so maybe no one will notice?

Quote:

Originally Posted by bobebob ... If you base all your planning too "worst case" I'd think you'd end up working til 70 and leaving a fortune on the table when you finally kick it. - not my plan. My philosophy is that were you to die at any point in your life, in your last few minutes on this planet you should be able to look back at your life and say "I did the best that I could with what I had and I truly experienced life and was happy." If I worked my butt off and lived like a pauper until I was 70 because that's what I had to do to "guarantee" that my nest egg would outlast me and then happened to die soon after, I would be SO pissed!

That's the rub. Few of us know when we will die, and we don't know what the economic future will bring, so we just have to decide for ourselves when to jump. It should be an informed decision, but we don't have to agree on what that point is.

-ERD50

[RetireAge50]

Quote:

Originally Posted by bobebob I do put in some worst case numbers now and then, just to give myself a reality check. But they make me scawed ("scared" in the voice of a little child) and sad. Ultimately, I'm shooting at just having a little left when I shuffle off the ole mortal coil. I'll have enough wiggle room in my retirement to make some adjustments downward if needed. If you base all your planning too "worst case" I'd think you'd end up working til 70 and leaving a fortune on the table when you finally kick it. - not my plan. My philosophy is that were you to die at any point in your life, in your last few minutes on this planet you should be able to look back at your life and say "I did the best that I could with what I had and I truly experienced life and was happy." If I worked my butt off and lived like a pauper until I was 70 because that's what I had to do to "guarantee" that my nest egg would outlast me and then happened to die soon after, I would be SO pissed!

This is how I think also thanks for putting it into words. 😄

[nun]

Quote:

Originally Posted by bobebob My philosophy is that were you to die at any point in your life, in your last few minutes on this planet you should be able to look back at your life and say "I did the best that I could with what I had and I truly experienced life and was happy." If I worked my butt off and lived like a pauper until I was 70 because that's what I had to do to "guarantee" that my nest egg would outlast me and then happened to die soon after, I would be SO pissed!

I plan to leave a lot of money to my grand children. I've always been happy to live well within my means. I did that when I worked which allowed me to save enough to keep doing that in retirement.

[Jerry1]

Quote:

Originally Posted by bobebob I'm way more anal-retentive than that!

Well, I just want to thank you for being anal and sharing your information. I'm 54 and have about $1.5M (very similar to your situation) I've done well to save, but I've not done well on planning on how to retire. Your budget and spreadsheet with all its assumptions is a great start for me to kick start my planning. I don't want to use your spreadsheet per se, but the information in it about all the things that need to be considered, laid out like you have, is somewhat of a checklist to see if I've considered all the things I need to address before I pull the trigger (hopefully next year).

One thing I will agree with that you're addressing is that I've not put enough into a non-401k account for the time before 59.5. Your plan to load up an account is good. This came up for me and my wife because we were thinking we might flip a house every now and then. Then I realized, if I take a large amount of money out of a 401K, how much of that will be taxed at the higher tax bracket. My planning to date has been to live simple and stay in the 15% bracket. Now I'm faced with working to pound some more cash away (after tax) so I have more to work with for large, one time purchases.

Anyway, thanks! You've helped me get a few steps ahead on my journey.

[nun]

Quote:

Originally Posted by Jerry1 One thing I will agree with that you're addressing is that I've not put enough into a non-401k account for the time before 59.5. Your plan to load up an account is good.

Managing the sources of your income is important. Once the paycheck disappears and you have to create you own, this definitely become a lot more "real". But there are lots of ways to fund the years between ER and 59.5;

taxable investments
401k withdrawals at 55 without penalty (if you qualify)
457 accounts (if you have one)
72t withdrawals
ROTH withdrawals
pension (if you have one)

...and the final 2

part time w*rk
early IRA/401k withdrawals with penalties.

[Sunset]

Quote:

Originally Posted by nun Managing the sources of your income is important. Once the paycheck disappears and you have to create you own, this definitely become a lot more "real". But there are lots of ways to fund the years between ER and 59.5; taxable investments 401k withdrawals at 55 without penalty (if you qualify) 457 accounts (if you have one) 72t withdrawals ROTH withdrawals pension (if you have one) ...and the final 2 part time w*rk early IRA/401k withdrawals with penalties.

+1
Some folks here don't seem to know about 72t rule, which will allow you to take money out of an IRA, without the penalty !
Sure it's complex so read up on it a lot first, but in reality it's only a little more complex than RMD's, which nearly everyone will have to do.

It was something I considered, but we have enough outside $$$
And not that many years to the magic 59.5 that we don't need to use it.

[Independent]

Quote:

Originally Posted by bobebob Part of the difference is the mortgage which should be paid off or very close by retirement. Only my personal spending was doubled outright. The other bidget items were padded extra, but not doubled. My total retirement savings last year was $14,400 (includes HSA, IRA and 401K). Plus my employer kicked in $4k on my 401K. I anticipate my contributions this year will be about $16,800 (plus employer). My spreadsheet doesn't consider inflation in the accumulation phase, only in the expenses post-retirement. I will of course update the budget periodically and certainly just before retirement. But that is why the 0% inflation didn't have a positive effect on the pre-retirement accumulation and all you saw was the negative effect of the lower return assumption. This spreadsheet just gives me a model to monitor my nest egg and decide when might be a good time to retire. FireCalc will also play a big part in my decision to finally pull the trigger and retire. Annually? I'm way more anal-retentive than that! I'll be updating the accumulation balances with actual results monthly and monitoring the effect.

This all makes sense. The important thing is to monitor and update.

My only suggestion is that I'd account for inflation from the current date, instead of from the retirement date, in column V of the second tab.

[David1961]

Quote:

Originally Posted by bobebob I'm more than willing to be incorrect and be corrected by those in the know. But it seems like you would be counting inflation twice. I.E. S&P500 100 year compound annual growth rate annualized without inflation included is 10% minus my 3.5% inflation assumption should be a net return of 6.5%. The accumulation portion of my spreadsheet doesn't apply inflation. So by my estimation, the 6% return would be just slightly pessimistic.

If that is how you arrived at the 6.5%, then you have already considered inflation into that number. In my opinion, a 6.5% after inflation return is much more optimistic than pessimistic, but would be interested in what others have to say.

Bottom line is that you have a detailed spreadsheet with many assumptions and are experimenting with the numbers. You are on the right track!

[nun]

Quote:

Originally Posted by David1961 If that is how you arrived at the 6.5%, then you have already considered inflation into that number. In my opinion, a 6.5% after inflation return is much more optimistic than pessimistic, but would be interested in what others have to say. Bottom line is that you have a detailed spreadsheet with many assumptions and are experimenting with the numbers. You are on the right track!

Yes 6.5% assumes a 100% equity allocation and that the future will follow the statistics of the past. I also think that its too optimistic for planning.

[bobebob]

Quote:

Originally Posted by ERD50 Not sure what 'most' do, but many shoot for 100% and throw in a buffer. My thinking is, once I'm too old to go back to work, I don't want to find myself in a position where I'm telling DW we have to cut way back, or I end up needed support from my kids. Now, if I planned for the worst history has ever thrown at us, and included a buffer, I feel I was being conscientious. If the future is worse, we probably will all be hurting, so maybe no one will notice? That's the rub. Few of us know when we will die, and we don't know what the economic future will bring, so we just have to decide for ourselves when to jump. It should be an informed decision, but we don't have to agree on what that point is. -ERD50

I don't have any children to be able to go to for support. If I have to cut back some it shouldn't be a big impact on my lifestyle at that point because it will likely be after I'm 85-90 and probably won't be as active then.

Update on the FireCalc numbers: I found all the little tabs about allocation and delaying retirement, ect. I filled all them out according to my plan and I get a 100% now. So THAT's good.

The only things I'm not sure about is if FireCalc estimates taxes in it's calculations, and there doesn't seem to be any way to account for differences in pre and post tax retirement accounts. I.E. a post-tax Roth account should be worth a lot more than a pre-tax Traditional account. I couldn't find a way to split these out in FireCalc. Anyone know?

And I'll be re-working my spreadsheet to adapt the 72t rule into it. That will be the last piece of my puzzle that will allow me to retire as early as my account balances provide for.

I'd like to thank everyone who mentioned that little tidbit of information.

It was exactly what I was looking for and why I hang out on these forums.

Quote:

Originally Posted by RetireAge50 This is how I think also thanks for putting it into words. 😄

I've never been accused of being eloquent (delinquent frequently), but you are welcome.

Quote:

Originally Posted by nun I plan to leave a lot of money to my grand children. I've always been happy to live well within my means. I did that when I worked which allowed me to save enough to keep doing that in retirement.

I don't have any progeny, so I'm more or less on the "Live Rich - Die Poor" track. An interesting philosophy if you haven't read the book. I probably won't be going heavily into annuities, but do plan to spend the majority of my nest egg prior to checking out.

I'll likely donate to charity what I have left. But I only expect to have something of a "maintenance" amount left at the end.

Quote:

Originally Posted by Jerry1 Well, I just want to thank you for being anal and sharing your information. I'm 54 and have about $1.5M (very similar to your situation) I've done well to save, but I've not done well on planning on how to retire. Your budget and spreadsheet with all its assumptions is a great start for me to kick start my planning. I don't want to use your spreadsheet per se, but the information in it about all the things that need to be considered, laid out like you have, is somewhat of a checklist to see if I've considered all the things I need to address before I pull the trigger (hopefully next year). One thing I will agree with that you're addressing is that I've not put enough into a non-401k account for the time before 59.5. Your plan to load up an account is good. This came up for me and my wife because we were thinking we might flip a house every now and then. Then I realized, if I take a large amount of money out of a 401K, how much of that will be taxed at the higher tax bracket. My planning to date has been to live simple and stay in the 15% bracket. Now I'm faced with working to pound some more cash away (after tax) so I have more to work with for large, one time purchases. Anyway, thanks! You've helped me get a few steps ahead on my journey.

Thank you for the kind words. I'm always happy when something I do positively affects others.

And I've started to look into the 72t rule that others have suggested. And it looks like exactly what I was looking for. It should let me retire as soon as I have the funds no matter what account they are in.

I'm not sure how much it will help you if you really need to take out a big chunk of money all at once. But then again you could get a mortgage to buy the house you want to flip and use a required minimum distribution from a 72t to pay that mortgage until you flip the new house. Just a thought. You'd be paying 3 or 4% interest, but that's a lot better than taking a hit on the penalties.

I've switched from paying ahead on my mortgage to putting that money away in a brokerage account so I have more flexibility on large purchases as well. Even if I don't need it due to the 72t rule, I've run the numbers and I should still be about $12,000 dollars ahead anyway due to the difference between the investment return (assumed 6%) and my interest rate on my mortgage (2.875%).

Quote:

Originally Posted by nun Managing the sources of your income is important. Once the paycheck disappears and you have to create you own, this definitely become a lot more "real". But there are lots of ways to fund the years between ER and 59.5; taxable investments 401k withdrawals at 55 without penalty (if you qualify) 457 accounts (if you have one) 72t withdrawals ROTH withdrawals pension (if you have one) ...and the final 2 part time w*rk early IRA/401k withdrawals with penalties.

I'm already starting to beef up my taxable investment account.

And the 72t looks like just what the doctor ordered. Thanks!

Roth withdrawals of contributions is already factored into my spreadsheet.

But WORK? Ahhhh! That's one thing I plan to avoid.

Quote:

Originally Posted by Sunset +1 Some folks here don't seem to know about 72t rule, which will allow you to take money out of an IRA, without the penalty ! Sure it's complex so read up on it a lot first, but in reality it's only a little more complex than RMD's, which nearly everyone will have to do. It was something I considered, but we have enough outside $$$ And not that many years to the magic 59.5 that we don't need to use it.

I'm reading up on the 72t rule and I think it's just what I needed. Thanks to everyone who mentioned it!

Quote:

Originally Posted by Independent This all makes sense. The important thing is to monitor and update. My only suggestion is that I'd account for inflation from the current date, instead of from the retirement date, in column V of the second tab.

I'm not understanding. Column V on the second sheet is where the inflation assumption is used. If you look at each subsequent years numbers, they go up by the inflation percentage.

The budget will be updated as my current expenses change and just prior to retirement. So the expenses numbers at the beginning of retirement should already be inflation adjusted, as it were.

Or am I not seeing something correctly?

Quote:

Originally Posted by David1961 If that is how you arrived at the 6.5%, then you have already considered inflation into that number. In my opinion, a 6.5% after inflation return is much more optimistic than pessimistic, but would be interested in what others have to say. Bottom line is that you have a detailed spreadsheet with many assumptions and are experimenting with the numbers. You are on the right track!

Quote:

Originally Posted by nun Yes 6.5% assumes a 100% equity allocation and that the future will follow the statistics of the past. I also think that its too optimistic for planning.

I don't know, you may be right. 6.5% is inflation adjusted annualized return. I'm using 6% for the moment which I still think is slightly pessimistic. I'll probably leave it in there for now. I'm still 10 years out at least. But when I retire, I might bump it down a little more before I pull the trigger.

I'm running my equity distribution at 90% on FireCalc and it is giving me a 100% successful for my current plan.

[ERD50]

Quote:

Originally Posted by bobebob I don't have any children to be able to go to for support. If I have to cut back some it shouldn't be a big impact on my lifestyle at that point because it will likely be after I'm 85-90 and probably won't be as active then. ...

You may be less active, but does that mean you will spend less money?

My MIL is in that age bracket, she is not active and therefore needs a LOT of help. With family in the area, we are able to handle it pretty easily, grocery shopping, taking her here and there, other shopping, helping with bills and things that come in the mail that need attention, figuring out what button she pressed on the remote to explain why the 'TV isn't working'. And she lives in an assisted living place, but she still needs a lot of help.

I'm not sure what that would cost of there wasn't family around to do it, or if you could even find someone you could trust.

-ERD50

[nun]

Quote:

Originally Posted by bobebob I don't know, you may be right. 6.5% is inflation adjusted annualized return. I'm using 6% for the moment which I still think is slightly pessimistic. I'll probably leave it in there for now. I'm still 10 years out at least. But when I retire, I might bump it down a little more before I pull the trigger. I'm running my equity distribution at 90% on FireCalc and it is giving me a 100% successful for my current plan.

You need to think a lot more about risk and the ways you might fail rather than plugging numbers into software and believing the results. Starting retirement with 90% equities could be a disaster if it also coincides with a 30% drop in the stock market.

[jim584672]

I just wanted to add that many 401k plans permit penalty free withdrawals for those who are 55 or greater and separate from service. Another option to consider.

[Independent]

Quote:

Originally Posted by bobebob I'm not understanding. Column V on the second sheet is where the inflation assumption is used. If you look at each subsequent years numbers, they go up by the inflation percentage. The budget will be updated as my current expenses change and just prior to retirement. So the expenses numbers at the beginning of retirement should already be inflation adjusted, as it were. Or am I not seeing something correctly?

If I understand correctly, you are using this spreadsheet to determine if you are saving "enough" today to hit a target retirement date. (Or else, you figure today's saving rate is pretty much fixed, and you're trying to estimate your "reasonably safe" retirement date.)

Either way, I wouldn't assume that I'll earn investment returns that include an inflation component between now my retirement date, while also assuming that my expenses will not be impacted by inflation between now and then.

The formula in V10 is:

Quote:

='Retirement Planning'!$F$35*((1+'Retirement Planning'!$J$24)^(YEAR('Projected Retirement Drawdown'!C10)-YEAR('Projected Retirement Drawdown'!$C$10)))

I'd change the last term to YEAR('Retirement Planning'!$N$10)

(Actually, I think it's better to just back inflation out of the assumed investment return. That makes all the numbers on the spreadsheet "real" instead of "nominal", and it's easier for me to see patterns.

[bobebob]

Quote:

Originally Posted by ERD50 You may be less active, but does that mean you will spend less money? My MIL is in that age bracket, she is not active and therefore needs a LOT of help. With family in the area, we are able to handle it pretty easily, grocery shopping, taking her here and there, other shopping, helping with bills and things that come in the mail that need attention, figuring out what button she pressed on the remote to explain why the 'TV isn't working'. And she lives in an assisted living place, but she still needs a lot of help. I'm not sure what that would cost of there wasn't family around to do it, or if you could even find someone you could trust. -ERD50

I haven't set up the spreadsheet to take money from the HSA account as a last resort because I won't accept a plan that isn't projected to not run out of money at the end. As a result, even when my spreadsheet "runs out", there is a sizable chunk of change left in that one (between $250,00 - $500,000 depending on assumptions. One of my recent "scenarios" has me running out at age 97 with $450,000 left in the HSA.

If I'm lucky enough to make it to that age, hopefully that will tide me over until whoever takes over Willard Scott's job features me on the Today show.

Quote:

Originally Posted by nun You need to think a lot more about risk and the ways you might fail rather than plugging numbers into software and believing the results. Starting retirement with 90% equities could be a disaster if it also coincides with a 30% drop in the stock market.

The point is not to just "dwell" on risk and think about all the things that could go wrong. What I am attempting to do as I'm "plugging numbers into software" (AKA my spreadsheet) is to develop a detailed mathematical model that allows me to quantify all those risks.

I can change my assumptions to reflect what I consider to be the most likely outcomes and balance that with my tolerance to risk to determine when I think it would be best for me to start my retirement. I may be more comfortable with risk than some. I mean I do ride a motorcycle.

I also use FireCalc. (uh-oh, more software I'm plugging numbers into ) That software specifically is designed to give you an idea of how your investments would have fared under the best and worst historical market and inflation conditions. My current plan scores a 100%, so I think that I have considered ways I might fail and it probably isn't the worst thing I could do. Some of those scenarios in the results must have started with significant drops in the market.

I'm not sure what better methods of applying the contemplation of risk you might recommend. I don't think my magic 8-ball is as scientific, and Ouija boards scare me.

Quote:

Originally Posted by jim584672 I just wanted to add that many 401k plans permit penalty free withdrawals for those who are 55 or greater and separate from service. Another option to consider.

I checked into my company's plan yesterday. And it does allow the penalty free withdrawals once retired and over 55. So I can use that to bridge from 55 to 59.5 and use my Roth contributions and broker account to retire earlier than 55 (should the market over achieve in the next 10 years).

Thanks!

Quote:

Originally Posted by Independent If I understand correctly, you are using this spreadsheet to determine if you are saving "enough" today to hit a target retirement date. (Or else, you figure today's saving rate is pretty much fixed, and you're trying to estimate your "reasonably safe" retirement date.) Either way, I wouldn't assume that I'll earn investment returns that include an inflation component between now my retirement date, while also assuming that my expenses will not be impacted by inflation between now and then. The formula in V10 is: I'd change the last term to YEAR('Retirement Planning'!$N$10) (Actually, I think it's better to just back inflation out of the assumed investment return. That makes all the numbers on the spreadsheet "real" instead of "nominal", and it's easier for me to see patterns.

The second one. I already am saving what I consider to be a significant amount towards retirement and don't want to cut my expenses to pull in or make the date of retirement "firm". The actual date of retirement will depend on the account balances reaching what I consider to be a "safe" level.

I don't thing that the change would be as accurate for two reasons:
1. The budget I have for retirement is padded already and attempting to apply inflation to already padded numbers would get somewhat out of hand.
2. The whole accumulation phase is academic until I think I am ready to retire. At which time I will have updated the budget with accurate recent numbers and the application of inflation to the start of the drawdown is mute. The spreadsheet lets me predict when I might be able to retire, but it is set firmly in jello until all the numbers check out with updated budgeting data.

Inflation is already backed out of the assumed investment return. The S&P 500 100 year compound annual growth rate annualized without inflation included is 10%. So if you take off my 3.5% inflation assumption should be a net return of 6.5%, and my return for the accumulation phase is 6%.

[Jerry1]

bobebob,
I think you might want to check the tax calculation in your spreadsheet. Given the brackets in your spreadsheet, the results are too high. I think you're missing the personal exemption (which I don't see in your spreadsheet or the formula) and I think you're using the brackets incorrectly.

Here's how I calculate 2029's taxes:

Total income labeled taxable ($3,183 x 12) = $38,194
Subtract the personal exemption 4,000
Subtract the standard deduction 6,200
Equals Taxable income $27,994

Tax on the first $9,225 is 10% 923
Tax on the rest (($27,994-$9,225)*.15) 2815
Total Tax $3,738

Versus your spreadsheet of ($428 x 12) $5,140

Difference is $1,402. You can verify my calculation by going to the IRS table for a single person and see that with taxable income of $27,994, the tax is $3,743. The small difference is due to using your 2015 brackets and the IRS table I used is for 2014.

Unless I'm missing something, I think you'll like your numbers even better when you make that adjustment.

[pb4uski]

I'm traveling and on my tablet so I don't have access to the spreadsheet but if the $38,194 of income includes any LTCG or qualified dividends then the tax rate will be nil on those so they can be excluded from the TI used in the tax calculation shown above.

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