Interesting read- had not seen this set of calculations before:
Retirement planning: Are you on track? Here's how to tell. - CSMonitor.com
Retirement planning: Are you on track? Here's how to tell. - CSMonitor.com
Retirement Savings: What's your RAM
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nvestysly
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Thanks for the link. Seems interesting but even this approach doesn't address one of the key issues... how much do you spend and what do you spend it on? I dislike the idea of referring to salary as a measure of how much "you need." Maybe I missed something in the article but it seems salary is used as a tool to determine how much you need in retirement. I realize most people think this way but IMO they are missing the real issue.
I'll have to study the math a bit more but I think it's more complex than 4% (.04) and its inverse 1/.04 = 25. I've used this a way to get others to understand how much they will need compared to their expenses. The inverse of withdrawal rate is the factor of 33 (1/.03), or factor of 25 (1/.04) or factor of 20 (1/.05), etc. The article takes a little different approach... I may be missing something or perhaps the article baffled me with their "new" math!
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Their approach is too complicated. The planning is simple.
A. How much are you going to spend in retirement? The easiest way to know is to track your actual spending now and identify what will change after you pull the plug. Why people can't track their spending is beyond me.
B. What income will you have from pensions and social security after you retire?
C. What is the gap you need to fill? Here's a little math. A - B=C
D. Use the 4% rule. C x 25=D. This is your required nest egg.
E. How long do you have left until you need to have D in hand?
To avoid any more math, use a savings calculator, like this >> Bankrate.com savings goal calculator -- Saving for the future to tell you what you need to do from this point forward (since you can't change the past).
Done.
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nvestysly
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I agree. Your points are much more akin to how I approach the issue of how much do you need.
As others pointed out - it equates ending salary with retirement spending. No bueno.
My last couple of years we were spending about 40% of our gross income (including taxes) - the rest was going to saving and to pay off the mortgage. We're still spending that amount. Salary was much higher than the amount we need to draw from the portfolio.
My last couple of years we were spending about 40% of our gross income (including taxes) - the rest was going to saving and to pay off the mortgage. We're still spending that amount. Salary was much higher than the amount we need to draw from the portfolio.
jkern
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Yep, too much math here for too little value.
DrRoy
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It was based on pre RE income rather than RE income, but basically that was one of the main concepts. Of course it is more complex than just that.
Taxman59
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The problem I have with these simple multipliers is that I had a good salary and our spending (not including taxes) was about 50%, but I am supposed to have 7 times my gross. If you factor in the mortgage (almost paid off) and charity (reduced a bit), my spend rate is less than 40%, but I need 7+ times my gross?!?!
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MrNickel
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One of my fears of retirement years is not understanding the market like I currently do. I'd imagine this article would scare the...out of me. I suppose you sell more advertising space with fear.
Only three ways to get to other side of that hill: climb up, go around or dig through. I won't pretend it's not there.
Only three ways to get to other side of that hill: climb up, go around or dig through. I won't pretend it's not there.
GTFan
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I really don't get the stupidity of using salary in these articles to determine how much you'll need in retirement, but you see it all the time. Your final salary (or multiples thereof) have nothing to do with living expenses over time, so salary has nothing to do with what you need to save for your personal safe withdrawal rate.
The ones that always killed me were the 'you need X% of your salary per year' to retire comfortably (usually around 80%). Um, no. That has to be one of the dumbest blanket statements that I've seen, over and over again.
The ones that always killed me were the 'you need X% of your salary per year' to retire comfortably (usually around 80%). Um, no. That has to be one of the dumbest blanket statements that I've seen, over and over again.
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RobbieB
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If you believe all the "doom and gloom" articles re the dismal state of American's retirement readiness, at least it is a "point of reference" to sort of "kick start" them perhaps?
I dunno. But if it at least "whaps em upside the head" it's a good thing.
I dunno. But if it at least "whaps em upside the head" it's a good thing.
Turn_the_Page
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What Gumby said!
Just had this conversation and back-of-the-envelope calcs with a co-worker. He's plenty bright, but a long history of poor personal finance decision.
Just had this conversation and back-of-the-envelope calcs with a co-worker. He's plenty bright, but a long history of poor personal finance decision.
Senator
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To me, 10% over, is not really safe. There are far too many variables that could affect you more than $8K annually. That's only $666 per month extra. A rounding error.
If you could my rental equity, I have a RAM of ~38. Just counting liquid assets, I have ~19.
I determined my budget, and basically doubled it to get those numbers. So the true RAM survival rate, based on actual spending, is MUCH higher.
GravitySucks
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FIDO rep came and did a retirement presentation before I left megacorp and brought up the 80% rule. (Along with the Expense x 25 rule.) His take on it in a private conversation was he uses 80% of earnings minus Social Security taxes, minus 401K and other retirement or non earmarked savings, minus extra mortgage / other loan pre payments.
He also said that honestly he's just trying to get folks to at least get to the 401k company match. Since 95% of the people he addresses are saving hardly anything and don't really track their expenses the 80% works for them.
ButButBut.... If the math is so easy, why is this so hard to do? You're never going to get any clicks this way!
One weird trick bloggers don't want you to know to get ad revenue!
My thought was the same as the FIDO rep in GravitySucks' note - most people don't track their actual expenses very well, so if an article starts with that premise, most people won't be able to relate to the article. The 80% number isn't precise, but it allows anyone reading the article to do a rough calculation of their readiness. I was always a diligent saver, but didn't track expenses carefully till I started reading this forum.
The internet exploded when the financial adviser revealed this secret technique!
Every one of those articles I read oversimplifies things, as stated in this thread, and salary = expenses is just stupid.
Now factor in us FIREs. First of all, salary minus SAVINGS and some taxes might equal current expenses, but really, do you think we get to FIRE by spending all of our savings!!??
Then comes the "withdraw should be expenses minus SS/pensions." I don't know many people who FIRE who take SS as soon as they retire. I'm certainly not. Not for a long time, but when SS comes, it is significant (my wife and I have both long megacorp careers) so that really "frontloads" the portfolio withdrawls. Then there is the gap from retirement to Medicare, etc. etc.
I don't know why I even bother clicking on those links thinking that I am going to find some secret wisdom that I don't already know.....
Now factor in us FIREs. First of all, salary minus SAVINGS and some taxes might equal current expenses, but really, do you think we get to FIRE by spending all of our savings!!??
Then comes the "withdraw should be expenses minus SS/pensions." I don't know many people who FIRE who take SS as soon as they retire. I'm certainly not. Not for a long time, but when SS comes, it is significant (my wife and I have both long megacorp careers) so that really "frontloads" the portfolio withdrawls. Then there is the gap from retirement to Medicare, etc. etc.
I don't know why I even bother clicking on those links thinking that I am going to find some secret wisdom that I don't already know.....
GTFan
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Yeah anything salary-related for FIRE is going to look stupid to us because most of us saved heavily to get to FIRE. Therefore, salary was irrelevant to what we needed to have per year for retirement.
But as mentioned above, these advisers oversimplify way too much with the 80% rule because people don't want to do the trivial task of using a budget to track expenses.
Well except for the author of this article, who uses salary for way-too-complex thinking that pretty much no one will adopt as a method to use. The masses aren't and we aren't.
But as mentioned above, these advisers oversimplify way too much with the 80% rule because people don't want to do the trivial task of using a budget to track expenses.
Well except for the author of this article, who uses salary for way-too-complex thinking that pretty much no one will adopt as a method to use. The masses aren't and we aren't.
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