When is it safe to retire?

[kyounge1956]

Current age: going on 53
Inflation: all projections so far use 3.5%
No debt except mortgage.
Tax Deferred portfolio: currently about $65K, making maximum annual contribution + over-50 catchup
Roth IRA: about $20K, making maximum annual contribution + over-50 catchup

Pension: defined benefit. At age 57, $41445.48/year, at age 59 $47595/year. Guaranteed to maintain at least 65% of original purchasing power (For FIRECalc I used half the amount with COLA and half without to approximate the guarantee.)
Social Security: $1881/month at full retirement age (66 + 4 months)

Assumptions:
At retirement, sell house and add $100K of proceeds to nest egg.
Use the rest of the money to buy land and build a house. Live on pension and savings only for three years during house construction.
Work part time, earning at least $5000/year, from retirement +3 years until age 70.
I might well live to be 100.
Stay in Washington State

Expenses: bare minimum, $37480, (2008 dollars, before taxes)

the models I ran with Flexible Retirement Planner (online Monte Carlo simulation) say, >90% successful outcomes with $180K saved when I retire from my current job, with pension, part time income, and savings only. If I devote 1/4 of projected Social Security income to meeting bare minimum, I only need $67500 in savings (which I will certainly have unless the market tanks to such an extent that I lose every nickel I contribute for the next four years ) for a similar success rate, and still have some cushion left. FIRECalc says, with the same inputs (including the 1/4 of Social Security), 100% of the relevant time periods succeed. This sounds OK, but based on some other scenarios I ran, if I retire at age 57, I could get torpedoed by some sort of economic double whammy, for example a big market drop and inflation spike both at the same time. I'm definitely too timid to go before that?

I ran similar scenarios for age 59, and that survived everything I could think of to throw at it, the double whammy, couldn't find even a lousy $5k a year job, etc.

So on the one side there is the Monte Carlo model saying there's a slight chance that some economic "perfect storm" might wipe out my savings, but FIRECalc says they would have survived anything that actually has happened to the economy in the last hundred years or so. How did you decide when it was REALLY safe to retire? How do you decide if it's worth an extra 2 years of work to be "bombproof"? Or did you agree with the "Retirement Calculator From Hell" author's contention that anything over 80% is just gilding the lily anyway?

 

[Midpack]

How did you decide when it was REALLY safe to retire? How do you decide if it's worth an extra 2 years of work to be "bombproof"? Or did you agree with the "Retirement Calculator From Hell" author's contention that anything over 80% is just gilding the lily anyway?

You've done your homework (above), you've run various scenarios and you recognize that there will always be unknowns. From there, what is safe or "bombproof" for you is something only you can decide. It's your money and your life, you're the only one that will be impacted by the ultimate success or failure of your plan - none of us will be around or responsible. And you have to make the necessary adjustments along the way - no skin off our noses. Decide what you think is safe and allows you to sleep at night, have some cushion and/or contingency plans and be prepared to adjust along the way...there is no right answer. Your life has been unpredictable so far, and it will continue to be unpredictable in retirement. We're all in the same boat, best of luck...

 

[Rich_by_the_Bay]

William Bernstein, among others, have concluded that once you get to > 80% survival rate on your retirement plan, it is probably sufficient.

I interpret that to mean that at that level and above, the variables become very unpredictable and that most people will by instinct contract their expenses long before they let the portfolio get dangerously low. Throw in the pension you describe, and I don't think you need to split hairs. In you place, I'd go for it.

 

[W2R]

I agree completely with MidPack and Rich's comments are very apropos.

Also, I'd like to add that my father wasn't sure he could retire so he waited until he was 70. As he and my brother were literally moving the furniture and things out of his office for the last time, he went to the doctor for some test results or something and was told that he had terminal cancer. A little over a year later he was buried on a hillside, overlooking the ocean that he loved. He spent much of his final year in great pain and drugged to the gills, a skeleton of his former self. Some "retirement". I wish he had had time to enjoy a real retirement after working his whole life.

The point being that all of us are juggling two risks: the risk of retiring with the risk of not retiring. The risk of not retiring is small at your age of only 52-53. Is the risk of retiring greater than that, though? I don't know but it is something to think about.

 

[2B]

I agree completely with MidPack and Rich's comments are very apropos.

Also, I'd like to add that my father wasn't sure he could retire so he waited until he was 70. As he and my brother were literally moving the furniture and things out of his office for the last time, he went to the doctor for some test results or something and was told that he had terminal cancer. A little over a year later he was buried on a hillside, overlooking the ocean that he loved. He spent much of his final year in great pain and drugged to the gills, a skeleton of his former self. Some "retirement". I wish he had had time to enjoy a real retirement after working his whole life.

The point being that all of us are juggling two risks: the risk of retiring with the risk of not retiring. The risk of not retiring is small at your age of only 52-53. Is the risk of retiring greater than that, though? I don't know but it is something to think about.

True words of wisdom from W2R.

There is a tendency on this forum to plan for a top tier lifestyle until age 100+. Unfortunately, most of us will be in the ground before 80. I have tended to follow Bernicke (do search or use FIRECalc) that assumes my expenses will gradually fall as I age. I saw this in both my parents and in-laws so I'm pretty confident in the effect.

I also use a tiered living approach. I have enough in cash and very safe fixed income to live into my late 70's at a modest lifestyle. Equity gains will give me extras like traveling, new cars and gifts.

We all have to buy our own ticket and take our chances.

 

[hankster]

I'm planning for two extreme scenarios in our retirement years. Best case: The economy is stable and investment returns allow a 4% SWR adjusted for inflation yearly. In this case, we cover normal expenses plus we have plenty of play money left over to do a bit of traveling and have a few toys.

Worst case: Economic problems and/or inflation come along to rain on our parade. This means that we fall back to a more frugal lifestyle that I call "heat and eat". We stay home, do some gardening and read library books. It's not what we would prefer, but it sure beats w*rking. I'll call it a career when DW and I decide we can be happy in retirement living the "heat and eat" lifestyle.

 

[Midpack]

William Bernstein, among others, have concluded that once you get to > 80% survival rate on your retirement plan, it is probably sufficient.

I interpret that to mean that at that level and above, the variables become very unpredictable and that most people will by instinct contract their expenses long before they let the portfolio get dangerously low. Throw in the pension you describe, and I don't think you need to split hairs. In you place, I'd go for it.

I may well be wrong, but that's not what I concluded from Dr Bernstein's Retirement Calculator from Hell series at all. In fact just the opposite unless you have some serious padding and/or contingency plans built into your plan. In other words, because of uncertainties outside of investment risk, you might want to shoot for a high probability - but you have to understand that number only represents the investment risk assuming a stable political, economic and military environment, which is historically not a given. I've highlighted sections from Part III of the series:

"Realize that these probabilities are merely an imperfect estimate of the investment risk you are taking. In other words, they assume the continuity of financial and political institutions over the period studied. Consider the implications of the above 97% success rate at a withdrawal of $2,500 per month ($30,000 per year). For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics).

Let’s examine a small sampling of possible political, economic, and military failure modes:

·The mildest scenario is that of catastrophic inflation, as experienced in Germany and Hungary in the 1920s or, more recently, in much of the developing world.
·Political failures are slightly worse, since these threaten the basic human motivation to work and produce. The state, for whatever reason, can decide to confiscate your assets or, worse, society’s means of production. Anyone who judges this unlikely should turn on CNN during any G-8 or WTO conference.
·Local military action. Probably the lowest-probability item on this list, but something to think about on other continents.
·The Big One: Some deranged prime minister or colonel in central Russia, Pyongyang, or South Asia could let loose the four horsemen upon the planet.

So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).
A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.
Now, let’s return to the above table. The historically naïve investor (or academic) might consider reducing his monthly withdrawals to a very low level to maximize his chances of success. But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning.

Mind you, this is not a call for wild abandon. The above table constrains the retiree desiring a theoretical 97% success rate (of portfolio survival) from spending more than 3% per year of the initial real amount of his nest egg. Taking the accident propensity of the species into account would allow him to spend about 4%. But if you believe that we’re about to encounter a bad returns sequence or simply wish to leave a few baubles to your heirs, you’re right back to 3% again.

[FONT=&quot]So live a little, and enjoy your money, for tomorrow we may be consumed by the ghosts of Hitler, Lenin, and Attila the Hun. And at withdrawals of 3% to 4% of your nest egg, don’t spend it all in one place."[/FONT]

 

[Eagle43]

Also, I'd like to add that my father wasn't sure he could retire so he waited until he was 70. As he and my brother were literally moving the furniture and things out of his office for the last time, he went to the doctor for some test results or something and was told that he had terminal cancer. A little over a year later he was buried on a hillside, overlooking the ocean that he loved. He spent much of his final year in great pain and drugged to the gills, a skeleton of his former self. Some "retirement". I wish he had had time to enjoy a real retirement after working his whole life.

Quite True. My Father worked all his life. Retired at 65. 2 1/2 years later his heart attack ended his retirement. At approx 1 pm he laid down, not feeling well, and by 4 pm he was pronounced dead.

Here's the rule. If you are not absolutely happy working, (some people are), and if you have done your financial homework as best you can, then follow the Nike plan. "Just do it."

 

[fisherman]

Seems we have similar situations that impacted us. My father unsure that he had enough to retire worked till he was 62 plus and he did the last ten years at a government job to get the pension. My Mom had been a teacher and covered the insurance. He got sick about six months after he retired with a heart condition. He died a year and a half from his retirement date and was too sick the last year to do anything. I was fortunately able to help take care of him and their home that last year. That was fifteen years ago. My Mom is no eighty and doing well.

After my father died I went through the family history he had been working on and found that no male in my family had lived to be over 67 in the last 150 years! Needless to say DW and I cemented our plan to retire early by 45 if possible or at least cut back.

By working two jobs each and starting our own business as well as some luck in the market we made it and the time we now have with our family and parents is priceless!

Firecalc says we are good and the pensions kick in at 55 or later if we defer so time will tell if it was a good decision but this year says it was on paper and in the hearts of our family!

 

[Grep]

The "Retirement Calculator from Hell" point, that our retirement projections depend on the stability of our world (stability that is not necessarily such a good gamble), makes a good case. It is true that the world could end at the push of a button, etc.

However, my sense is that personal calamity such as debilitating illness and accidental death, etc., looms as larger threats in our minds; half of us will die earlier than the median. If we plan for living to 100 at 99% success predictions, we will inevitably work longer and enjoy our remaining lives less - lives that may in any event be far shorter and more painful than we hope.

Therefore, while striving for 99% success at age 100 is overkill from the standpoint of the "Hell" scenario, it's also ridiculous in the face of the fact that, for reasons of purely-personal calamity (e.g., early death from walking under a falling piano) we have a ~99% chance of dying earlier than 100.

I'd recommend keeping things in perspective. Strive for a high success ratio out to age 85 or something like that. If, along the way, things go down-hill, you will have time to make adjustments. The odds that you will wind up in the streets, cold and starving and staring at your last penny in your hand, at age 99, are very, very low.

 

[Midpack]

I'd recommend keeping things in perspective. Strive for a high success ratio out to age 85 or something like that. If, along the way, things go down-hill, you will have time to make adjustments. The odds that you will wind up in the streets, cold and starving and staring at your last penny in your hand, at age 99, are very, very low.

I agree wholeheartedly. There is the danger of overly cautious assumptions (ie, low returns, high inflation, excessive longevity, overly pessimistic SS/Medicare outlook, etc.) leading to (far) too much of a safety factor. Assuming an average projected age like 76 or whatever it is today (which is a 50% probability to start with) and 80% probability it probably not wise. Assuming a maximum projected age like 100 and 98% probability is probably equally unwise. Each of us has to settle on what we are comfortable with, and your suggestion is clearly better than either extreme...

 

[growing_older]

While I see some risk in your portfolio and savings, plus we may have recently lived through an example of historic risk where institutions and markets fail (fortunately averted at still to be determined cost), it looks like your major retirement asset and therefor largest retirement risk is your pension. How confident are you in receiving this pension as described? Should it fail, what is the guarantee (PBGC?) behind it?

I have lived through periods of very low income and times when higher income was suddenly replaced by lower income. If you feel confident in your ability to adjust lifestyle if needed, then you have an ability that the calculators generally do not account for. All in all, your plan sounds reasonable to me.

 

[hakuna matata]

First off I would like to thank all of you fine people on this board. This board is very refreshing for me as I feel I have finally found people with similar outlooks on life and retirement as me. It is a bit frustrating here in my day to day life as most of the people my age seem to have nothing saved for retirement and thus I can't really discuss my concerns with anyone (besides my wife!) here in my day to day life.

This thread was very helpful in that I struggle with the same issues as all of you folks. I kept doing the scenarios of 99% safe rates, etc and that seemed way too extreme but I also didn't want to settle on some scenario of only living to 80 or something.

I finally settled on something that for me and my wife seemed reasonable and very likely based on our lifestyles and the relative health risks within our families. I probably can reduce my level of success rate but since our ER depends partly on the pension from my wifes job which kicks in at age 55 I don't see the need. I mean "I" could retire today and still have a good success rate--but I am quite certain that won't fly with the wife.

But I enjoy my job and 55 is not that far away. Just wanted to let you all know that sometimes you write something on a message board and you might not realize the impact it truly does have for someone. It is very comforting to me to know that there are like minded people as me out there. And threads such as this one do help cut through the crap and give another perspective on issues. Thanks again!

 

[mexmeme]

Quite True. My Father worked all his life. Retired at 65. 2 1/2 years later his heart attack ended his retirement. At approx 1 pm he laid down, not feeling well, and by 4 pm he was pronounced dead.

Here's the rule. If you are not absolutely happy working, (some people are), and if you have done your financial homework as best you can, then follow the Nike plan. "Just do it."

My father had to retire at 60 with heart trouble. He was frail for 10 years and had a terrible retirement with years of hospital stays. My mother was in a nursing home for 5 years and died with alzeimers, so forgive me, but if given a choice, I'd take your father's demise.

 

[FIYes]

W2R really expressed what I was thinking when read the first post in this thread. Safety is not just how safe will our retirement income be---but also what are the chances of having both the longevity and health to enjoy. That is very personal decision. If retiring a couple of years early means sleepless nights worrying that portfolio won't make it---then it is not worth it. However, for me health and the years that I have left are also big factors. For me I know a couple of extra years working would make a difference in my finances---but those are years I will never get back. I am very fortunate that I still like my job, but I want the chance to try other things, so I plan to retire before retirement means sitting around the house planning my next doctor's appointments.

 

[Finance Dave]

I agree with others that you appear to be in good shape and doing the right things. I deal with the uncertainty you're fighting with by separating my retirement needs into two buckets. One is bare necessities, and one is niceties. At the end of each year I plan to evaluate my nestegg. If it's below target, we will cut back or eliminate the niceties the following year. That may mean going on one small vacation rather than two luxurious ones, but it also protects us from running out of money.

Good luck.

Dave

 

[kyounge1956]

... a more frugal lifestyle that I call "heat and eat"....

I like your description better than "barebones budget" which is what I've been calling the no-frills lifestyle level to myself. Actually, mine is heat, eat & treat, because it includes my health & LTC insurance premiums too.

 

[kyounge1956]

While I see some risk in your portfolio and savings, plus we may have recently lived through an example of historic risk where institutions and markets fail (fortunately averted at still to be determined cost), it looks like your major retirement asset and therefor largest retirement risk is your pension. How confident are you in receiving this pension as described? Should it fail, what is the guarantee (PBGC?) behind it?

You are correct that my pension is my biggest retirement asset. The pension system is AFAIK operated by the City, and I don't know what happens if it goes bust, whether it is covered by PBCG or not. That's one reason I wanted to leave SS out of the equation. I want to be pretty conservative in my assumptions but I thought it safe to assume that at least one out of the two (pension & SS) will perform as advertised, and plan to have enough to get by with just one of my main income sources.

 

[Canadian Grunt]

I may well be wrong, but that's not what I concluded from Dr Bernstein's Retirement Calculator from Hell series at all. In fact just the opposite unless you have some serious padding and/or contingency plans built into your plan. In other words, because of uncertainties outside of investment risk, you might want to shoot for a high probability - but you have to understand that number only represents the investment risk assuming a stable political, economic and military environment, which is historically not a given. I've highlighted sections from Part III of the series:

To add further insight to the equation:


What Bernstein is trying to get across is that instability in the financial markets accounts for 20% of a models equation and this portion cannot be determined with any accuracy. So seeking predictability from a model beyond 80% is a waste of time.

This doesn't mean after 80% you have it made, just that anything further falls into the unpredictable area statistically since the future stability of financial systems can not be known. All you would be doing is depriving yourself in the present for an uncertain future.

This is why SS, bonds, annuities, defined benefit pensions are all part of a healthy portfolio once a person crosses age 62 as it stabilizes the unpredictability quotient of a financial model.

 

[Canadian Grunt]

Current age: going on 53
Inflation: all projections so far use 3.5%
No debt except mortgage.
Tax Deferred portfolio: currently about $65K, making maximum annual contribution + over-50 catchup
Roth IRA: about $20K, making maximum annual contribution + over-50 catchup

Pension: defined benefit. At age 57, $41445.48/year, at age 59 $47595/year. Guaranteed to maintain at least 65% of original purchasing power (For FIRECalc I used half the amount with COLA and half without to approximate the guarantee.)
Social Security: $1881/month at full retirement age (66 + 4 months)

Assumptions:
At retirement, sell house and add $100K of proceeds to nest egg.
Use the rest of the money to buy land and build a house. Live on pension and savings only for three years during house construction.
Work part time, earning at least $5000/year, from retirement +3 years until age 70.
I might well live to be 100.
Stay in Washington State

Expenses: bare minimum, $37480, (2008 dollars, before taxes)

the models I ran with Flexible Retirement Planner (online Monte Carlo simulation) say, >90% successful outcomes with $180K saved when I retire from my current job, with pension, part time income, and savings only. If I devote 1/4 of projected Social Security income to meeting bare minimum, I only need $67500 in savings (which I will certainly have unless the market tanks to such an extent that I lose every nickel I contribute for the next four years ) for a similar success rate, and still have some cushion left. FIRECalc says, with the same inputs (including the 1/4 of Social Security), 100% of the relevant time periods succeed. This sounds OK, but based on some other scenarios I ran, if I retire at age 57, I could get torpedoed by some sort of economic double whammy, for example a big market drop and inflation spike both at the same time. I'm definitely too timid to go before that?

I ran similar scenarios for age 59, and that survived everything I could think of to throw at it, the double whammy, couldn't find even a lousy $5k a year job, etc.

So on the one side there is the Monte Carlo model saying there's a slight chance that some economic "perfect storm" might wipe out my savings, but FIRECalc says they would have survived anything that actually has happened to the economy in the last hundred years or so. How did you decide when it was REALLY safe to retire? How do you decide if it's worth an extra 2 years of work to be "bombproof"? Or did you agree with the "Retirement Calculator From Hell" author's contention that anything over 80% is just gilding the lily anyway?

I assume your numbers include your mortgage. Your retirement date essentially depends on the standard of lifestyle you want. If you retire at 57 and sell your house and move into a less expensive house without a mortgage would you be able to live at the standard you want?

Run the numbers, you should be fine at either age with some living adjustments. I would keep some money in the bank for emergencies so it might not be wise to deplete savings all the way.

I intend to use 85 for my age limit as I have a pension. It’s a good bet your expenses will be covered by your pension, SS, and Medicare afterward no matter what the stability of the financial world. If the government collapses then all bets are off but so would be any benefits from working longer.

As you already stated you have the option of part time work to supplement income from your retirement date to age 70 if you wish.

 

[kyounge1956]

I assume your numbers include your mortgage. Your retirement date essentially depends on the standard of lifestyle you want. If you retire at 57 and sell your house and move into a less expensive house without a mortgage would you be able to live at the standard you want?

The numbers assume no mortgage. I plan to sell the house I live in now, move somewhere less expensive, and pay in full for my next house. The numbers above are for the "heat & eat" plan, with most of projected Social Security income left out of the equation to provide an ample cushion for the niceties of life. So yes, unless I have made a drastically wrong assumption or misplaced a decimal point somewhere, this should allow an acceptable living standard, except in the case of an "all bets are off" event.

Run the numbers, you should be fine at either age with some living adjustments. I would keep some money in the bank for emergencies so it might not be wise to deplete savings all the way.

I've run them on FIRECalc and an online Monte Carlo simulator. Have folks here used another method to get some additional reassurance? I'm a bit of a Nervous Nellie about this as you have probably guessed by now.

I intend to use 85 for my age limit as I have a pension.

I have used 100 for life expectancy because I come from a long-lived family. Both parents and my mother's two sisters are still living in their mid-80's, and maternal grandmother lived to 84. For me anyway, using a life expectancy in the mid 80's is cutting it way too close for comfort. I'd rather be provided for until 100 and only live to be 90 or 95, than the other way around. Of course, if I did plan only to the mid-80's, maybe I'd worry myself into an early grave with concerns about what to do if I outlive my money. Problem solved!

It’s a good bet your expenses will be covered by your pension, SS, and Medicare afterward no matter what the stability of the financial world. If the government collapses then all bets are off but so would be any benefits from working longer

Please explain more about how you see this. I keep hearing statements (on the news etc) like "if we don't do something, Social Security will be in the red by 2040", or "in 20XX the commitments of Medicare will exceed the entire projected tax revenue of the country", or "by 20XX there will be only two people paying into Social Security for each retiree drawing benefits". I assume the longer I live, the less likely SS, Medicare and so on, will provide as much as they do now.

 

[Canadian Grunt]

I am making an assumption that from 85 onward your entertainment costs would be minimal but health costs may eat up your pension and then some. Medicare and Medicaid should cover you for health issues.

Your pension, SS, and house equity after 85 should cover your basic wants and plenty more.

My grandfather is 90 and still lives in a house by himself. His needs are minimal...a newspaper, crossword puzzle, TV, a place to walk, food, a few other small things, but he has no desire for anything expensive at this point of life. He has no wish to redecorate, drive anywhere...etc.

At old age the only issues that become predominant are food, medical care, shelter, and comfort.

 

[Rich_by_the_Bay]

I am making an assumption that from 85 onward your entertainment costs would be minimal but health costs may eat up your pension and then some. Medicare and Medicaid should cover you for health issues.

Medicaid? Not unless you are impoverished, virtually all assets included. Still plenty of out-of-pocket expense even at that point, alas.

 

[2B]

Retirement, like life, is never completely safe. All we can do is do a reasonable balance of risk against our perceived value of retirement. There are many ways to do this.

One popular on the forum is to live or <3% of assets with COLA'd pensions and/or annuities so that FIRECalc shows a 100% SWR.

Another is to go out real early expecting to live on market gains that allow a 10% SWR over the course of their life expectancy.

It really becomes a personal decision. How lucky do you feel? How disappointed will you become watching your assets melt away so that you have to cut back your lifestyle?

 

[ziggy29]

Retirement, like life, is never completely safe. All we can do is do a reasonable balance of risk against our perceived value of retirement. There are many ways to do this.

One popular on the forum is to live or <3% of assets with COLA'd pensions and/or annuities so that FIRECalc shows a 100% SWR.

Another is to go out real early expecting to live on market gains that allow a 10% SWR over the course of their life expectancy.

Another may be to take up skydiving and start smoking and drinking very heavily in order to reduce the chance of outliving your money...