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WSJ: Retirement Planning assumptions too optimisic
Old 06-19-2011, 10:58 AM   #1
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WSJ: Retirement Planning assumptions too optimisic

Interesting article in the Wall Street Journal about planning assumptions for retirement. They suggest that salaries do not rise evenly throughout a career and planning rarely accounts for this.

Rosy Assumptions Could Wreck Your Retirement - WSJ.com

I do also note that although the date published is today, it references an example of someone working at Digital Equipment Corp, which ceased to exist 13 years ago, so I am unclear how current this info is.
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Old 06-19-2011, 11:23 AM   #2
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My read is that Ms. Fullerton's DEC job ceased to exist at least 13 years ago too, leading her to make a leap to the financial planning career she has today. Sounds like her pay has just caught up with her old DEC job, too.

Quote:
IRS filings for pension plans show that a decade ago, large employers assumed steep drops in the rate of salary growth as employees aged. Boeing Co., Hershey Co., Sears Holdings Corp. and Xerox Corp., for example, assumed salaries for a 25-year-old would increase by 7% to 13% a year, but that the rate of increase would fall steadily thereafter, generally reaching the 3% range by age 50. With inflation, this means that salaries remain flat in one's final decade or two on the job.
Ironically it sounds as if the company actuaries got it right.

When we did our retirement planning for our military pay, we assumed that promotions would stop at O-4. (That promotion happens about 9-10 years into a 20-year career, but the assumption turned out to be prescient.) The real problem was predicting if/when we'd be getting specialty pays like sea pay, sub pay, and bonus money. The "safe" assumption was that you wouldn't get any of that stuff, and in real life when you did get it you learned to invest it instead of spending it. That turned out pretty well, too.

Do you civilian Young Dreamers assume pay raises in your ER planning? Or do you just assume that it's flat over the next 10-20 years?
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Old 06-19-2011, 11:49 AM   #3
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The article does provide good planning info as I saw many older co-workers fall into the scenarios described. I had a good finance professor in college that actually provided advice like this and on the time value of money, IE. earn it early and invest it. We took his advice and it worked out well for us though perhaps we went to an extreme.

DW and I both graduated college at 22 and enter professional careers. We realized early the time value of money and chose to not only work our career jobs but to have a business or two on the side. The goal was to always have a high income and live off of one salary and save the rest. We did this for twenty years. Toward the end of that period we started to back off the outside work work some. We assumed our pay raises would be minimal and just did more in our side businesses to cover. We both did well in our career and had good raises throughout thankfully but we did not plan for that.

In essence we sacrificed our twenties and most of our thirties in regards to what our peers where doing on the weekends and after work. Now we are both work a few hours a week in our business and traveling when school is out while our peers are tolling away. It worked for us but it was a gamble and I have struggled to recommend that other young friends follow to such an extreme.
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Old 06-19-2011, 12:18 PM   #4
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In 2005, my DH worked at a remote field site for a Fortune 500 company. At that time we were estimating his pension with pay increases of 3%/year until he retired at age 55. There was no room to advance at the field site unless someone died or retired and even then it was iffy (too many people wanting the same job/promotion).

In the late fall of 2005 (at age 49), he had the opportunity to relocate with the company (at their expense) and take a promotion. Eighteen months later he got another promotion. From 2005 to now, his pay has increased by 92% (not only due to the promotion, but also because the pay scales were higher in the new location due to a HCOLA). He is already doing the job of a director (he manages three departments and reports directly to the VP), but will never see the promotion or salary increase due to the crappy economy.

As a matter of fact, his company is planning to lay off hundreds of workers in his labor grade (manager level) before the end of the year because they have way too many managers who don't manage anything/anyone. I can tell you that there are more than just a few people who are not sleeping well right now. Even though many are over 55 and qualify to collect a pension/ retirement benefits, most assumed that they would be able to continue saving for retirement for another 10 years. They know that in this economic environment they will not be able to get a job that pays nearly as well.

Because DH is really doing a director's job for a manager's pay, he is not too concerned about getting a pink slip. He plans to FIRE in the first quarter of next year after he turns 55 in January so that he can draw from his 401k without penalty, collect his pension, and receive the little bit of help that they give toward retiree medical.
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Old 06-19-2011, 03:25 PM   #5
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In essence we sacrificed our twenties and most of our thirties in regards to what our peers where doing on the weekends and after work. Now we are both work a few hours a week in our business and traveling when school is out while our peers are tolling away. It worked for us but it was a gamble and I have struggled to recommend that other young friends follow to such an extreme.
I respect your perseverance and focus. However many people, including me, would not be happy with this bargain. From your post I know that you know this too.

Ha
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Old 06-19-2011, 09:27 PM   #6
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My projections assume my salary will keep pace with inflation. I have decided not to pursue further advancement up the corporate ladder. I don't want the hours or the stress that comes with being responsible for others (doing stupid things...).

I also assume I am not a good investor and that my assets will barely beat inflation during accumulation.

It'd be great if both assumptions are wrong, but even so, they act as a hedge against other risks I might not anticipate.
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Old 06-20-2011, 04:52 AM   #7
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I respect your perseverance and focus. However many people, including me, would not be happy with this bargain. From your post I know that you know this too.

Ha
It probably depends on what one means by sacrifice!

To us it meant to work hard, control the discretionary spending (save and invest instead). But we did not sacrifice youthful fun, wants, or needs.... just exercised some financial discipline.
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Old 06-20-2011, 03:51 PM   #8
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Do you civilian Young Dreamers assume pay raises in your ER planning? Or do you just assume that it's flat over the next 10-20 years?
When I quit a job about 10 years ago, I assumed that job would be my three high years for the pension system. Later, I got my current job under the same pension system (different employer, lower pay), and figured I was still correct in my planning five years later. We have defined pay scales, so you can plan out your raises relatively easily.

About three years ago, HR did a job survey which gave me a new title at a higher pay level. At the end of this year, I will exceed my previously high three by $1,000/month, which helps greatly toward retiring at age 60, in less than three years. While there will be small raises during my last years, none will exceed the benefit due to reaching a new high three.
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Old 06-20-2011, 04:17 PM   #9
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Do you civilian Young Dreamers assume pay raises in your ER planning? Or do you just assume that it's flat over the next 10-20 years?
No. Flat in real terms although less than 10 years until I'm out - I assume salary increases commensurate with general inflation. I will probably get one more promotion before FIRE, but I don't plan for an increase. It probably won't make a difference to my timeline anyway.

Earlier in my career I would have assumed salary increases based on my industry and my level of ambition at the time.
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Old 06-20-2011, 07:42 PM   #10
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Do you civilian Young Dreamers assume pay raises in your ER planning? Or do you just assume that it's flat over the next 10-20 years?
I assume it is flat, though I often worry that that is too optimistic given my tendency to want to go do startups (often not particularly well paid activity).
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Old 06-20-2011, 11:03 PM   #11
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I assumed raises for CPI inflation only, and budgeted our spending for the same. We did a little better in raises than that over our last 5 years before retirement and just added it to retirement savings. This has the side benefit of keeping your retirement spending slightly lower assuming you want to match you last w*rking year spending during retirement.
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