What will it take to FIRE?

[axtec]

I'm fairly new here, and I've read through some of the posts from the 'Young Dreamers'. I'm wondering what it would take for me to be able to retire at 55 (earlier would be more fun...). I'm almost 33 now, so that gives me 22 years. Here's the relevant information:

Age: 32
401k/Roth value: $30,000 (I know, way too little for my age )
Asset Allocation: 95% stock, 5% bonds
Savings/year: $15,000 (maybe I can increase this in future years)
Pension: Yes, but there are so many assumptions here, I'm not sure I should include it (years of service, salary, etc). Age 65 is considered the normal age for the pension, but 55 is the earliest with a significant reduction.
Social Security: Not looking likely...
Health Insurance: If I stay with my employer until retirement, I will have continuing coverage at going rates.
Debt: Mortgage (28 years left)
Emergency Fund: 1 year's expenses

Some basic calculations assuming 6% return (too high?) put the value of investments at age 55 at $862,000. I know it's a lot to ask with minimal information, but is retirement even possible with these numbers and historic inflation rates? Help me understand what assumptions I'm making that are wrong, or what I'm leaving out. Where do I need to adjust course?

Thanks for your comments!

 

[Rambler]

What are your current and future estimated expenses? With a port of that size, your max starting withdrawl would be $34,480, assuming no pension or SS or healthcare from employer. Can you live on that? I can't answer for you, but with our current spending profile, DW and I could not make it on that amount.

R

 

[axtec]

I don't think so. At least not without some lifestyle adjustment. Is that with a 4% withdrawal rate? I need to spend some time figuring out how to use the FIRECalc.

 

[FIREd]

The 6% return you are using, is it a real rate of return (return adjusted for inflation) or is it a nominal return (return unadjusted for inflation)?

If this is a nominal return, then in 22 years your $862,000 will be equivalent to about $450,000 in 2009 dollars (assuming 3% inflation) and you would only be able withdraw $18,000 a year (in 2009 $$$). Could you live on $18,000 a year right now?

Also you said how much you saved per year, but you did not say how much you made... Many people around here save 20-50% of their gross income.

 

[DayDreaming]

The fact that you're thinking about this at age 32 is a great start. (I was well into my 40's by the time I gave ER serious thought).

Regarding the pension: I think you should include the present value in your calculations, but don't assume you'll be at the same job forever, so don't try to figure out what the pension would be if you worked there until 55. Between now and then, you may end up with a different employer where there is no pension plan. Or your current employer might drop their pension plan someday and your pension value would be frozen at that point. Hopefully your current pension plan has an online calculator where you can plug in numbers like: stop working at age 32, start collecting pension at age 55 - that would be the number I'd use in my calculations - adjusted every year that I remain there of course.

Besides the obvious advice of save more / spend less, start keeping track of every cent you spend, if you don't do that already. I only started doing that a few years ago and was surprised at how much I sent on certain things. Knowing exactly how much money you spend each year is critical to coming up with a realistic retirement plan.

 

[W2R]

The sad truth is that retirement is harder than it used to be. So that is what you have to deal with, and you can't change that fact. You can still retire but it is going to take some effort.

If you can contribute the maximum to your 401K, and then save 1/3 of your take-home pay after that, I think you will be able to make it in 22 years without a pension or SS. If you can't live on 2/3 of your take-home pay (half of which probably goes to rent or mortgage, and half for other things) then you will have to downsize your lifestyle if you really want to retire in 22 years.

Edited to add: there are no guarantees, so you will need to see how you are doing as the years pass. It's really hard to know exactly how much to save this far in advance, but doing the above should give you a good start.

 

[Rich_by_the_Bay]

Get to know Firecalc.

You are right in seeing that there are so many variables when looking ahead 20+ years that a clear answer is just not possible. Given that, why not work backwards: see how much income it takes now for you to be content, have some fun, but be frugal to the extent that you can without scraping too close to the bone (that is, while still enjoying life). Then figure out how much you have left to save each year, and run the numbers.

You can guesstimate either how much money it takes to retire at a given age, or what age it will take to retire in comfort with a certain amount of inflation-adjusted dollars.

Who knows what health insurance, social security, future relationships, etc., will be decades down the road; you just have to adjust accordingly. Either way disciplined saving and reasonable expense control are you big guns.

 

[bizlady]

What are you earning and what are your yearly expenses? Try to get at least 10-15% of earnings into savings. Max out an IRA- Roth if eleigble. Max out 401k up to the amount that is matched.

Buying "stuff" regularly- think about if you want or NEED the vacation, car, toy etc or if you could put that money into savings for retirement instead.

You need a goal and a plan to get there.

Consider getting Quicken to get a handle on your expenses and investments. Reasonably good retirement planner built in also.

 

[axtec]

Thanks for the many replies so far. It looks like I have a lot of homework to do (thanks for helping me figure out what I haven't figured out yet).

The 6% return you are using, is it a real rate of return (return adjusted for inflation) or is it a nominal return (return unadjusted for inflation)?

I think I chose this number as a more realistic guess of what a nominal rate of return might be. Some of the 'financial experts' on the radio, etc. act like a 10% - 12% nominal return is no problem. Everything I have read says more like 6% - 8%.

Regarding the pension: I think you should include the present value in your calculations, but don't assume you'll be at the same job forever, so don't try to figure out what the pension would be if you worked there until 55....

I'm not even vested in the pension yet, so I won't include it until that becomes a reality. Thanks for the advice.

Get to know Firecalc.

You are right in seeing that there are so many variables when looking ahead 20+ years that a clear answer is just not possible. Given that, why not work backwards: see how much income it takes now for you to be content, have some fun, but be frugal to the extent that you can without scraping too close to the bone (that is, while still enjoying life). Then figure out how much you have left to save each year, and run the numbers.

I'll do some homework here and start to work the numbers backwards. I've been thinking from the viewpoint of "I'll save as much as I can, and hope It's enough".

Consider getting Quicken to get a handle on your expenses and investments. Reasonably good retirement planner built in also.

I've been thinking about doing that, or maybe investigating some of the online applications (when I feel more comfortable with the security of online financial apps)

What are you earning and what are your yearly expenses? Try to get at least 10-15% of earnings into savings. Max out an IRA- Roth if eleigble. Max out 401k up to the amount that is matched.

Right now, I'm saving 10% of my income (including company 401k match), but I'm going to bump it up to 15%. I'm a long way from being able to afford to max out 401k and Roth contributions for me and DW. We budget our spending pretty carefully (no plasma TV yet ), but I do see expenses going up in the near future, as we want to move to a different (probably more expensive) area of the city.

Again, thanks for all the replies so far. You've been very helpful.

 

[FUEGO]

So you are saving something like 6% of your salary and your employer is kicking another 4% or so? Which means you are spending the other 94% (probably a big chunk is taxes?). I doubt you will make early retirement at age 55 (in 22 years) without taking a significant cut in lifestyle now and/or later upon ER. Maybe if the pension is large enough and still in existence in 22 years, depending on its terms.

One thing that would help is to save most of your future raises/bonuses.

 

[dixonge]

just for kicks, an alternate vision:

"There are also a few of us, who choose to live on much less in return for the time that would otherwise be spent on accumulating money and spend our life-energy doing things that are more meaningful to us than spending money. We want more time and we willing to spend less in order to work less. Consequently, we need less in retirement savings, even less than a million. Actually quite a bit less. And thus we can accumulate it fast. Quite fast, actually.

It’s a choice. How little do you need? Simple, how little do you want?"


http://earlyretirementextreme.com/2008/11/how-little-do-you-need-to-retir.html

 

[FIREd]

Axtec,

I think that a 6% nominal return is a reasonable assumption (I use about 4% myself but my portfolio is more conservative than yours). After reading your reply, it seems like you are making a good income and, in order to retire at 55, you must cut your expenses and increase your savings rate. Easier said than done, I know. But if retiring early is truly a priority of yours, you have to start making sacrifices now. I think that saving 10-15% of your income is fine if you want to work until your mid sixties, but it's not going to cut it for early retirement (especially with the lower market returns we might be looking at).

 

[axtec]

So you are saving something like 6% of your salary and your employer is kicking another 4% or so? Which means you are spending the other 94% (probably a big chunk is taxes?).

That's right, but I'm now committed to saving a total of 15% each year going forward. I hope to increase that with any raises I might get.

A big chunk is taxes. I contribute to a Roth 401k, and a Roth IRA, but maybe I should consider switching to traditional contributions to save a little on the tax bill. Another big chunk is charitable donations, which might be at the expense of earlier retirement, but we enjoy doing it.

Maybe we'll end up moving to a different area of the city, where home prices are cheaper...

 

[FUEGO]

That's right, but I'm now committed to saving a total of 15% each year going forward. I hope to increase that with any raises I might get.

A big chunk is taxes. I contribute to a Roth 401k, and a Roth IRA, but maybe I should consider switching to traditional contributions to save a little on the tax bill. Another big chunk is charitable donations, which might be at the expense of earlier retirement, but we enjoy doing it.

Maybe we'll end up moving to a different area of the city, where home prices are cheaper...

So... from now on, you are spending 89% and saving 11%, plus the company match. Of the 89% that you are currently spending, let's say 29% is taxes and 60% is actual spending. The 60% will have to be replaced by income from your portfolio (barring net changes in spending upon retirement like more travel pr less expensive clothes). But the neat thing is that for every extra 1% you contribute to savings, you also reduce your spending by 1%. Which means you are saving more and also needing to replace less income to cover your expenses. That is the double benefit to saving more by reducing spending.

 

[axtec]

...for every extra 1% you contribute to savings, you also reduce your spending by 1%. Which means you are saving more and also needing to replace less income to cover your expenses.

That's a good way of thinking about it... thanks for the extra motivation.

 

[Coach]

axtec, as you have discovered, with a long time frame it's hard to get concrete answers. You're on the right track -- as you say, save as much as you can. You're committed to saving 15%, and if you save a part of raises too that number will rise your whole working life.

Personally I'd be taking advantage of tax-deferred saving opportunities. I would hate to give up money to taxes now that could be invested instead.

Coach

 

[crazy connie]

One of the big drawbacks to getting to retire early is housing costs. If you can accelerate a bit on the mortgage then you can get out earlier. Consider that money well spent and look at shorter term mortgages if you do move, another plus is a lower interest rate.

There are about a million ways to make it happen and much of it is about the smaller daily changes compounded over time. Don't forget to enjoy the journey as well.

 

[Rich_by_the_Bay]

Personally I'd be taking advantage of tax-deferred saving opportunities. I would hate to give up money to taxes now that could be invested instead.

That's a good example of a longstanding assumption that may not translate well to a 20 year future horizon. I think if I were in the OPs place, I might use a Roth or even personal after-tax savings to hedge the tax deferral strategy, at least in part. It may well be that his generation (and maybe ours?) will be in a higher tax bracket than we are today. Some would say it's likely. At the least, it's plausible.

A nice chunk of Roth money compounding away for 25 years and tax-free at withdrawal time will put a big smile on his face in 2032.

 

[ziggy29]

A nice chunk of Roth money compounding away for 25 years and tax-free at withdrawal time will put a big smile on his face in 2032.

Unless the income tax is at least partially replaced with a VAT or "national sales tax" by 2032...

 

[axtec]

I keep going back and forth on the Roth vs. Traditional debate. I know there are a million threads on the issue, but it just goes to show how hard the "right" answer is to find. I guess the company match goes in tax-deferred, so I'm a little diversified there.

On another note, I've been tempted to cut the emergency fund (1 year's expenses currently) to 6 months, and put the rest in the Roth IRA/401k or maybe put some of it down on a house if we move. My job seems stable for now. Crazy?

 

[REWahoo]

I keep going back and forth on the Roth vs. Traditional debate. I know there are a million threads on the issue, but it just goes to show how hard the "right" answer is to find.

Since there is no way to know the right answer, why not diversify and do both? No reason to put all your eggs in only one type of IRA.

On another note, I've been tempted to cut the emergency fund (1 year's expenses currently) to 6 months, and put the rest in the Roth IRA/401k or maybe put some of it down on a house if we move. My job seems stable for now. Crazy?

I don't think it's crazy, but I wouldn't do it if it were me. Lots of unemployed people thought their job was stable a few months ago. In this economy, best to err on the side of caution.

 

[caninelover]

Hmmm...maybe consider a second job on the weekends or evenings, and add that to savings?

On the e-fund, I would be ok with putting it in a Roth in some conservative investment - I believe you can withdraw your contributions at any time with the Roth. I wouldn't put it down on a house though - too illiquid at a time where cash is king.

 

[Kronk]

Maybe for some people, the traditional vs Roth debate still makes sense. For me, I'm comfortable with the belief that my tax rate on my current $140k-ish income is going to be more than the rate on the very roughly $40-45k/year in taxable income from SEPP IRA payments and taxable dividends and the like.

 

[ziggy29]

On another note, I've been tempted to cut the emergency fund (1 year's expenses currently) to 6 months, and put the rest in the Roth IRA/401k or maybe put some of it down on a house if we move. My job seems stable for now. Crazy?

I wouldn't do it in this economy. Especially if you don't have very good reason to think your current income stream is extremely secure.

We've recently decided to start cutting back on our emergency fund, but that's only because (a) my wife just found what will probably be a pretty secure job with the local school district, AND (b) we already had an emergency fund which, when combined with likely severance and unemployment, would have allowed us to tread water itself for more than 2 years (even accounting for health insurance). But before we added another fairly secure income stream into our future, almost all of our excess cash flow (after maxing a 401K and two Roths) was going into building a nuclear-proof emergency fund.

 

[W2R]

I wouldn't do it in this economy. Especially if you don't have very good reason to think your current income stream is extremely secure.

I agree completely with ziggy29. Until the economy is a little more settled down, I would want to keep a hefty emergency fund.

I would be even more cautious than ziggy29, since his wife hasn't actually started working yet and you never know what could happen. I guess that is a little negative but there you have it. At least he is just paring down a 2-year emergency fund. I would want to keep 12-18 months.