Yearly Retirement Income

[popowich]

Practically speaking, if you have no major debts, own your home, and only need to be paying your insurance, food, a nice vacation or two per year (no more than $3000/yr), and maybe even working part time at something you like, how much of a nest egg do you need to safely retire? I'm 31 and have almost $100K in savings. I'll own my home in 4 years which today would sell between $110-$120K. So at 35 I'll be debt free and have at least between $250-$300K in savings value (house and retirement accounts), and be ratcheting it up from there. If I was to move into a smaller house in 10 years, go part time or be making less, will I live comfortably until I "done"? What's the magic number? I'm happy chilling by the pool and drinking some beers. The Merrill Lynch automated adviser says I want 40K/yr which seems crazy high to me and that I have a 78% chance of getting there at my current savings rate. Of course everything depends on how long I keep my current job of almost 9 years now. Help! I save as much as I can (over $1000/month), but have absolutely no idea what goal I am working toward.

-Raymond

 

[Marquette]

That's what the safe withdrawal rate is all about. There are some good threads here

and a good post here: What's the "safe" withdrawal rate in retirement ?

Run everything through FIRECalc as well

Also look for the retirement calculator from hell articles

Keep in mind that the trinity study is based on a 30 year time frame (portfolio survives 30 years), but a lot of people here are comfortable assuming that will extrapolate to longer terms (seems reasonable to me).

Basically, your magic number is when a 4% withdrawal on your portfolio covers your expenses. Or, 4% plus income from a part-time job. Or, when you cash it all in on an annuity and join a commune in northern Idaho.

 

[Nords]

The global answer for this question is "It depends".

The reason for that sucky answer is because everyone has a different budget, and the only one you care about is your budget. So the first task of most Young Dreamers is to develop a realistic budget. Then develop one for ER. Then try to project healthcare expenses, inflation, major capital costs like a new roof or a replacement vehicle or a fantasy vacation, and maybe a little extra for surprises. Some ERs have a "barebones" budget with quality-of-life spending added on.

Then figure out where/how you want to live, and whether you want a "Work Less, Live More" ER with part-time/occasional work or if you want to ER cold turkey. Most retirement calculators only handle fixed annual spending with an occasional burp for a capital expense, so your advantage will be an ability to vary your spending from "barebones" to "quality" as you deem necessary.

The ER spending graph is a huge flattened bell curve with very fat tails. Most ERs seem to have a hump around $2000/month and another hump around $4000/month. Howver Khan & Unclemick have definitely figured out how to anchor the "Possum Living" side of the curve, while we've had others on this board who insist they can't possibly ER on less than $200K/year.

Merrill-Lynch has no idea what they're talking about-- run away fast.

 

[FIREd]

The first thing to do is to create a realistic annual retirement budget. Don't forget to include items like the costs of car repairs, home repairs, car replacement, healthcare costs, income taxes and investment costs in your budget. Once you feel you have nailed down the number, multiply by 25 (for a full retirement) and it will give you an idea about the kind of nest egg you will need to accumulate. Then refine the number using FIREcalc.

 

[TN_INVEST]

what's your number

Check out the book "The Number"
It's a good read.

Regarding you and your number, I'd seriously question your ability to live on $3,000 a year. That does not seem realistic. I'd say it's extremely difficult for a person to live on less than $12,000 a year by the time you factor in all the little and irregular expenses.

One simple calculation for generating income works something like this. It takes about $250,000 to generate $1,000 in monthly income. The theory is that you can draw about 4% to 5% off each year. Assuming you earn about 7% on your nest egg, you'll be able to increase your retirement income as you age.

Keep in mind, this is meant to address the size of your nest egg. You first have to determine if you need a nest egg in the first place. Some folks have other sources of income (trust fund, pension, employment, rich
uncle, sympathetic grandmother, etc.).

Another general rule of thumb is that if you are saving 15% of your income towards retirement and are investing it properly, you ought to be in good shape.

 

[kombat]

Practically speaking, if you have no major debts, own your home, and only need to be paying your insurance, food, a nice vacation or two per year (no more than $3000/yr), and maybe even working part time at something you like, how much of a nest egg do you need to safely retire? I'm happy chilling by the pool and drinking some beers.

First of all, right off the top, keep in mind that retirement is (hopefully) a very loooooong time. Chilling by the pool is a fantastic way to start off retirement, but if you really, seriously think about it, don't you think you might be bored after a few months? I would build in enough "buffer" into your planning to allow for some unforeseen activities or new hobbies. Who knows what might happen after you retire? You might actually enjoy chilling by the pool for a good 5 or 6 years straight, then meet and fall in love with someone who wants to travel the world with you. Wouldn't it suck to not be able to seize that opportunity?

The Merrill Lynch automated adviser says I want 40K/yr which seems crazy high to me. I have absolutely no idea what goal I am working toward.

Here's the quick-and-dirty method I use:

1) Figure out how much you actually spend per year, on everything. Exclude expenses you won't have when you retire, like a mortgage, or saving for retirement (no need to keep saving for it once you've already retired). Figure out how much after-tax money it would actually take annually for you to maintain your current lifestyle today (minus the mortgage and retirement savings).

2) Adjust the pre-tax amount for taxes. How much income would you have to earn to generate the amount of money needed in step 1? For example, maybe increase it by 30% if you're in a 30% tax bracket.

3) Subtract benefits you'll receive when you retire, such as Social Security or a company pension.

4) Multiply the result by 25. This is how much you need in order to produce the money you need to maintain your current lifestyle, at a 4% Safe Withdrawal Rate.

5) Adjust for inflation. You're 31 now, so if you planned to retire at 60, then you'd need to account for 29 years of inflation at, say 3%. The calculation is 1.03^^29 = 2.36. So you'd multiply the amount in step 4 by 2.36 to figure out how big of a nestegg you need in order to produce enough income (in 2037 dollars) to maintain your current lifestyle.

That'll give you a rough estimate, but keep in mind there are other variables to consider, such as expenses you might have in retirement that you don't have now (like higher health insurance), and possible changes to the Social Security program in the future. But it'll give you a decent starting point to gauge whether you're on track or not.

 

[popowich]

OK, that 40K doesn't seem too far off. My monthly recurring expenses are a little over $1000 month now. Round up to the nearest 10 gets me to 20K yr, double that up for the inflation and we arrive at $40K/yr. Wow. Wasn't hard to get it that high, messy math i know. So a safe side that includes travel number is more like $50K/yr. Meaning I need roughly $1.5M to retire? At least as a sort of in the ballpark number. Holy smokes.

-Raymond

 

[Nords]

So a safe side that includes travel number is more like $50K/yr. Meaning I need roughly $1.5M to retire? At least as a sort of in the ballpark number. Holy smokes.

Well, what's important to you-- working longer for a more opulent lifestyle, or escaping the rat race with early release for good behavior? Serious question, because we have some on this board who insist that they couldn't possibly retire on less than six figures a year.

Many people find their ER budgets are different (usually lower) than expected. Beyond removing all the usual commuting & work-related expenses, ER gives you the time to tweak hard on every part of your budget. You could spend that time rinsing out plastic bags and re-using dental floss, or you could focus on the big payoffs-- housing expenses, reducing infrastructure maintenance, reviewing insurance policies, shopping discount stores as well as Craigslist & eBay, managing your investments & taxes, and so on. For example you may have more time to dine out and to barhop, but you also have more time to shop for exactly the food you want and to try new cooking ideas. You may also find that you no longer need to blow off alcohol-fueled steam to relieve workplace stress.

You may also be able to significantly reduce that $10K/year travel number. You no longer have to hop on a plane, live in an expensive hotel, eat restaurant food, and come home before two weeks come Monday. You have the flexibility to leave when the bargains are available and to come back when [-]the visa runs out and this time they really mean it[/-] you're ready. You can learn to live local and seek out the low-cost places.

So keep working if it makes you sleep better at night, but if you don't like the look of that $1.5M number then tweak it hard and consider whether you'd prefer to work occasionally for life's luxuries.

 

[popowich]

I don't need 6 figures. I figure I could retire today, luxury style for me, if I could afford to withdraw $20K/yr from retirement savings. It's likely I'd still be pulling some sort of part-time income. I forgot about social security income. On that little white and green statement it says if I became disabled today I'd get $2000/month and change, and if I retire at 62 I'll get $1400 and change. If I double up my current expected costs for inflation that's still a significant percentage of a monthly budget.

Here is a question. Can you declare yourself retired before age 59 or whenever 401K's and IRA's expect you to be retired? If I want to retire early at 45 or 50, does that mean I need 10 years of retirement savings and misc life expenses (new roof, whatever) saved up outside my retirement accounts and no other incomes?

-Raymond

 

[CitricAcid]

kombat, I don't think you need to include the inflation numbers into the calculation, usually the 4% SWR covers the growth in your expenses and inflation so you have 4% each year (as it grows, so do your expenses). He is only 31 years old, so I would suggest a SWR of 3%, so for that $20,000 a year... I think you only need closer to 700k-750k

 

[Marquette]

You can set up a SEPP distribution to get around the early withdrawal penalties. I believe purchasing a SPIA fulfills the SEPP requirements.. or, probably even better, look at tax code 72(t) (Welcome to 72t on the Net).

You might also consider part-time work to stretch your portfolio needs. Consider that an extra $10k a year in salary from a very part-time job would do wonders for your portfolio needs.

 

[youbet]

What's the magic number?

When looking at "what's the number" info from this board, bear in mind that folks throw out numbers without specifying whether it's for a single or for a couple. Most of the really low numbers are from singles and, no surprise, most of the really high numbers are from couples. At our house, it apprears either of us would need about 60% of "the number" we spend as a couple to achieve an equivalent lifestyle as a single.

The $40/yr number Merrill Lynch gave you seems reasonable to me if you are a single, have access to low cost health insurance and no expensive habits.

 

[Khan]

One person with one cat, spending less than $30K/year.

 

[TN_INVEST]

You can take money out of 401(k)s at age 55 and you don't have to do the 72(t) thing.

 

[FIREd]

You can take money out of 401(k)s at age 55 and you don't have to do the 72(t) thing.

I don't think you can if you retire before 55.

 

[thaidyed]

What about for a Roth? How old do you have to be before there are penalties to taking money out?

 

[TN_INVEST]

I don't think you can if you retire before 55.

You are correct. You must be 55.

 

[TN_INVEST]

What about for a Roth? How old do you have to be before there are penalties to taking money out?

Huh?

You can withdraw your Roth contributions at any time. There is no penalty for doing so, regardless of your age. The penalty for withdrawals only pertains to the earnings.

 

[Texarkandy]

Practically speaking, if you have no major debts, own your home, and only need to be paying your insurance, food, a nice vacation or two per year (no more than $3000/yr), and maybe even working part time at something you like, how much of a nest egg do you need to safely retire? I'm 31 and have almost $100K in savings. I'll own my home in 4 years which today would sell between $110-$120K. So at 35 I'll be debt free and have at least between $250-$300K in savings value (house and retirement accounts), and be ratcheting it up from there. If I was to move into a smaller house in 10 years, go part time or be making less, will I live comfortably until I "done"? What's the magic number? I'm happy chilling by the pool and drinking some beers. The Merrill Lynch automated adviser says I want 40K/yr which seems crazy high to me and that I have a 78% chance of getting there at my current savings rate. Of course everything depends on how long I keep my current job of almost 9 years now. Help! I save as much as I can (over $1000/month), but have absolutely no idea what goal I am working toward.

-Raymond

You are only 35 & don't state your particular life situation -

don't forget to consider health insurance, kids, (& hopefully not - a divorce ) when pondering your "how much will I need" budget. Very common budget killers for many folks in their 30's & 40's

Also - you say you are happy just "chillin by the pool & drinkin some beers" - well, me too, but after a while I want to go do something & some of those things I want to/like to do cost money - some of them quite a bit of money! & I'll want to continue them after my semi-ER.

I'm 48 & hoping to semi-ER in the next year or two (partially dependent on what this stupid economy does ) I'll have a pretty good cola'd federal pension in the bank that calculates out to about 1 mil were it an annuity & a 401K type thrift plan worth an additional 400K that I don't plan to touch for a few years yet - maybe not till 59.5. I get to carry my health insurance into retirement (big + for me). Even with that - I consider my retirement will be somewhat modest. After my semi-ER, DW & I plan to work a few more years (albeit at a somewhat more leisurley & flexible pace). We will still have a kid to get through college & started in life.

I used to think I'd be happy with a paid for house & 35K a year (today's dollars) - now I want just a little bit more.

(ask anyone "how much is enough" & the answer will usually be "just a little bit more" than they have now)

 

[popowich]

I don't think you can if you retire before 55.

I thought you can take contributions back out of a Roth IRA at any time, just not any profits earned over the contributions until retirement.

-Raymond

 

[kombat]

If I want to retire early at 45 or 50, does that mean I need 10 years of retirement savings and misc life expenses (new roof, whatever) saved up outside my retirement accounts and no other incomes?

Yes, but it's actually even a little worse than that.

I can't speak about specifics in the US, but in Canada, if you retire early and live off your savings until you can begin claiming CPP (Canada's Social Security) at age 60 (the earliest you can start to collect it), then keep in mind that your benefit will be reduced because of the period you weren't working. That is, if you quit work at age 50 and plan to start claiming the government pension at age 60, then when they calculate your entitlement, they'll include the 10 years during which you contributed nothing to the plan, and will reduce your benefits accordingly. You can't even contribute during those years, just to preserve your benefits, because your contributions have to be based off earned income.

 

[kombat]

kombat, I don't think you need to include the inflation numbers into the calculation, usually the 4% SWR covers the growth in your expenses and inflation so you have 4% each year (as it grows, so do your expenses).

I was using inflation to estimate what his expected expenses will be at the time he retires. Obviously, 30 years from now, he will not be able to get by on the same amount he is spending this year.

After he retires, he'll need to adjust his 4% withdrawals for inflation. Before he retires, he needs to use inflation to calculate his required nest egg.

 

[FIREd]

I thought you can take contributions back out of a Roth IRA at any time, just not any profits earned over the contributions until retirement.

-Raymond

I was talking about 401Ks. With 401Ks you can start taking money out penalty free if you are at least 55 years old and if you quit (or get laid off by) the company administering the plan no earlier than the year in which you turn 55. If you quit (or get laid off) sooner or if you are not 55 yet, and if you need to access the 401K money now, then doing an IRA rollover and setting up 72(t) distributions is probably the best option.

For a Roth IRA, you can access your contributions anytime, penalty free. If you take any earnings out of the Roth before the age of 59.5, you will have to pay a 10% penalty on the earnings in general, though there are exceptions.

 

[CitricAcid]

I was using inflation to estimate what his expected expenses will be at the time he retires. Obviously, 30 years from now, he will not be able to get by on the same amount he is spending this year.

After he retires, he'll need to adjust his 4% withdrawals for inflation. Before he retires, he needs to use inflation to calculate his required nest egg.

You are right in saying that before he retires he needs to use inflation to calculate his nest egg, and he needs to adjust his 4% withdrawals for inflation (nominally, not percentage-wise though). The 4% assumes that you will slightly grow over time, even WITH an increasing deposit nominally. But, if he has 15-20 years to go before retirement, you are right he needs to factor in inflation. If he is looking at today or tomorrow? The 4% supposedly covers it.

BTW, for such a long retirement and the UNCERTAINTY of markets/inflation, I would still hedge on 33-40x your yearly expenses in savings to retire.