how much does she need?

[Martha]

I need help figuring something out. I know a person that earns roughly $20,000 a year and has 24 years before retiring at age 67. Probably will earn the same, plus wage inflation, throughout her career. Using the SSA website for very rough figures, she should get 10,600 a year in social security income. Assuming she need about the same amount of income in retirement, how much money would she have to save to replace the $9400 shortfall in social security? I am having trouble trying to figure out how to use FIREcalc for this situation.

She has some money in a 401k ($5000) and will have a paid off house by retirement (current value maybe $125,000, owes about $25,000) , so the source of the savings will likely be 401k money plus a reverse mortgage.

You don't need to tell me things like: She should make more, who knows what SS will be like, etc.

Thanks for any math help. This isn't just a hypothetical exercise.

 

[cute fuzzy bunny]

Planning on leaving anything behind, and what is the expected term of retirement past 67?

Both of those make a big diff.

What will be the savings 'vehicle'? Money market, stocks, balanced fund? Before and after retirement?

 

[REWahoo]

In today's dollars, wouldn't it be roughly $235,000 (25 x 9,400)?

 

[Martha]

Let's assume 23 years of retirement, which would take her to age 90. Doesn't care about leaving anything behind. Just cares about being able to retire and pay her bills

Currently the small 401k is in a balanced fund. Probably where it should stay given her lack of sophistication.

 

[Martha]

Wahoo, I am thinking that 24 times 9400 is too conservative and she can probably get along on less and in fact have a higher withdrawl rate. We aren't talking early retirement and we aren't talking preservation of capital.

 

[cute fuzzy bunny]

So your calc is 5000 with ~7% (conservative) investment returns for 24 years, or 7500. That'll go the first year assuming inflation persists.

Do you imagine the property will appreciate at least with inflation? A real seat of the pants based on a couple of reverse mortgage quotes is 300-500 a month.

That leaves her needing to put about 500-600 a month in todays dollars away in something earning at least the rate of inflation until she retires.

The biggest problem is doing this in a fishbowl. That house is going to need a lot of work over the next 24 years. A roof, furnace, water heater, three coats of exterior paint, etc. Is she gonna need a car?

 

[Martha]

She will have the house paid for in 10 years. After that she can use the house payment (around $300) to add to her retirement accounts. So that will help.

Yes, this is tough in a fish bowl. She buys used cars so it isn't a major expense and fits in her budget. But expenses like house repairs, cars, etc. is why she is would like to replace 100% of her income in retirement. So don't get too wound up on expenses.

 

[brewer12345]

For a 65% equity 35% 5 year treasury portfolio and a 23 year withdrawal starting at $9400, firecalc says you would need about $200k. The size of the portfolio should be prportional to the size of the safe withdrawal. Therefore, she needs a portfolio equal to 200/9.4 = 21.3X her withdrawal. Just by way of example, that $9400 withdrawal in 24 years inflated at an arbitrary 3% inflation number would be $19108. So the portfolio she would need would be $19108 * 21.3 = $407k. If we assume a starting portfolio of $5k, annual return of 7%, and a required ending portfolio of $407k, annual savings would need to be $7,432 according to my financial calculator.

These are ballparks, but they should give an idea of the required sums.

 

[Martha]

Brewer, is their any way to consider the home equity to reduce what she need to put in her portfolio? I am sure she is going to end up in the position of needing a reverse mortgage because she isn't going to be able to put away $650 a month.

 

[brewer12345]

Sure. If we conservatively assume the house appreciates with inflation (assumed at 3%), it will be worth a tad over $250k at retirement. If a reverse mortgage lender will advance 50%, that reduces the required portfolio by $125k or so, leaving her with a requirement of about $280k portfolio. Still requires saving around $5k a year.

 

[cute fuzzy bunny]

This will tell you what a 'lifetime' reverse mortgage will provide monthly or as a lump sum.
http://www.rmaarp.com/


I picked a random minnesota zip code and left the age at the default, and it came up with #'s in the 300-500 range a month for the lifetime payment option. Presuming the home value paces inflation, it'll be 300-500 in year 2030 dollars too.

I dont know how they qualify reverse mortgages, but I'd imagine someone does some sort of evaluation of the home; they want their money out at the end. If its left to fall apart, they might not give one.

 

[Martha]

So it looks like she needs to save somewhere between 400 and 600 a month? A goal of 400 might be doable, and she can do some catchup when her mortgage is paid off.


BTW, she built the house (as in pounded nails, hung dry wall, etc) so it is pretty new.

 

[brewer12345]

Using a 67 YO with a home value of 250k and a Minneapolis zip, I get a lump sum of $133k or a monthly check of $800.  Not too shabby.

If we take the income option, she would still need to come up with a portfolio that would throw off about $10k.  That's still a required portfolio of $213k, which requires annual savings of $4100 between now and then.  Sounds a bit more doable, especially if there is an employer match on the 401k or our mystery retiree is willing to take on some seasonal work to make a few extra bucks.

 

[SteveR]

I think there are at least two things not being considered here.

1. SS has a COLA factor that will help with inflation.
2. After the house is paid off her expenses will go down so her income needs would be less and therefore would need less to live on.
3. She could save part of what she won't spend on the mortgage and that could go in to her 401k or into an Emergency fund for future expenses.

 

[brewer12345]

I think there are at least two things not being considered here.

1. SS has a COLA factor that will help with inflation.

Actually, I included inflation in all my calculations. Sorry, no free lunch.

 

[bongo2]

With still reasonable assumptions you could justify just about any numbers you want for this exercise.  I assume you don't want to discourage your friend, so you may want to be a little more aggressive on the withdrawal rate, and maybe more optimistic on the investment returns as well.  There will be plenty of time to change the plans over the next 20 years if things don't turn out that well, and she'll be better off if she's been putting together $200 a month starting now, than if you tell her she needs $600, and she decides to forget the whole thing.

If she puts away $200 a month and beats inflation by 5%, then she'll have $123k in today's dollars in 24 years.  At an 80% success rate over 20 years you can take out about 1/15th a year.  This gives her $8.2k + 10.6k SS, and she has 18.8, which is pretty close to her income now after putting $200 a month in savings.

Frankly, I wouldn't give this plan much of a shot of working out exactly as presented, but the reverse mortgage could help things out in the future, and if she re-evaluates in 5 or 10 years and needs more, then it will be easier to ramp up savings from $200 to $400, than from $0 to $600.

 

[SteveR]

Actually, I included inflation in all my calculations.  Sorry, no free lunch.

OK, then what about the other two of by two (three) things. :

 

[cute fuzzy bunny]

I went the other direction and just ignored it. SS today cola adjusted should be the same as when she retires. Many homes appreciate at the rate of inflation or better. Providing her investments exceed inflation, that adjusts that.

We ended up with similar numbers, so there ya go.

Steve...we noted the increased ability to save after the mortgage is paid off earlier in the thread...Martha said she couldnt save the full amount needed until the mortgage is paid off, but could save more after.

 

[SteveR]

I went the other direction and just ignored it.  SS today cola adjusted should be the same as when she retires.  Many homes appreciate at the rate of inflation or better.  Providing her investments exceed inflation, that adjusts that.

We ended up with similar numbers, so there ya go.

Steve...we noted the increased ability to save after the mortgage is paid off earlier in the thread...Martha said she couldnt save the full amount needed until the mortgage is paid off, but could save more after.

Sorry, I skimmed too fast. These people want me to actually do some work today. That sucks.

 

[cute fuzzy bunny]

Any chance she can increase hours at work or take on a second, low key relaxed type of job part time or part time during the year? One of my neighbors works a few months a year during tax time just taking down peoples information and 'prepping' them for the meeting with the official tax person. Took a few days training up front, she makes a nice little lump of cash for the few months work.

Even if its just for a few years to put a little money into the system early and let it work for her.

 

[Martha]

Any chance she can increase hours at work or take on a second, low key relaxed type of job part time or part time during the year? One of my neighbors works a few months a year during tax time just taking down peoples information and 'prepping' them for the meeting with the official tax person. Took a few days training up front, she makes a nice little lump of cash for the few months work.

Even if its just for a few years to put a little money into the system early and let it work for her.

Not now; she is having a tough time in her life.

Thanks all, I am starting to get my arms around this.

 

[cute fuzzy bunny]

All our best hopes and wishes for her going forward. Keep us posted and let us know if we can help.

 

[Martha]

Using a 67 YO with a home value of 250k and a Minneapolis zip, I get a lump sum of $133k or a monthly check of $800. Not too shabby.

Weird. If I use a 67YO with a home value of $250K and her actual zip code, I get a monthly check of $667. So it pays to live in the big city? Either way, I am pleased with the reverse mortgage figures. (understanding that she is not 67 now and her home isn't worth 250,000 now. If she was 67 now and her home worth 125,000, she would get a bit more than $400 today)

 

[brewer12345]

Weird.  If I use a 67YO with a home value of $250K and her actual zip code, I get a monthly check of $667.  So it pays to live in the big city? Either way, I am pleased with the reverse mortgage figures. 

Bear in mind that we are talking about a federally insured mortgage program that may not even exist by the time this person retires. Given the large number of variables involved, I wouldn't take any of these numbers too seriously other than as an order of magnitude indication.

I think the take-home message is that if she can save 300 or 400 a month, she should be in reasonable shape when the time comes.

 

[Martha]

Bear in mind that we are talking about a federally insured mortgage program that may not even exist by the time this person retires. Given the large number of variables involved, I wouldn't take any of these numbers too seriously other than as an order of magnitude indication.

I think the take-home message is that if she can save 300 or 400 a month, she should be in reasonable shape when the time comes.

I understand Brewer. Unfortunately, she can't plan a whole lot for the worse case. But all in all, good news.