Newbie from Calif needs long term advice

[jcleme1537]

Hello I have a ways till retirement but would welcome any advice.

I am 43 years old and married with one child. I have a 23 year investment horizon as I plan to retire at 65. I would like to reach a goal of 150k in annual retirement income. I have predicted a retirement horizon of 25 years. According to a financial plan this will take 10,500,000 in income to provide this income. If I continue on my path I will have 6,429,482 which will leave me 4,049,477 short of the 10mil that I need to provide that income. I am on track for 108k annual income instead of the 150k target. How do I make up the rest?

Current holdings:
401k and IRA's = 260,000 (invested in aggressive growth 401k)
Savings = 200,000 (invested 80pct funds/ 20 pct bonds)

Contributions:
401k = 14,000 per year
Savings = 12,000 per year

Assumptions:
Social Security Monthly payment will be 56,000 per year
Retiring in 23 years
20% tax on any withdraw income taken during retirement years
Inflation is 3%
Money will grow at 7.25% before retirement
Money will grow at 5% after retirement
Current income is 260k and I will live on 150k annually
I have a home with 400k equity in the property
I have to pay for a college education for my son in 10 years

I thought I was doing well, but according to this depressing analysis done by my advisor, I have a long way to go.

Any advice would be greatly appreciated.

 

[Spudd]

4% of your 6-ish million comes out to $257k/year. And, 2% (a very conservative withdrawal rate) comes out to $128k/year. Add your 56k in SS and you're at 185k/year. I don't know what withdrawal rate your advisor has planned for you but it seems he wants you to leave a very large estate.

 

[jcleme1537]

Thanks for responding. You bring up a very good point.

I forgot to mention one other assumption because of inflation:
150k per year is much more in 2035 money

2035 equivalent is 287,416 and
at the end of my retirement horizon it grows to 287,416 annual income per year - assuming 3% for inflation.

 

[Spudd]

Is your 6.4 million in today's dollars or future dollars? Normally I believe when this type of analysis is done, they use today's dollars for simplicity.

 

[racy]

jc,

It's good that you're planning ahead and you're young, so time is on your side. I'd advise you to ditch the financial planner; you can do this stuff yourself and save a lot of money.

And, like Spudd says, calculate everything in today's dollars.

Educate yourself. Check this: Bogleheads

 

[jcleme1537]

The 6.4 mil is in tomorrow's dollars.

 

[CUinFl]

I agree you do not need the $10.5MM, and you should use today dollars....

That said, here are a couple suggestions to get to you $10.5MM goal.


1.) you need to convert all savings to retirement accounts an/ or do not touch these funds during your working years.


2.) set "decade" goals. Lets assume you were at ~$400k in retirement at 40. Each decade you should quadruple that number, hitting $1.6MM by 50, $6.4MM by 60, and well over $10.5mm by 63.


3.) you will need to double your savings to meet the above goals


Jc, you really should rethink some of you estimated numbers and targets. As I feel you are trying to reach something that you will not be able to fully enjoy.


Maybe one other way to set your "number", its conservative and will be in future $$. Lets say you want to live on $290k in tomorrow dollars. Lets also assume that you retire at 65 with 30 years of retirement. Lets also assume that growth percentages equal inflation for your 30 years of retirement so that a dollar today equals a dollar tomorrow. Using those conservative assumptions you still "only need" $8.7MM, which is close to where you are heading towards today.


My last piece of advice would be to keep driving towards the big goal you have, tweak where you can, and reassess at 50.


Good luck...

 

[jcleme1537]

Thanks CUinFl - how do I convert my savings into retirement. Can I just simply make a large contribution to my employers 401k?

 

[CUinFl]

Thanks CUinFl - how do I convert my savings into retirement. Can I just simply make a large contribution to my employers 401k?

"Convert" was the wrong word to use; basically, I was suggesting you consider your savings as retirement money, not emergency / rainy day spending.


You do point out though that you have not maxed you 401k.... Should certainly do that.

 

[Gumby]

Are you sure that your expenses in retirement will be $150k in today's dollars? You may be spending that now, but will it continue? (i.e. - will you still be making mortgage payments?)

 

[jcleme1537]

Thanks CUinFL

gumby-I am shooting for 150k. Just because our current income is 260k.
I heard that most people shoot for at least 75%, this is 67%

Also with rising medical costs, we were trying to compensate for that. Also we plan to travel quite a bit.

 

[Gumby]

Thanks CUinFL

gumby-I am shooting for 150k. Just because our current income is 260k.
I heard that most people shoot for at least 75%, this is 67%

Also with rising medical costs, we were trying to compensate for that. Also we plan to travel quite a bit.

I believe most here would say that using a percentage of your pre-retirement income is not the way to go. Rather, you should track your actual spending now, and then make reasonable assumptions about how that spending will change once you retire.

Consider, for example, someone who saves 50% of his gross right now. He will not need 67% of his gross to live on when he retires, because he is obviously living on less than that now and he won't be saving for retirement - he'll be retired.

IMHO, you need to seriously track your spending now and then make an estimation about what you'll need to generate from your portfolio after you retire.

 

[jcleme1537]

Gumby - never thought about that. You're right I will be retired, forgot about that part of the equation. No more 401k as well. I am going to re-look at our monthly spending as well.

 

[urn2bfree]

If you have a financial advisor telling you that you need X% of your income at retirement instead of analyzing your spending needs....FIRE that advisor. If like most said advisor is paid by a percent of your assets then advisor has an inherent conflict of interest if your interest is in retiring. Advisor wants you to never retire, but keep adding more money for advisor to skim off a percentage. Advisor's compensation should be the same as you would pay a plumber or dentist or doctor, by the hour or by the procedure performed.
We currently live on less than 40% of our paychecks very comfortably. Our current spending includes costs that will disappear at retirement like saving for retirement, disability insurance, commuting costs, higher car insurance rates because we log more miles than we would if not commuting,and professional dues. Health insurance cost is the great unknown for which you have to account and budget very cautiously. But none of that can be interpreted through looking at a percent of your income....you have to know what you might spend.

 

[Mulligan]

Are you sure that your expenses in retirement will be $150k in today's dollars? You may be spending that now, but will it continue? (i.e. - will you still be making mortgage payments?)

I was thinking the same thing concerning mortgage. It appears he is just plugging in inflation rate and assuming he will need that much more in retirement. Even if mortgage is carried into retirement it is fixed and not subjected to annual assumed increases of inflation. Needless to say, when/if it is paid off expenses can drop considerably.

 

[rodi]

Gumby - never thought about that. You're right I will be retired, forgot about that part of the equation. No more 401k as well. I am going to re-look at our monthly spending as well.

Here are the spending adjustments I see in retirement.
- No more mortgage (in our case, mortgage payoff is concurrent with hubby's retirement next year).
- No more 401k savings. In our house that's a huge percentage of our gross pay.
- No more taxable spending accounts
- No more Medicare and Soc Sec wage tax.
- Depending on whether you have kids, and what age they are - no more college funding...

On the other hand -
- Health insurance. (retiring before 65)
- increased travel budget (in our case - that's a big goal)

Additionally - taxes can be different in retirement. If your income is mainly from after tax accounts - cap gains are a lot cheaper than wage income tax. This is often an advantage to early retiree's

All are predictable - so you should look at your current income, and adjust as needed.

The "rule of thumb" of 75% of income is generally blown away by the crowd here... because we mostly live on less than 75% during the working/accumulating years.