How much is a nest egg of $500,000 worth in retirement each year?

[ER-Chuck]

I have readed multiple sources

1) The end salary should be 8x the nest egg = $62,500/yr

2) CNN money says $500,000 withdrawal of $43,000/yr for 25 years

3) 3% of the nest egg $15,000/yr

4) 4% of the nest egg $20,000/yr

There is a big difference between $62,500 vs $15,000

What have you found to be true?

 

[2017ish]

How long are you predicting to be retired? ($43,000 is nuts, btw.)

 

[ER-Chuck]

I don't know how long yet. I am in my 30's and trying to understand what my saving goal should be.

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[dallas27]

The 43000 is likely assume 25-30 of it is coming from social security.

Btw- cnn calculators are a joke. Ignore them for all but entertainment.


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[Running_Man]

#1)
There I believe in all of these there is an assumption on the nest egg that you would also be earning social security. The age is a big determining factor, assuming there was social security of 2,000 per month for a 65 year old standard retiree or $24,000 that leaves (62,500 *.80) -24,000 as the old school rough estimate of what one would need and you would need about 25,000 per year to meet #1 for a 5% withdrawl, which for 30 years would have on average about an 86% chance of survival on many studies Retirement Planning by Targeting Safe Withdrawal Rates
This puts a very real risk of running out, the younger you are than 65 the more likely that your portfolio of 500,000 is not enough and other plans need to be made, assuming you could even cut 20% of your spending. This provides 49,000 per year of income available.

#2) I am assuming this for an age 65 retiree who would have 24,000 in social security, he takes 43,000 per year for 5 years depleting portfolio to 285,000 and then has 36,000 in social security and a very conservative 2.5% withdrawal from the remainder after age 70 from the 285,000 portfolio. This portfolio counts much more heavily on social security but is probably better inflation protected and safer than #1

#3) Due to ZERP this is becoming fashionable on what safe withdrawal now is, certainly that level of withdrawal is much more likely to be sustainable but would require a cut to 39,000 in spending from 62,500. That $4,000 cut from #2 is very possible but probably tough.

#4) This gets you to 44,000 in the example given same basically as #2 only with more reliance on the portfolio instead of social security.

It comes down to personal preferences and how one judges the future. Not knowing anything else about a person and given facts of a 65 year old and 500K I would recommend #2 as the most sure income consistently throughout retirement, and shows in the era of low interest rates the value of deferred social security. Good expense control and budgeting are the key to not running out of money.

 

[FIREd]

Without much specifics, I'd say that the 3-4% numbers are probably closer to reality.

 

[growerVon]

Hi ER-Chuck,

Length of retirement plays a big factor and with you in you're 30s you'll want to make sure your retirement investments last long enough. Read up on Safe Withdrawal Rates at the boglehead wiki: Safe withdrawal rates - Bogleheads

Also, if contemplating early retirement, know that often means you'll get less out of Social Security when that time comes around since you won't have been contributing for as long & for as high of earning years had you worked longer. As well, healthcare costs can be high - though there is some wicked min/max'ing possible to take advantage of ACA discounts if you can keep your adjusted taxable income very low.

For me, I am in the accumulation phase and targeting a 3% SWR to support 120k, and have another decade+ to go. My situation includes two kids and a DW with finer ta$tes, so YMMV.

Hope this helps! Good job to be thinking about these plans in your 30s!

 

[RetireAge50]

Depends. If it is all you have and you have to draw money from it every year it may get deteriorated quickly (in down markets). But if you have flexibility with pensions, social security, or have other money to live on it will last longer and have higher payouts (if you are patient and leave the money alone during down markets).

Really low safe withdrawal percentages like 3% are guarding against worst case scenarios and are more than likely not going to be depleted over time.

 

[ERTX]

$500K would work it you knew you were going to die within 8 years before retiring.

 

[jim584672]

You could use an amortization table to see how long an amount will last over time.

 

[MikeWillRetire]

#1)
There I believe in all of these there is an assumption on the nest egg that you would also be earning social security. The age is a big determining factor, assuming there was social security of 2,000 per month for a 65 year old standard retiree or $24,000 that leaves (62,500 *.80) -24,000 as the old school rough estimate of what one would need and you would need about 25,000 per year to meet #1 for a 5% withdrawl, which for 30 years would have on average about an 86% chance of survival on many studies Retirement Planning by Targeting Safe Withdrawal Rates
This puts a very real risk of running out, the younger you are than 65 the more likely that your portfolio of 500,000 is not enough and other plans need to be made, assuming you could even cut 20% of your spending. This provides 49,000 per year of income available.

#2) I am assuming this for an age 65 retiree who would have 24,000 in social security, he takes 43,000 per year for 5 years depleting portfolio to 285,000 and then has 36,000 in social security and a very conservative 2.5% withdrawal from the remainder after age 70 from the 285,000 portfolio. This portfolio counts much more heavily on social security but is probably better inflation protected and safer than #1

#3) Due to ZERP this is becoming fashionable on what safe withdrawal now is, certainly that level of withdrawal is much more likely to be sustainable but would require a cut to 39,000 in spending from 62,500. That $4,000 cut from #2 is very possible but probably tough.

#4) This gets you to 44,000 in the example given same basically as #2 only with more reliance on the portfolio instead of social security.

It comes down to personal preferences and how one judges the future. Not knowing anything else about a person and given facts of a 65 year old and 500K I would recommend #2 as the most sure income consistently throughout retirement, and shows in the era of low interest rates the value of deferred social security. Good expense control and budgeting are the key to not running out of money.

Excellent post.

 

[RunningBum]

1) The end salary should be 8x the nest egg = $62,500/yr

I don't even understand what this even means? Is this another twist on the "you need xx% of your ending salary every year" fallacy? Any retirement calculators based on your working salary are dumb. What's important is to have enough money to cover your retirement expenses, including the irregular ones like major repairs and replacements.

As others have said, #2 must include SS, but it's not wise to use anything but your own SS projections, perhaps trimmed to handle possible future SS cutbacks.

Somewhere between #3 and #4 makes more sense, depending on how many years you expect to be in retirement.

 

[Independent]

I don't know how long yet. I am in my 30's and trying to understand what my saving goal should be.

At your age, there are so many unknowns that any number is very approximate.

I like this approach, which doesn't require any lump sum goal. It focuses on the real issues:

1) I'm 35 today. I'll save $S this year, invest it for 30 years, have it grow to $T, then spend the entire $T in the year I turn 65.
2) Next year, when I'm 36, I'll also save $S, let it grow to $T by the time I'm 66, then spend it all.
3-30) Etc.
This provides a 30 year retirement income, starting at 65.

Of course, you'll point out that you really don't know how much you'll want to spend when you're 65.
- How should my future lifestyle compare to my current lifestyle?
- Will SS still be there, and how much?
- Will I have a paid-for house? ...

And you don't know how much your money will grow over 30 years
- What types of assets am I comfortable owning?
- Should I assume average 20th century US growth rates?
- Or, should I expect some other growth rate?

Any lump sum target, plus any plan to build up to that target, requires that you make decisions about these things. In your example, #1 made an assumption about SS that #3 and #4 didn't.

Start with the assumptions that you're willing to live with. Notice how they impact my extremely simple calculation. Then adjust assumptions. Then you can decide whether you want a more complicated calculation.

 

[imoldernu]

It was eery, reading the OP... So close to our situation, that I could have written the same words.

As I have mentioned in the past, instead of using formulas or calculators, back in 1989 age 53, did the entire projection on dozens of very large green spreadsheets and a pocket calculator. Projected every cost, including major purchases and moves... cars, travel, home and details of food, entertainment, health, and even interest income and inflation... A full page for every year to age 85.

While there were major variances over the past 25 years, the end result is on target, within 5%. It worked. The plan even included the 9 years between reitrment and SS @ age 62 and Medicare @ age 65.. The inflation adjusted expenses about $45 to $50K... close to the range in the CNN money projection. Calculations included SS for 2 upfront.

There won't be an inheritance of any great amount, but except for a major catastrophe the nest egg should remain intact.

Always planned for a possible return to part time employment up to age 70, but never had to put this into effect.

A major part of this was keeping a good eye on the plan, and being willing to make adjustments as necessary. Likely pure dumb luck, but would do it all over again. For us, an extraordinarily happy life.

 

[Big_Hitter]

I don't know how long yet. I am in my 30's and trying to understand what my saving goal should be.

Sent from my D6503 using Early Retirement Forum mobile app

When I was in my 30s I saved as much as I could but nothing more.

Your "goal" depends on several things, target retirement age, target retirement income, what will provide this income (all sources), target asset allocation(s), CPI assumptions, real rate of return assumptions/covariances, and mortality assumptions.

Good luck.

 

[dallas27]

OP must be confused by now....


Short answer - Take your expected expenses at retirement in TODAY'S dollars, multiply by 25 (this is 4%). That's how much you need in TODAY's dollars, realizing inflation will increase this number by retirement.


Social security, pensions, living below your means, etc., can reduce that expense number and significantly lower the amount (x25) you need to save.

 

[Big_Hitter]

^ I think I'm becoming a fan of the 25x rule. Need to noodle on it some more tho.

 

[doughroller]

OP must be confused by now....


Short answer - Take your expected expenses at retirement in TODAY'S dollars, multiply by 25 (this is 4%). That's how much you need in TODAY's dollars, realizing inflation will increase this number by retirement.


Social security, pensions, living below your means, etc., can reduce that expense number and significantly lower the amount (x25) you need to save.

This is a great answer. What you need to save for depends on what your basic expenses are. A $1 mil. portfolio for someone with expenses at $75k/yr. may not be enough if you do not have other income streams. On the other hand if you have expenses much lower you may be ok. William Bernstein has a term, Residual Living Expenses, which is your basic expenses minus what you will get for SS and any pensions/annuities x 25. I you want to be super safe x by 30. The problem is this will change depending on when you retire. If you retire early and take SS a full retirement age or delayed at 70 years your RLE will be higher, untill SS kicks in.

Unfortunately at your age it is hard to figure your expense level at retirement. You may have a large family, or health expenses or still a mortgage, or paying for kids college, the tax rates may change, etc. Current expenses will have to suffice for planning but just realize you are only estimating for the future. FWIW.

 

[W2R]

Without much specifics, I'd say that the 3-4% numbers are probably closer to reality.

+1

 

[fanmail]

25x expenses works as a ballpark for normal retirement age. Add 1x for each year before full retirement age maybe.

 

[timo2]

Here is a link to the Bernstein article http://finance.yahoo.com/news/tell-retirement-nest-egg-big-040000668.html

 

[David1961]

I agree that 3% to 4% should be the general rule of thumb. If you are in your 30's, I'd lean more towards 3%

 

[karluk]

2) CNN money says $500,000 withdrawal of $43,000/yr for 25 years

Some posters suggest that this CNN calculation includes Social Security benefits, but I haven't seen anyone propose what I consider to be a much more plausible assumption - that it is a fixed withdrawal amount without any inflation adjustment. If you get a 7% return on your investments, you can withdraw $43,000 per year from a $500k portfolio for 25 years before running out of money.

Now, whether that's a wise withdrawal strategy is certainly debatable, but it does go to illustrate a likely reason for the big differences in suggested withdrawal amounts. If you want to keep inflation adjusted spending constant throughout retirement, you have to start out with a much smaller withdrawal in order to provide for cost of living adjustments in later years. If you want to spend more early in retirement while your health is still good, you need to be willing to risk a lower standard of living later on.

It also shows that you should never simply accept the results of online calculators at face value without finding out the assumptions that went into the calculations. If I'm right that CNN got the higher WR by eliminating COLAs, there's nothing wrong with that, as long as you understand what they did and are comfortable living with a gradually declining standard of living as inflation eats into the buying power of your $43,000 retirement income.