How much is enough to retire early on?

[bots2019]

A related article that may perhaps be of interest: How big a 'nest egg' do you need to retire? - Cracked Nest Egg - MSNBC.com.

Extract:“The traditional methodology is giving very bad advice,” said Lawrence Kotlikoff, an economics professor at Boston University. “The targeting for how much to plan on spending in retirement is being done by people that are trying to sell securities and insurance policies. That right there is a conflict of interest.”

Kotlikoff, who has developed his own methodology (more on that later), argues that for some people, the typical method of shooting for a fixed minimum income for life creates a savings target that is higher than it needs to be. But that suits the financial services industry just fine, he says.

“I’m not suggesting that everyone is oversaving or that we don’t have a saving problem with a lot of the population. We do,” he said. “We also have an oversaving problem with a lot of the population. They’re different people.”

Hmmm... it may be bad advice, but I think oversaving is a better way to go than to follow this Kotlikoff guys advice:

“For a lot of people who are young and have mortgages and have college tuition to save for and a lot of mouths to feed what the program is saying is, ‘Don’t save a whole lot when you’re young, and save a lot right before retirement — which is what most people do,” he said.

Yep, spend now save later... definitely the route to a happy retirement

 

[Rich_by_the_Bay]

Hmmm... it may be bad advice, but I think oversaving is a better way to go than to follow this Kotlikoff guys advice:

“For a lot of people who are young and have mortgages and have college tuition to save for and a lot of mouths to feed what the program is saying is, ‘Don’t save a whole lot when you’re young, and save a lot right before retirement — which is what most people do,” he said.

Yep, spend now save later... definitely the route to a happy retirement

Bots, I understand your point but I think the reality is more like what Kotlikoff is reacting to. Some young people fail to save even when they can (fancy cars, house, etc.) and others fail to save cause they can't (debts, prolonged schooling, family issues and a million other reasons).

Of course it's best to start saving early but if you can't, all is not lost. You can start in your 40s, and turn up the FIRE big time, and still retire at least somewhat early.

I'm in between, mostly the latter. In hindsight, I could have save a little bit more when young, but educational debt repayment (at the 1980s inflationary interest rates) really trumped all other after-expenses priorities. Family not wealthy, kids early, wife mostly home with the kids, etc.

Wait to you're 50 and you'd better pray for that inheritance or lottery ticket, or else you're likely to be working until you're 65-70.

 

[bots2019]

Bots, I understand your point but I think the reality is more like what Kotlikoff is reacting to. Some young people fail to save even when they can (fancy cars, house, etc.) and others fail to save cause they can't (debts, prolonged schooling, family issues and a million other reasons).

Of course it's best to start saving early but if you can't, all is not lost. You can start in your 40s, and turn up the FIRE big time, and still retire at least somewhat early.

I'm in between, mostly the latter. In hindsight, I could have save a little bit more when young, but educational debt repayment (at the 1980s inflationary interest rates) really trumped all other after-expenses priorities. Family not wealthy, kids early, wife mostly home with the kids, etc.

Wait to you're 50 and you'd better pray for that inheritance or lottery ticket, or else you're likely to be working until you're 65-70.

Agreed. I'm just not sure how many folks would have the discipline to start saving after a couple decades of spending everything they make. For those with the discipline I can see a somewhat early retirement is still possible.

 

[David1961]

With cash I can get a guaranteed 5% (I'm actually getting more right now)

Do you mind if I ask where your cash is that is getting you over 5% a year? And how liquid is it?

 

[Independent]

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt,....

What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

It's good to see all the "cash fans" come out of the woodwork on this one. I'm mostly fixed-income, too. That's primarily so my wife can sleep at night. But I worry about inflation, so we're mostly in TIPS. They are inside qualified accounts, so I don't think about annual taxes on the gain.

I like the SS "bridge" concept. If I were in your position, I'd look up my "full" SS benefit first. That may be $15,000 at age 67. I'd figure I need (67-51) x $15,000 = $240,000 to bridge to SS. If I can put that somewhere where I can match inflation after tax, then I've got a base of $15,000, inflation adjusted, for life (the bridge for the first 16 years, then SS).

That leaves about $960,000 to provide income on top the $15,000 base. You only need to get inflation plus 1.6% to reach your $30,000 target without touching principle. So you've got the $960,000 as an emergency fund, for things like increasing medical costs and some future reductions in SS.

This calculation says "Retire Now".

In practice, I expect most people aren't that conservative. They'd probably figure they can do better than 1.6%. And they would split the $960,000 into a "spend down" fund and an "emergency" fund. That might add something like $10,000 of annual spending.

 

[W2R]

I like the SS "bridge" concept. If I were in your position, I'd look up my "full" SS benefit first. That may be $15,000 at age 67. I'd figure I need (67-51) x $15,000 = $240,000 to bridge to SS. If I can put that somewhere where I can match inflation after tax, then I've got a base of $15,000, inflation adjusted, for life (the bridge for the first 16 years, then SS).

That's what I'm doing. At 66 my social security benefit would be $13,000/year before taxes. But in my case, I'll only have 55 months from ER to 66, so I will need about $41,800 for my bridge based on my benefit after taxes (but I plan to put my bridge in CD's, so depending on the interest rate, I might be able to get away with less than $40K due to the interest.)

I will not include that in my asset allocation, since it will be assigned to "paying myself" social security for those 55 months.

If I am doing really well financially at age 66, then I might try gathering some more cash together and making another bridge to last until age 70 (don't know yet).

 

[Milton]

Yep, spend now save later... definitely the route to a happy retirement

Another extract from the article:

If your retirement investments have a bad year, you can postpone buying a new car. On the other hand, if your returns are above average, that may be the year to splurge on a cruise. “Our dynamic programming model says people are going to adjust their spending based on how they do in the market every year,” he said.

I am not sure if he is saying "this is what people do" (in which case, you can probably save the $149 he charges for his planning software), or "this is what people should do". If the latter, I disagree. IMHO, retirement savings should be left alone to compound longterm, not treated like a piggybank whenever there are some paper profits.

 

[bots2019]

IMHO, retirement savings should be left alone to compound longterm, not treated like a piggybank whenever there are some paper profits.

Couldn't agree more. I think it's pretty easy for people to consider all their spending 'necessary' and let their expenses grow to equal their income.

These types of folks are going to have a pretty difficult time transitioning to 'saving' phase after a couple decades of spending it all.

 

[Dawg52]

Spanky,

Thanks for posting the chart. I suspect it was created by an investment company. A few observations:


(1) My tax rate since retiring has been considerably lower than the tax rate used by the chart -- about half.

(2) I shop for CD rates and usually get higher interest rates than those shown in the chart.

(3) Even using the chart's inapplicable assumptions, CDs kept pace with or beat inflation and taxes during 14 of the last 20 years.

(4) The chart doesn't quantify peace of mind for those of us trying to avoid risk during retirement.


I have a somewhat small ($31K) non-COLA pension and figure the approx $2M nestegg will last until we croak. Most of that money is after tax (i.e., outside any 401K or IRA).

I like your thinking. Someday I will inherit some additional money and I imagine I will just keep it in cd's as it is right now. Taking that money into account, I will only have about 25% in stocks. But for now, I have closer to a 50/50 blend.

 

[Bigritchie]

100% CD for me too

 

[OrcasIslandBound]

Well? Did you do retire? Did you keep 2/3 in cash? Would've been brilliant if you had...
The last posting was 8-19-07, 2 1/2 years ago. I'm curious how this retirement worked out so far?

 

[DallasGuy]

Well? Did you do retire? Did you keep 2/3 in cash? Would've been brilliant if you had...
The last posting was 8-19-07, 2 1/2 years ago. I'm curious how this retirement worked out so far?

I worked on and off (semi-retired) as a computer programmer contract worker until June 2009 and then I quit my job, not so much because I wanted to retire, but because I was really burnt out on computer programmer type of work after doing it for about 30 years. My net worth is up about 40 grand from 8/19/07 and I'm sitting at about 75% in cash right now, the majority of the cash in CD's. I actually increased my cash investments in Oct/Nov 2008 by selling some stock mutual funds right before the stock market downturn. I feel as though my high percentage of cash helped me in weathering that stock market downturn fairly well. My spending budget is $30,000 per year but my current spending rate is closer to $25,000 per year. All in all retirement is working out pretty well. With a withdrawal rate of about 2%, I'm probably pretty confident that my money will outlast me and my decision to retire last year was a good one. But if interest rates stay as low as they are now, I may be looking around for other types of cash investments soon since I have several CD's maturing this year.

 

[Alan]

Well? Did you do retire? Did you keep 2/3 in cash? Would've been brilliant if you had...
The last posting was 8-19-07, 2 1/2 years ago. I'm curious how this retirement worked out so far?

Welcome to the forum

I worked on and off (semi-retired) as a computer programmer contract worker until June 2009 and then I quit my job, not so much because I wanted to retire, but because I was really burnt out on computer programmer type of work after doing it for about 30 years. My net worth is up about 40 grand from 8/19/07 and I'm sitting at about 75% in cash right now, the majority of the cash in CD's. I actually increased my cash investments in Oct/Nov 2008 by selling some stock mutual funds right before the stock market downturn. I feel as though my high percentage of cash helped me in weathering that stock market downturn fairly well. My spending budget is $30,000 per year but my current spending rate is closer to $25,000 per year. All in all retirement is working out pretty well. With a withdrawal rate of about 2%, I'm probably pretty confident that my money will outlast me and my decision to retire last year was a good one. But if interest rates stay as low as they are now, I may be looking around for other types of cash investments soon since I have several CD's maturing this year.

Thanks for updating us, and congratulations on stepping out and ER'ing

 

[chinaco]

It sounds like the OP is is pretty good financial shape. If the income needs are $40k, I think they are ready. Just make sure that medical/insurance expenses are factored in.


Here are my approaches/rationale:

• In retirement, I am more worried about capital preservation than hoping to get a lot wealthier. Of course, I would like to grow our money so I will take some measured risk in terms of volatility of security prices. I also want to beat inflation. Therefore, I will invest some percentage of money in broadly diversified equity mutual funds. Our goal is to spend our money and enjoy it while we are younger and save some for when we are older. We are not planning to leave a large estate.
• I will keep enough near-term money in high quality cash equivalents and medium term fixed securities (including TIPS) (5-7 years of projected income needs). This money will ensure we have a reliable income stream.
• IMO - Deferring SS till 66.x or 70 is the best deal available to mitigate the risk of outliving your money. It is the highest quality inflation adjusted annuity most of us can get. For married couples, this is essentially a Joint Life Annuity. Since we have enough bridge money we will defer taking the largest SS income amount till 66.x or 70 (depending on the situation at the time).

 

[Alan]

It sounds like the OP is is pretty good financial shape. If the income needs are $40k, I think they are ready. Just make sure that medical/insurance expenses are factored in.


Here are my approaches/rationale:

• In retirement, I am more worried about capital preservation than hoping to get a lot wealthier. Of course, I would like to grow our money so I will take some measured risk in terms of volatility of security prices. I also want to beat inflation. Therefore, I will invest some percentage of money in broadly diversified equity mutual funds. Our goal is to spend our money and enjoy it while we are younger and save some for when we are older. We are not planning to leave a large estate.
• I will keep enough near-term money in high quality cash equivalents and medium term fixed securities (including TIPS) (5-7 years of projected income needs). This money will ensure we have a reliable income stream.
• IMO - Deferring SS till 66.x or 70 is the best deal available to mitigate the risk of outliving your money. It is the highest quality inflation adjusted annuity most of us can get. For married couples, this is essentially a Joint Life Annuity. Since we have enough bridge money we will defer taking the largest SS income amount till 66.x or 70 (depending on the situation at the time).

That pretty well describes our approach almost exactly. This is the first year of ER and we expect the expenses to be much higher in the earlier years while we are still fit and able to do a lot of living in different fun places.

We've also decided at this point for DW to take her SS at 62 and then me at 67 or 70.

 

[REWahoo]

...we expect the expenses to be much higher in the earlier years while we are still fit and able to do a lot of living in different fun places.

Exactly the reason we decided to buy the motor home now instead of waiting until we were in our late 80's and absolutely positive we could afford it.

 

[youbet]

This is the first year of ER and we expect the expenses to be much higher in the earlier years while we are still fit and able to do a lot of living in different fun places.

Don't forget to pencil in enough funding to buy the necessary services to keep on partying in your later years. DW and I, in our early 60's, are already using guides on remote fishing/camping trips and that sort of thing so that we can "keep on doing" instead of throwing in the towel. So, our expenses for some of our activities have actually increased (some substantially) compared to when we were younger and could do robust outdoor activities without any help.

Another example might be REWahoo and DW bringing along a combo driver/cook/go-fer on RV trips to handle everything except the fun.

It's just another way of handling growing older and becoming less physically fit. You throw in the towel on some activities and go sit in the rocker or you simply hire the appropriate help and keep on rockin'!

 

[Alan]

It's just another way of handling growing older and becoming less physically fit. You throw in the towel on some activities and go sit in the rocker or you simply hire the appropriate help and keep on rockin'!

Brilliant - I don't suppose I'd have thought of that. We certainly want to keep as active as we can for as long as we can.

 

[Onward]

So, our expenses for some of our activities have actually increased (some substantially) compared to when we were younger and could do robust outdoor activities without any help.

That's one of the reasons I could never swallow the idea of planning to spend less as you get older.

 

[rescueme]

Brilliant - I don't suppose I'd have thought of that. We certainly want to keep as active as we can for as long as we can.

That's why I have expenses for "nurse Nancy" in my later years retirement plan allocated ...

 

[Alan]

That's one of the reasons I could never swallow the idea of planning to spend less as you get older.

I agree.

I monitored what we actually spent in the last few years before ER and budgeted to spend no less in ER. It looks like we can afford to spend more but it's early days yet.

 

[Alan]

That's why I have expenses for "nurse Nancy" in my later years retirement plan allocated ...

I also have a fund outside of my ER investments for "nurse Nancy" but for some reason it hadn't occurred to me to also spend money on someone to help me when I'm not actually sick, just not as physically capable to do the things I want to do.

 

[angelbaby]

Protect Your Self

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now.

What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

Take about $120K of that money (10%) that's in cash and immediately move it to some physical gold and silver. Trust me, it's rather small and compact, so storage shouldn't really be a problem. It'll all fit inside of a small shoebox.

Why do I suggest this? Well, it's your backup plan in case the government gets stupid and we end up with serious inflation down the years. The Fed has printed a lot of money... A LOT! I wouldn't feel too comfortable sitting on all of that cash.

Look at it this way: If precious metals plummet to the basement, you've only risked 10% of your portfolio. If inflation skyrockets, like many very noted world economic authorities predict, you're adequately hedged against the risk.

 

[plex]

I think inflation is a serious risk coming up, but I also think gold/silver (which is clearly recognized, at the very least, as not historicly underpriced right now), is not the only way to protect cash needs against inflation. Right of the top of my head, TIPS do the same thing, without a significant risk of losing your shirt on that portion of your portfolio. Stable value funds, and then switching possibly to CDs once rates drastically increase, would be another approach.

 

[jdw_fire]

Take about $120K of that money (10%) that's in cash and immediately move it to some physical gold and silver. Trust me, it's rather small and compact, so storage shouldn't really be a problem. It'll all fit inside of a small shoebox.

not if most of the $120k is used to buy silver