Help me stop my constant worrying about retirement!

[daxm]

I feel that I am forever worried about retirement. Should I be?

I am 32 (wife 28) and am gainfully employed. I make about $65,000/yr and save about $1000/month. I would love to retire tomorrow if I could but I still don't know what it takes to retire. I have heard/read anything from $100,000 to $10 Million.

Everyone says that I am doing great towards retirement but I can't stop worrying that I won't make it, or not have enough, etc. I currently own 5 pieces of property, have $10,000 in 401k, have $6000 in Roth, $20,000 in cash, and (other than mortgages) am debt free. (And no, I didn't just consolidate all my debts into mortgages.)

All and all I think if I cashed myself out of everything I could scrape together about $125,000 right now (cash). Now I know that is better than nothing but it certainly isn't $10Mil either. In fact I don't see any legal way to make $10Mil given my current trajectory.

Now, if my wife and I could have a goal of, say, $250,000 to retire on I think we could do it easily and probably within the next 5-10 years. (My wife doesn't work right now so all her income could go towards that goal.) BUT I don't want to go down that path and slave us out to "the highest bidder" for the next 5-10 years only to find that we cannot retire on $250,000.

Basically I think I worry so much because I don't want to waste our lives working toward an unachievable goal. I'd rather just accept my fate of living in the lower end of the middle class and know that I will be the old guy wiping the grocery cart handles at WalMart (I am sure some people do that because they want to but I'd be in living hell) and live happily now than just be a wage slave forever.

Am I making any sense? (I feel I am rambling).

I would like to make one note. I am sure a lot a people can respond to this post with generalities like "good job" "keep it up" but my whole point in this post is to get some real feedback that actually helps me make goal oriented plans. My intention is not to be rude with this last comment but to help define that I am in dire need of some specifics here.

 

[SteveR]

IMHO,

What you will need to do to retire depends on how much you need to live on and how long it must last you. It is pretty basic math for the most part and you should be able to get an idea of what your income needs will be when you retire. The rest is just how much of a pot you will need to support your lifestyle.

$250,000 will only support a certain amount of income at the 4% withdrawl (FIRE calc.) that is most common for retirement income withdrawls from a retirement account(s).

The more money in the pot will support either a longer retirement at the same income or a larger income for a shorter time. The key is how much do you really need to live on? To answer this you must know the following:

What will be your expenses plus annual inflation over each year of your retirement?

What other sources of income will you have? Pension, rents, inheritance, etc.?

How long do you want this income in retirement?

What changes will take place in your life that may afffect your income? College for kids, new home, travel, health problems, support parents in their old age, support yourself in your old age, etc.

How do you plan on investing your pot? The amount of income you can take per year is dependent upon the amount of growth or income you can get from your pot. Safe investments i.e., CDs, T Bills, Bonds have lower future income potentials than riskier investments like individual stocks or commodities.

How much risk of loss in value to your pot can you withstand? The longer the time you can allow your pot to grow the more risk you can endure in the early years (and the less closer to starting to take income out).

Ok, all this is general knowledge but without more details it is not possible to really answer your question.

 

[TromboneAl]

I used to wonder about whether I had enough to retire (or when I would). But I found through resources like FIRECalc, that it's possible to get a pretty good answer. Do a lot of research and your worrying/wondering days will be done.

The quick and dirty answer is: If you can live on $40,000 per year, you need about $1 million to retire.

 

[retire@40]

Now, if my wife and I could have a goal of, say, $250,000 to retire on I think we could do it easily and probably within the next 5-10 years.  (My wife doesn't work right now so all her income could go towards that goal.)  BUT I don't want to go down that path and slave us out to "the highest bidder" for the next 5-10 years only to find that we cannot retire on $250,000.

I would go down that path anyway.  The worst that can happen is that you will have a lot of money saved.

If you find you only have $250K saved, you may not be able to fully retire, but maybe you won't have to work as hard going forward, unless you want to keep adding to your pot.

At some point, if you can manage to save $500K, you may be able to semi-retire.  If you need $40K a year to live,  work enough to make $20K, and take a $20K draw a year from your investments.

 

[malakito]

Try plugging your numbers into this:

http://www.retireearlyhomepage.com/software.html

malakito.

 

[Nords]

Your situation doesn't seem to need any help...

I feel that I am forever worried about retirement.  Should I be?

Everyone says that I am doing great towards retirement but I can't stop worrying that I won't make it, or not have enough, etc. 

... I don't want to go down that path and slave us out to "the highest bidder" for the next 5-10 years only to find that we cannot retire on $250,000.

Basically I think I worry so much because I don't want to waste our lives working toward an unachievable goal.  I'd rather just accept my fate... and live happily now than just be a wage slave forever.

I would like to make one note.  I am sure a lot a people can respond to this post with generalities like "good job" "keep it up" but my whole point in this post is to get some real feedback that actually helps me make goal oriented plans.  My intention is not to be rude with this last comment but to help define that I am in dire need of some specifics here.

Welcome to the board, Dax! The short answer to your first question is "&^%@ no". Your goal is easily achievable. What are we supposed to do-- call you a slacker?

Here's some specifics. First, if you're going to worry then worry constructively. Instead of setting a specific goal, develop a retirement portfolio that will eventually allow you to meet your spending by withdrawing 4% of it each year. It should be about 25x your annual expenses.

"Accumulation" seems to be doing fine. You're saving 18% of your income. Hopefully you're maxing out your 401(k) and your IRAs. You own at least four investment properties and hopefully they have cash flow, let alone 5-10% cash-on-cash return. For your ages the two of you are prodigious accumulators of net worth. What more should you do-- start your own business and work 90-hour weeks?!?

I'm probably preaching to the choir, but here's the rest of the process. Track your expenses to tweak a spending budget and to eliminate the things that you personally don't care about. You have a hefty savings rate so I'm not suggesting red beans & rice or even cutting out the daily Starbucks. Just track your spending habits so that you'll immediately recognize things that you don't value.

Take care of your personal finances-- wills, POAs, healthcare, life & disability insurance, LTC if warranted, and planning for kids & college savings. $20K looks like a healthy stash of emergency unemployment/rental-vacancy funds. This board has plenty of posts on these subjects. Some of them you may choose not to do, especially if don't expect to need LTC or if you feel that college students shouldn't be subsidized by their parents.

Put the rental properties under an accounting microscope and make sure they're on track. You probably have a manager but you may or may not be getting value for all their reputed services, some of which you may want to do yourself or contract out to someone else. If you're holding the rental properties long-term, then take a look at major rehabs or other upcoming expenses. Now would be a good time to make sure you're incorporated the right way (S, C, or LLC) and that you have enough liability insurance for your growing fortune. You could fiddle around refinancing the mortgages to a lower rate but you've probably already done that. If RE values look frothy then consider a 1031 exchange into a neighborhood with better appreciation potential (not that there should be any imperative to mess with success). Again the board has plenty of posts from landlords who've been there (and at least one who's ER'd that way).

Project your spending. Make sure that you'll continue to max out your tax-deferred/free investments and look for big future expenses like kids, a rental-property refurb, a new roof on your residence, new cars & appliances, etc. You can start to budget for those now if you predict their life cycle and then run them into the ground (well, except perhaps for the kids).

Invest your savings (401(k), IRAs, & taxable accounts) aggressively. Now is the time in your life to have high stock allocations and low bond holdings, and you can probably keep it up for at least the next decade or two. Stay away from REITs (due to your rental properties) and company stock (due to employment risk) but invest as aggressively as you're able to sleep with. Stick with low-cost stock index funds and keep DCA'ing no matter what the market is doing or how it looks like it will do. Bernstein's "Four Pillars" has a wealth of asset-allocation advice and will help you to find your volatility comfort level.

Take a look at your retirement income from Social Security, pensions, and any other cash flow that you can conservatively estimate. When you subtract it from your annual expenses/healthcare, your retirement portfolio should be at least 25x of that difference. You might even be able to project your net worth & expenses into the future to determine your retirement date. Add two-five years to that for unexpected problems and then try to quit worrying about it. You might be pleasantly surprised to reach ER before your deadline.

All of us ERs (and most of the Young Dreamers) have worked through your concerns. At this point in your life, your biggest risk is impatience! Keeping tabs on this board is probably the best therapy available...

 

[ronin]

What Nords said...  and then let it go!  Hopefully you realize your life is now, not some greener pasture in the fantasy future.  Don't let a day of it pass you by, my friend.

 

[rapoole]

Daxm-

Time is your friend. If your assets appreciate at 10% per year, the rule of 7's says you'll hit a million in 21 years, at 53. If growth is 7% you'll get there in about 30 years, at 62. And that assumes no new saving between now and then! So assuming you are prudent, your retirement is already substantially paid for, and what you need to figure out is how to save enough more to retire EARLY. Don't worry, keep saving.

rapoole

 

[Calgary_Girl]

Daxm-

      Time is your friend.  If your assets appreciate at 10% per year, the rule of 7's says you'll hit a million in 21 years, at 53.  If growth is 7% you'll get there in about 30 years, at 62.  And that assumes no new saving between now and then!  So assuming you are prudent, your retirement is already substantially paid for, and what you need to figure out is how to save enough more to retire EARLY.  Don't worry, keep saving.

rapoole

Unfortunately, the $1 million 21 years from now will only be worth half as much due to a lovely thing called inflation.

 

[maddythebeagle]

Welcome. Nords said just about all you need, but I want to add some of perspective. I am the same age as you (early 30s) and think it is good to set a goal (I want to be able to FIRE at 45). I think the avg. advice is 10% savings for the average person and I think many on this board in your pay range are 20-30% (and some extremes higher) savers to FIRE and live below their means. You say you save 1k a month (that must only be recently since your retirement accounts look kinda low). Think "baby steps" and just look at your expenses every so often and figure what little things you can cut out and still be happy and save a little more each year. I think the big ones are expensive vacations, eating out a lot, fees on active mutual funds, services that you dont use, buying new cars every few years, etc. You dont have to deprive yourself, just be a smart consumer and dont waste.

Another thing I would recommend the Millionaire Next Door (from the library-since we are on the road to frugality) to find out what the true attitudes of the wealthy are.

 

[daxm]

Welcome. Nords said just about all you need, but I want to add some of perspective. I am the same age as you (early 30s) and think it is good to set a goal (I want to be able to FIRE at 45). I think the avg. advice is 10% savings for the average person and I think many on this board in your pay range are 20-30% (and some extremes higher) savers to FIRE and live below their means. You say you save 1k a month (that must only be recently since your retirement accounts look kinda low). Think "baby steps" and just look at your expenses every so often and figure what little things you can cut out and still be happy and save a little more each year. I think the big ones are expensive vacations, eating out a lot, fees on active mutual funds, services that you dont use, buying new cars every few years, etc. You dont have to deprive yourself, just be a smart consumer and dont waste.

Another thing I would recommend the Millionaire Next Door (from the library-since we are on the road to frugality) to find out what the true attitudes of the wealthy are.

Thank you.  I have read Millionaire Next Door, along with a multitude of other like books, which are all good and have been helpful.  My $1k/month savings has nothing to do with 401k.  That is the money I have left over after my net paycheck pays my monthly expenses.  (Hence the multiple properties and liquid holdings.)

Thank you to Nords and the rest of the gang who put in their 2 cents.  I really appreciate it.

Nords help a lot by giving me a figure to work with 4% (or a principle of 25x yearly expenses).  I hear that people retire on a fraction of that though.  How do they do it?

I still don't grok how I'll ever be able to collect the $1,625,000 needed to retire (4% of which makes $65,000/yr).  Given that over the last 5 years I have been able to amass about $25,000/yr ($125,000 net worth today after starting with nothing) it will only take me 65 YEARS to attain my goal.  How is it even possible to reach?  Even if I save my WHOLE gross paycheck it would take me 25 years to attain it.  I am sorry to whine but I don't make the $150,000/yr some of you talk about.  I live in poor little Boise, Idaho and $65,000/yr is a huge salary for this area (I recently found out I make more than everyone in my office of 50 people EXCEPT the general manager).  AND THEN to add fuel to the fire we need to consider inflation which makes the amount needed to retire even bigger!!!  ARRRggh!!!  It seems totally hopeless.

 

[justin]

I still don't grok how I'll ever be able to collect the $1,625,000 needed to retire (4% of which makes $65,000/yr). Given that over the last 5 years I have been able to amass about $25,000/yr ($125,000 net worth today after starting with nothing) it will only take me 65 YEARS to attain my goal. How is it even possible to reach? Even if I save my WHOLE gross paycheck it would take me 25 years to attain it. I am sorry to whine but I don't make the $150,000/yr some of you talk about. I live in poor little Boise, Idaho and $65,000/yr is a huge salary for this area (I recently found out I make more than everyone in my office of 50 people EXCEPT the general manager). AND THEN to add fuel to the fire we need to consider inflation which makes the amount needed to retire even bigger!!! ARRRggh!!! It seems totally hopeless.

It doesn't seem like you're grasping the concept of compound growth. Your $25k you invest the first year, assuming it grows at a real rate of 7%, will be worth around $97000 in year 20. The first year's investment grows while you work for the next 20 years. Repeat for each successive year, and you have a lot of money growing more money.

 

[Jay_Gatsby]

I agree with Justin on this one. You're not grasping the concept of compound interest. I did a little calculation, and found that your $125,000, plus an additional $25,000 a year, if saved at 7.2% over 20 years, will give you $1,643,998 at the end of that period. I'm not sure that your real estate holdings will appreciate 7.2% over the next 20 years, so let's assume that the calculation is limited to the retirement savings and cash you have on hand. That amounts to $46,000, plus $25,000 a year, and saved at 7.2% over 20 years, will give you $1,311,995 at the end of that period. Both amounts may be lower because your $20,000 and approximately $7,000 or so in annual savings will be taxed at the normal capital gains rate.

Overall, you're definitely on track.

 

[maddythebeagle]

I think you can do it with your income and all the info. is on this site ready to be "plucked" for the plucky ones that have the "right stuff". You probably dont need 65k in retirement. Spend some time on these boards and you find that some actually think in the 40% range since when you have working income from a job (more taxes are taken out like s.s. and medicare) and smart fin. planning can get you to avoid even more tax. Not to mention,  a lot have their house paid off. It depends on what you want to do. Do you have expensive hobbies? or want to travel a lot?

On "the magic of compounding", it doesnt work if you dont invest. Why arent you contributing to a Roth and more in your 401k? Even if you arent getting a match in your 401k, you can defer taxes (you are probably in the 25% bracket) and with smart planning you can take that out at retirement and pay little or no taxes.

 

[unclemick]

Buck up bucko - you're doing ok.

Another fun thing to keep your spirit's up - When I read 'Your Money or Your Life.' - alas - well into ER and after the fact - is to track your expense vs investment income line as described in the book. DON'T follow their investment advice aka Treasuries only. You can substitute 4% of your retirement investments or another method. It's a another way of tracking your progress toward financial independance - when the lines cross - do not pass go to ER.

 

[poyet]

Further to what Justin, Jay_Gatsby and maddythebeagle said, which I support 100%, there's no reason to consider that compound interest does not work with rental real estate as well (rents must follow in the US whatever CPI like index for RE as they do in Europe). Not only does it, but it also enables to leverage using mortgages with little risk as compared to other forms of leverage (trading on margin, futures, options...). Not only does RE enable to hedge inflation, but it also generate a source of income which often does more than covering the mortage (paying back the loan).
I do not know what the compounding rate will be for daxm and his particular RE props ? who knows ? but it will work in some way as for the rest of his investments (therefore assets in RE should not be excluded from the compounding equation).
So definitly Damx needs to work a bit more his spreadsheets and look at compounding, etc. simulating all options.

Patrice.

 

[daxm]

Yes, I didn't take compounding into account.  I felt that the $25,000/yr was taking into account compounding since I was using "today's value" of my real estate along with my other funds.  I delayed (and am still learly) of investing in my 401K or Roth because you cannot get to your own money until you're old (without some sort of penalty).  Instead I bought houses, invested in options, bought/sold used cars, etc.  I feel that I am almost at full tilt right now and don't know if I want to continue collecting rent and babysitting real estate for another 20 years.

You all seem to use an interest number around 7%.  Where do you get that?  Is this some average of what the stock market has done for the past 100 years or is it something else?  I don't think I am getting 7% on anything I am invested into right now so I'd like to know to what you are refering.

Also, I know I'm "milking you all for information" and thank you for your help.  Also, thank you for the encouragement.  Usually when I talk about my situation all I ever get is "keep up the good work" and I feel empty with such remarks because I feel I am lacking something.  (Like enjoying the life I have instead of slaving myself out to just ensure I retire).  I feel like a tightwad who rarely breaks out and does anything.  (Like go on a nice vacation.)

I will say, however, I have looked into going back to school to become a mathematician.  Apparently I am real close to graduating with a B.S..  If I do go back I'll get a masters and then probably make about the same amount of money as I do now but in a field that I think I'd enjoy better.  (Though it seems ludicrous to spend money going to school to get out to make about the same, if not less, than I do now.)

 

[maddythebeagle]

I think the 7% on the stock market that was quoted was a "real number", which is after inflation. The stock market has returned around 11% over time, but many (including several on this board) feel that the market "pays back" excessive gains (like we saw in the 90s), but if you dollar cost average over a long time, you shouldn’t worry about. You should read some of Ben Graham’s ideas on dca'ing during the 30s and market downturns. He pointed out that you can make money as the market drifted down.

I agree that all of your investments shouldnt be tied up in 401ks since like you said, you cant get at. Some should be in taxable investments (and those have benefits also, including special capital gains and dividend tax treatment). As long as you dont sell, it is tax deferred and the dividend taxes have been reduced.

 

[preben]

Lots of good comments already. Only point I see missing is that the 4% we keep talking about is based on the historical WORST case scenario of a rather undiversified portfolio (US largecaps and US bonds only) and for someone blindly pulling the 4%+inflation nomatter WHAT the market did...

Historically a more diversified portfolio (w. international/small caps/commodities Etc.) would have added at least 1-2% to the 4%. See the commodities study at www.raddr-pages.com for examples.

Using 5% for a well diversified portfolio does not seem completely un-realistic in my book - especially if one is willing to reduce spending a bit in years of bad returns.

Cheers!

 

[retire@40]

Using 5% for a well diversified portfolio does not seem completely un-realistic in my book - especially if one is willing to reduce spending a bit in years of bad returns.

I agree.  So it would be prudent to create at least two retirement budgets.  The first would be the budget you plan to have if everything goes well, say at the 4% SWR, and the second would be at the lowest REALISTIC rate you could live with.

The second budget would only include food and other bare living essentials until things get better.

And don't forget, if things get so bad, you can always do a little work to supplement your withdrawals and/or you can move to another country where life may be better and/or cheaper.

 

[justin]

Roth IRA's allow withdrawal of everything you contribute with no penalty or taxes. This is only the contributions you make (the $4000 per year). This does not apply to earnings on your contributions. Also, there is an exception to the penalty rules called 72(t) that allows withdrawal of substantially equal periodic payments each year for the rest of your life. This usually amounts to 3-6% of the total amount in your IRA. What this means is you can tap your IRA's and 401k's (once you roll the 401k into an IRA) before you turn 59.5.

You may also want to look at your 401k's and IRA's as a last resort to be tapped only in a catastrophic emergency. You should have a sufficient emergency money buffer (usually said to be 3-6 months expenses) on hand (in a bank). You may want to invest some money in taxable accounts that can be tapped without penalty. The problem is paying taxes on the distributions and income from these investments. This will be a drag on your rate of return.

If nothing you own is returning 7% real or nominal, then you may want to get some new investments. If the real estate isn't making money for you, it may not be worth holding. Unless you like gambling/speculating that the property will go up in value. If your properties are a headache (mine was till I got rid of it), then you should factor in this "cost" into your consideration of investments.

 

[sgeeeee]

I agree.  So it would be prudent to create at least two retirement budgets.  The first would be the budget you plan to have if everything goes well, say at the 4% SWR, and the second would be at the lowest REALISTIC rate you could live with.

The second budget would only include food and other bare living essentials until things get better.

. . .

Discussions about simulating the basic vs discretionary budget case:

http://early-retirement.org/forums/index.php?topic=2048.0

http://www.retireearlyhomepage.com/...=SWR1;action=display;num=1107790433;start=0#1

 

[maddythebeagle]

very good points justin. I forgot to tell him that he can get at his iras.
Sounds like he is Idaho, so I dont think he is a RE speculator, lol. Unless Idaho is hotter than I thought. It sounds like he is tired of the hassles with tenants. The only RE that I have or want is my current house unless there is a bust and I might pickup something. I dont know how people make it work.

 

[unclemick]

Ducks to water - er ah something like that. The SO's old boss had a six unit building in Slidell, LA for years when she/he was still working - far as I know he's still working(one of those age 65 types) and still has it. The owner of my apartment building(retired airplane salesman) in Littleton, CO - keep telling me to go rental RE - he was up to 10 -12 buildings in and around Denver - built up over 25 years.

Our duplex(New Orleans) was ok - with good tenants - no horror stories - BUT - it never floated my boat.

Done well - you can totally ignore stocks/bonds - but it's not my bag - nor did I expand the required skill set - it does take work - oh yeah - location, location, location helps - but if you learn local conditions - I believe you can be successful anywhere - provided you learn the ropes.

 

[daxm]

Yeah, I have dabbled in a lot of different investments.  Some of those investments lost hard.  Oh well, I learned something.  I worry about just putting all my retirement monies just in 401K and Roth IRA but I also don't want to spread myself so thin that I am slaving today just to prepare for retirement (which is where I feel I am now).

You all seem so relaxed about retirement, like it is basically inevitable.  The whole point of this discussion really is based on that point.  How do you enjoy today yet feel secure that you are doing enough about tomorrow?