Ben Stein - More doom and Gloom on Retirement............

[ESRBob]

Audrey,
It sounds like you've recently come up the curve and taught yourself this stuff. Most of us here probably found managing finances something of a hobby. So you're in a pretty good position to tell us -- what were the key factors that you think might have made you different? What hurdles did you stumble on? Why would you want to do this when most people would rather not? Just curious, and congrats on making the transformation.

 

[nun]

The article states "85% of pre-retirement salary". I have even seen some articles state 85% of gross income. True, if it is 85% of net after savings and all deducted........that may not be too far off.

85% of slaray is ridiculous. If you are planning to ER you should be saving a good %age of your salary already. If you need 85% of your salary you'll be working for a long time. I save 45% and live of 55% of my salary, and once the house is paid off that will go down to 20%

 

[laurence]

Same here, save ~12% (this year) of my salary, and mortgage makes up ~33%, so since I plan on paying it off before I retire, I'll need about 55% to live very well.

 

[audreyh1]

Audrey,
It sounds like you've recently come up the curve and taught yourself this stuff.  Most of us here probably found managing finances something of a hobby.  So you're in a pretty good position to tell us -- what were the key factors that you think might have made you different?  What hurdles did you stumble on?  Why would you want to do this when most people would rather not?  Just curious, and congrats on making the transformation. 

Well, I think like most ER folks on this forum, I had the strong desire for financial independence, and learning how to manage my finances was part of the requirement.

It didn't take much to look at what advisors charge for portfolio management for me to figure out that it was a heck of a lot of money in real dollars.

I'm just one of those folks who has to figure out things for themselves - I am naturally distrustful.  I think most people aren't like that.  Plus there appears to be a huge conflict of interest for a financial advisor, so I had strong cause to be distrustful in this case.

And unlike most folks, I am not easily intimidated by people spouting off technical jargon - whatever the field.  This all might have something to do with having been an engineer.

Oh - I came up the curve a while back in 1999/2000!  And then I got a trial by fire in 2000-2003!  And I came out ahead!!!  I guess now I feel pretty "seasoned" - LOL!!

Audrey

P.S. I have to credit the www.morningstar.com site and forums for really helping me scale that learning curve.  What a great resource.  And somehow I stumbled across Frank Armstrong's "Investing for the 21st Century" http://www.investorsolutions.com/v2content/book/index.cfm - taught me asset allocation which as an investment style fits well with my personality.  I also watched way too much CNBC and that got me used to the short-term insanity of the markets and reinforced my contrarian instincts as I watched most pundits be wrong, wrong, and wrong again.

 

[ESRBob]

Thanks, Audrey;
Maybe that isn't so different from others. A poignant vision of the goal, an instinctive 'frugality' when it comes to forking over your savings to a clip joint, a lot of research and then getting the tar kicked out of you a few times by bear markets... Maybe we should hand the model over to our local high schools and see if it could help the kids learn math and science?

 

[audreyh1]

Yep - I don't think I'm that different from the other folks here after all.

Just that money management is not a favored hobby for me.  I deliberately picked a simple plan that didn't require much maintenance after the initial setup (i.e. rebalance once every year or so).  Got better things to do with my time  .

Amazing summary by the way!  You've got quite a head on your shoulders.  I enjoy the way you express yourself.

Audrey

 

[youbet]

85% of slaray is ridiculous.

Have another glass of wine!

If you are planning to ER you should be saving a good %age of your salary already.

That's something I think we can all agree with!

If you need 85% of your salary you'll be working for a long time.

But if that's what you need, you better work for a long time or get ready to live on less than you need.

I save  45% and  live of 55% of my salary, and once the house is paid off that will go down to 20%

Ridiculous!  You should live off 5% and save 95%!  If you didn't retire yesterday, you made a BIG mistake

Everyone seems to be getting caught up in their underwear concerning this percentage of current expenditures. income, salary, budget, whatever thing, and it isn't a percentage that matters.  What matters is what you need in the future and your resources to to provide for that need in absolute terms.

Aw.....just  kidding.....  working with percentages makes no sense in these calculations nun.  If you make one billion bux per day now and can live happily off of a nickle a day in the future, work tomorrow, save 99.9% of it and retire.  If you make a dollar a day and need 5 dollars a day in the future, well, you're gonna be working along time.  Absolute dollars matter.  Percentages don't.

 

[perinova]

youbet

I am not sure you understood the percentage thing.
If you can sustain living off x% of your salary then you can do it in the future too. Since you SWR is about 4% you need to save 25 times x% before you can retire. This determines immediately how many years you need prior to retrement.

Example
You make $100k/yr and lives on $40K/yr (save $60k/yr). You need 40k*25=$1M to retire. Goal that you will reach in 16.7 years.

You live on $85k instead and save $15k per year means you will need 85k*25=$2.25M for retirement. You can reach your goal in 150 years!!!! (ie never reached your goal)

IT IS ALL ABOUT PERCENTAGE.

As rule of thumb the time to reach your goal is about T=10/(pct savings)
if your investments at least keeps up with inflation.
Save 25% and you retire after 40 years at 65 (thats not early retirement)
Save 33% and you retire after 30 years at 55
Save 50% and you retire after 20 years at 45

perinova

 

[youbet]

youbet

I am not sure you understood the percentage thing.

Perinova,

The reason I am not comfortable with using percentage of salary as a basis for RE is that our income has not been a steady stream of "salary."  Our budget stays fairly steady but our income varies widely. Thus, the budget that supports our lifestyle consumes various percentages of our income from year to year since our income varies from year to year. I'm more comfortable building up a budget to support the retirement lifestyle I aspire to and then working to acquire the assets and income flow to support that budget/ lifestyle.

Try your math with an extremely uneven income flow.  Assume you can't project future income based on past averages.  Throw in some windfalls and some bust years.  Add in a factor for changing your future lifestyle from what it is now. It makes it much more interesting!

For me, working in absolute numbers is far better that working with percentages of a rapidly changing income stream. 

BTW, your method and examples are very good for illustrative purposes for people with regular, steady income flow! Thanks for your inputs! 

 

 

[nun]

Perinova,

The reason I am not comfortable with using percentage of salary as a basis for RE is that our income has not been a steady stream of "salary." Our budget stays fairly steady but our income varies widely. Thus, the budget that supports our lifestyle consumes various percentages of our income from year to year since our income varies from year to year. I'm more comfortable building up a budget to support the retirement lifestyle I aspire to and then working to acquire the assets and income flow to support that budget/ lifestyle.

Try your math with an extremely uneven income flow. Assume you can't project future income based on past averages. Throw in some windfalls and some bust years. Add in a factor for changing your future lifestyle from what it is now. It makes it much more interesting!

For me, working in absolute numbers is far better that working with percentages of a rapidly changing income stream.

BTW, your method and examples are very good for illustrative purposes for people with regular, steady income flow! Thanks for your inputs!

Getting back to the basic 85% of before retiremement income number that is often quoted, I really think that it is very misleading and dangerous information to give people. I wish financial planners would encourage people to spend less and save more before they even talked about investing or %ages of income required. Of course that would severly cut into their fees as people would realize that the key to building wealth isn't so much investing, but saving and living within your means......Remember Mr Mcorber

 

[laurence]

perinova, nice first post, welcome to the board. Feel free to start a thread under "Hi, I am" and tell us about yourself!

 

[MasterBlaster]

Perinova:

For most of us, we expect our investments to do better than the inflation rate.

Therefore, for most of us, your time span to retirement numbers are pretty pessimistic.

 

[slepyhed]

Stein's column was so full of contradictions that I too considered writing an email to him. Instead, I'll just post about it here!

1) He says that his hypothetical woman needs to save 20% of her pay so that she can spend 85% when she retires. She gets used to living on 80% of her pay, but after retirement she needs 85%?

2) Not including *any* social security income? For someone retiring at about age 65, this seems far too pessimistic.

3) She's going to get 3% raises, on average, over the next 25 years?  I seriously doubt that. There is all kinds of news out there telling me that the rich get richer and the poor get poorer. She's not exactly rich, so it must be all downhill from here for her, right?

4) I guess the calculations are so complicated that not even Ben's friend PHIL DEMUTH could get it right.

 

[audreyh1]

Example
You make $100k/yr and lives on $40K/yr (save $60k/yr). You need 40k*25=$1M to retire. Goal that you will reach in 16.7 years.

Welcome to the forum Perinova!

I think sometimes people forget that a HUGE chunk of their salary goes to payroll taxes. I'd be surprised if someone clears more than $80K after taxes (income, SS, medicare, etc.) in your example. So I could see someone saving $40K/year in your example, but not $60K/year. Hard to believe that the "living on $40K/yr" would include all those taxes.

I know it's just an example to illustrate a point. But taxes is one reason it's so hard to put aside a really huge chunk of earned income.

Audrey

 

[lazygood4nothinbum]

Stein's column was so full of contradictions that I too considered writing an email to him.

while your at it you can mention in his linked article "three big mistakes" that it is las olas blvd, not las olas street. also next time he should try le bonne crepe. not only is the food pretty good, but they always brought wolf puppy his own water dish.

 

[perinova]

Thank you all for your warm welcome.

Something I think is interesting about the formula I mentioned is that you have to realize this at a very young age if you want to be able to retire early. Even I should say if you want to retire at all with a lifestyle anywhere close to pre-retirement. A 25 year old needs to save 25% to make it to a normal retirement of 65. Unfortunately for them few realize it at that age.
I myself didn't realize this but I was lucky enough to start saving for ... well... any kind of things I wanted. House. Cars. Vacations etc

In effect the most difficult is to overcome taxes, as even savings will be taxed at higher income rate. (except 401k, deductible IRA portion). The situation gets better in retirement with an overall lower tax burden.

As for the fact that money will be invested at higher return than inflation. Even this helps it will not be for much the amount of savings is the overwelming factor.
If your savings rate is very high you will reach retirement earlier and investments will not have time to grow much so the difference is minimal. If your savings rate is low, well, then you are not worried about early retirement. Remember the SWR rate of 4% well it applies to pre-retirement as well as post-retirement. If you are counting on a much higher rate of return prior to retirement you can also count on a higher SWR.
Are you ready to increase your SWR masterblaster?

 

[Nords]

A 25 year old needs to save 25% to make it to a normal retirement of 65. Unfortunately for them few realize it at that age.

I'm 45 and I STILL don't "realize" it.

Retirement is a multi-factored formula with several non-correlated variables, so from what do you derive that seemingly simplistic statement?

Frankly it suspiciously resembles the kind of sound bite that claims retirees need 70-100% of their pre-retirement income-- and we all know how true that assertion is.

 

[MasterBlaster]

As for the fact that  money will be invested at higher return than inflation. Even this helps it will not be for much the amount of savings is the overwelming factor.

I'll just point out that the money that is saved when you are young is the money that has time to really snowball. I haven't tracked it too carefully but I beleive that I have a career average return of around 8 percent over inflation for my return.

At 8% over inflation and 25 years my return would be over 3 times what an inflation only savings plan would yield.

Another way to look at is I would only have to save for ~14 years what it would take someone earning only rate of inflation to have in 25 years.

Contrary to your statement...rates of return over long periods do make a big big difference.

Similarly investment expenses act as a big big drag on earnings and over long periods of time can be very very costly. High investment expenses should therefore be avoided.

 

[perinova]

...the money that is saved when you are young is the money that has time to really snowball. I haven't tracked it too carefully but I beleive that I have a career average return of around 8 percent over inflation for my return.
...
Another way to look at is I would only have to save for ~14 years what it would take someone earning only rate of inflation to have in 25 years.
...
Similarly investment expenses act as a big big drag on earnings and over long periods of time can be very very costly. High investment expenses should therefore be avoided.

MasterBlaster
I agree with you completely on all counts.( save early, watch expense ratios,)
I didn't mean to say that returns don't matter. Just that - for me personally- I would rather not count on higher return to compensate for lower savings rate.

Retirement is a multi-factored formula with several non-correlated variables, so from what do you derive that seemingly simplistic statement?

Frankly it suspiciously resembles the kind of sound bite that claims retirees need 70-100% of their pre-retirement income-- and we all know how true that assertion is.

Nords:
Yes the method (in my previous post did you see it) is simplistic but it is there as a guideline. I in the past many spreadsheets and other methods to plan finances for retirement, varied many variables to make scenarios... I only came up with this method in the past year and interestingly enough got the same answer using this simple method.
I am not claiming anything. The formula shows that by saving 25% of income you will be able to retire after saving for 40 years, and you will then be able to draw 75% of pre-retirement income and SUSTAIN THE SAME LIFESYLE BEFORE AND AFTER.

Nothing else is claimed by this. It is just a Point of Reference you can use. If you want more after retirement save more or retire later. If you want less do the opposite.
This simple method is a good tool to alert younger workers to the challenge of retirement. Like everything financial the actual result will higher for some, lower for others. and the target needs adjustment from time to time based on life events and actual returns.

------------------------------------------------

By the way for those who want to experiment with this method, the formula to use is: Time_to_retire = (1/save_rate - 1)/SWR

After experimenting with investment returns etc I concluded that (for my own use) I could rely on 10/save_rate as an approximation. It works for 4% SWR for savings period above ~7 years.

perinova

 

[Nords]

The formula shows that by saving 25% of income you will be able to retire after saving for 40 years, and you will then be able to draw 75% of pre-retirement income and SUSTAIN THE SAME LIFESYLE BEFORE AND AFTER.

Well, if it works for you then good.

I'd prefer to stick with the approach that got us here and has worked for the last five years of ER-- LBYM, DCA into low-cost funds, & ER budgeting.

I think financial advisors flinch at having to suggest to anyone that they'll need to save 25% of their pay for 40 years to preserve their standard of living. People should look at their current spending, figure out how it'll change in ER, and set a savings target to fund the ER budget. The required annual savings may be 25% but I bet it's lower for many.