Doing the Math in Reverse?

[NomDeER]

Hello,

I intermittently lurk here, but recently have found myself coming here more. I think that’s my subconscious telling me I should early retire soon.

People frequently ask whether they can afford to retire. I think that I can afford to retire. The real questions are how much I should plan to spend each year and the related questions of where I would live and what my standard of living would be.

I’ve always lived below my means, so I’m pretty sure I can make it work. I have tracked my expenses for the last couple of years, but that seems to be of limited usefulness. Putting aside the COVID effect, I think my expenses will be different in retirement, but I’m not sure exactly how.

I probably will live in a different city and state, which will impact my expenses depending on where that is. I moved to where I am now because of my job. For a variety of reasons, including health issues, I am considering retiring early and moving to another city and state sooner or later. I want to choose where to live – state, city, and particular home – in part based on what I think I can afford.

Big picture, I’m just not sure how much I should plan to spend each year. I don’t have long term care insurance, so I’m basically self-insured. I’m not sure how to build that into my budgeting. I don’t have a spouse or kids, so I don’t have to worry about leaving money to survivors, but I also don’t want to worry about running out of money before I kick the bucket or not being able to afford care and assistance that I may need. My parents and most of my grandparents did not live to old ages, but you never know.

I am concerned about inflation and sequence of returns risk if I were to retire soon. One of the reasons to retire early is to greatly reduce stress, so I don’t want to spend my retirement living on the edge financially. Although I eventually might want to get a part-time job for fun, I don’t know how likely that is, and I don’t want that to be a financial factor that I consider.

So, I have several questions I would welcome feedback on.

First, how have you budgeted for changing costs at the time you retire, including moving to a new city and spending your time in different ways?

Second, especially for you solo retirees, how have you budgeted for expenses later in life when you might need assistance?

Third, especially for you solo retirees who retired before the traditional retirement age and then moved to a new location, how did you choose your location and how did you meet people and adjust to the new location?

Fourth, and most importantly, how much would you be comfortable spending each year if you were in my position and were retiring soon?

Here are my vitals:

Age 56. No spouse or kids. No debt. Not a homeowner.

I've got $250k in cash.

Of my non-cash funds, about 300k are in bond funds and about 2140k are in stock funds.

So, there's a total of about 2,690k.

The non-cash funds are roughly divided as follows.

Roth- 350k

Non-Roth retirement funds- 1,240k

Non tax-advantaged mutual funds - $850k

If I were to retire soon, I would get about 16k per year in pension (no COLA).

I’d get about 24K per year if I took SS at 62. I’d get about 34k at 67. I will evaluate later on, but I may take SS later than that, partly as a hedge against living longer than anticipated.

Thoughts?

 

[Freedom56]

If you took your SS at 67 vs 62 you would forego 24K x 5 years of payments or $120K. With a difference of of 10K in payments, it would take you 12 years to break even. This is why I will take SS at 62. Plus my pension drops by the SS amount at age 62 whether I start taking SS or not.

 

[levindb]

Because you do not have a verified spending plan, similar to me, here is the approach I took:

1. I did all calculations in today's dollars.
2. I assumed my investments will grow 3% more than inflation.
3. I assume SSA benefit will grow with inflation.
4. I assume I will run out of money when I die
5. I assume I will live to age 105

Then I use a spreadsheet to calculate how much I COULD spend each year to end up at $0. Since most calculators start by asking you how much you need each year, they may not be helpful. This is a good place to start...and need to be adjusted each year with new numbers.

 

[Morgan22]

If it were me I would start at spending 4% of my portfolio.
Have you input your numbers into FIRECalc? Fill in all of the tabs.
Make sure to click on the investigate tab, then click on "Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level Search for settings that will get a success rate of as close to 100 % as possible (usually within 1%) by changing... Spending Level " (I changed the 95% to 100%).
When I quickly input your numbers it looks like to you could safely spend 4.5% of your portfolio to start. But you should go through the exercise and make sure everything is properly included.

 

[RunningBum]

Because you do not have a verified spending plan, similar to me, here is the approach I took:

1. I did all calculations in today's dollars.
2. I assumed my investments will grow 3% more than inflation.
3. I assume SSA benefit will grow with inflation.
4. I assume I will run out of money when I die
5. I assume I will live to age 105

Then I use a spreadsheet to calculate how much I COULD spend each year to end up at $0. Since most calculators start by asking you how much you need each year, they may not be helpful. This is a good place to start...and need to be adjusted each year with new numbers.

That looks like a very realistic case, but what happens if things go a lot worse than that? If you used historical runs like FireCalc does, I bet you'd have a lot of failures. Maybe the age 105 gives you enough buffer?

To the OP's question, do. I use a VPW withdrawal plan, explained here: https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

I'm more conservative with the starting rate than they are though, partly because I retired with a buffer, and partly because I have an heir I'd like to leave something to, if I can. At 56, I used 3.15% and increase by .05% per year. At 70 I increase by .10%, and .15% by 80, .20% at 85, and so on. Decide for yourself what you want to use.

The annual balance I multiply by includes an annuitized value of my SS and pension. Or you can use a side fund to make up the difference of the income for those until you start collecting. I also used the after tax value of my tIRA since that money is not all mine to spend.

That was your question #4. The others:

1) There's some research you can do for other locations, such as property, sales and income tax rates. The rest is highly dependent on your interests, especially if you are going to travel more.

2) LTC costs, if needed, hopefully is covered by my buffer. If not, I guess I'll hope Medicaid takes care of me.

3) I picked locations that best matched my interests. Skiing and trail running put me in the mountains, and that's also a good way to meet people. Volunteer work that I enjoy is another way. Many people rent first to try it out before fully committing.

 

[Mr. Tightwad]

Anyone with 2.7 mil, 16k in pension, and SS on the way is going to be fine.

If you took all the money and put it under your mattress, consider how long it might last. I'd say a lot longer than you or I shall last.

Now consider your investment returns.

I'd retire and enjoy life. Life can be short.

 

[MichaelB]

Fourth, and most importantly, how much would you be comfortable spending each year if you were in my position and were retiring soon?

All good questions, and each is worthy of its own thread. Regarding question 4, what matters is not now much any of us would spend, it’s how much you need.

I suggest you look at this post by Gumby. It presents some questions that are critical for retirement and particularly relevant to your 4th question https://www.early-retirement.org/fo...-answer-before-asking-can-i-retire-69999.html

 

[athena53]

Anyone with 2.7 mil, 16k in pension, and SS on the way is going to be fine.

This was me in 2014 when I retired at age 61. I'm at about $3.7 million now. OK, the market has been good to me and my tastes in housing and cars are modest but I've had a lavish travel budget and given generously to charities. I was widowed at 64.

I sort if did it backwards, too. For about 10 years before I retired I had a very simplistic Excel model that projected what I'd have at age 65 given my savings patterns and a reasonable investment return, took 4% of that and considered whether I/we could live on it, taking 3% annual inflation into account. It was reasonably close to what we were spending since we were saving a lot.

The OP is starting with a known portfolio- can he/she live on 4% of that plus pension and, later, SS? Health insurance was the biggest unhappy surprise for us- DH was Medicare-eligible but I was not. We got through those 4 years and, fortunately, I never had any expensive medical issues.

LTC- I figure that just about everything else I spend money on can go to zero in that case. No travel, cars, home repairs/upgrades, charity can go to zero if necessary, My annual spend is close to what LTC would cost.

 

[DrRoy]

At a rather conservative WR of 3% plus your pension, you would be at $97,000 per year. SS around age 65 would add $30,000 to that.

 

[pb4uski]

If it were me I would start at spending 4% of my portfolio.
Have you input your numbers into FIRECalc? Fill in all of the tabs.
Make sure to click on the investigate tab, then click on "Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level Search for settings that will get a success rate of as close to 100 % as possible (usually within 1%) by changing... Spending Level " (I changed the 95% to 100%).
When I quickly input your numbers it looks like to you could safely spend 4.5% of your portfolio to start. But you should go through the exercise and make sure everything is properly included.

+1 and it looks to me like the OP could safely spend ~$120k a year

 

[yhoomajor]

Stop modeling. Start living.
OP - You will be fine. Frugal nature just doesn't change overnight.

 

[Sojourner]

First, how have you budgeted for changing costs at the time you retire, including moving to a new city and spending your time in different ways?

Second, especially for you solo retirees, how have you budgeted for expenses later in life when you might need assistance?

The way I would suggest handling these somewhat "unknown" expenditures is to model your situation in FIRECalc using conservative assumptions (e.g., no reduction in spending starting at age 56; a reduced pension and/or smaller SS estimates; no inheritance, etc.) and then spend only 80-90% of what FIRECalc says is your 100% historical success number.

Third, especially for you solo retirees who retired before the traditional retirement age and then moved to a new location, how did you choose your location and how did you meet people and adjust to the new location?

I was single when I FIRE'd seven years ago, but I didn't move to a new city. I thought about it but never did it, mostly because I had siblings and a parent still living nearby. If I had ended up moving, though, I would have joined a bunch of different Meetup groups in the new city and started going to several meetups each week. IMHO, Meetup.com is a great resource for single early retirees.

Fourth, and most importantly, how much would you be comfortable spending each year if you were in my position and were retiring soon?

I think I would just follow the spending advice I laid out above (80-90% of FIRECalc's 100% historical success number). This is pretty much what I've been doing for years, and it helps me sleep better at night knowing I'm not "pushing the limits" in any way.

 

[NomDeER]

Thanks for all the replies!

If it were me I would start at spending 4% of my portfolio.
Have you input your numbers into FIRECalc? Fill in all of the tabs.
Make sure to click on the investigate tab, then click on "Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level Search for settings that will get a success rate of as close to 100 % as possible (usually within 1%) by changing... Spending Level " (I changed the 95% to 100%).
When I quickly input your numbers it looks like to you could safely spend 4.5% of your portfolio to start. But you should go through the exercise and make sure everything is properly included.

Thanks! I have used Firecalc, but I never used the investigate tab or did much beyond the defaults before.

When you say you would start at 4%, would you recalculate 4% of your remaining portfolio every year after that? Or, would you keep using the original amount from year one and adjust for inflation? Or, something else?

Also, I’m curious as to what people are using when they put a number into Firecalc for inflation.

All good questions, and each is worthy of its own thread. Regarding question 4, what matters is not now much any of us would spend, it’s how much you need.

I understand that financial “need” is the critical issue for a lot of people. I don’t really think it is the main issue for me. I think I will have what I need in terms of money, whatever that “need” figure is. I could move to a very low cost of living area where I know nobody. I could cut the cable cord. I could stop donating to charities. I could reduce my food budget. I don’t eat out much, but I could completely eliminate that. But, there’s not much point in doing that if I don’t have to. Even if I were to look at my current expenditures as what I “need,” I clearly can afford to do that after I stop working. I’m trying to figure out what I will need down the line, but also what I can afford to spend on what I would like but don’t need.

One of the reasons I have the portfolio I have is because I live significantly below my means. I never have spent as much in one year as I could afford to spend annually in retirement, even including taxes and health insurance premiums. So, I can leave a lot of money behind when I kick the bucket. Or, I can use my money to make adjustments to my life to improve my health and happiness. I know a lot of people tighten their belts when they retire, but I may do the opposite, though in a responsible and realistic and productive way. If I can afford to move to a location that I prefer and that is a better place to age than my current location, then I want to do that, even if it is more expensive. Plus, I am not someone who enjoys lots of open time just puttering around the house and watching tv. I am coming up with ideas for what I will do when I do not have a job, and I want to feel comfortable spending the money to do it. For example, I want to learn digital photography, and I don’t want to refrain from doing that because I’m concerned about spending the money on the equipment. Getting a handle on what I can afford to spend will help me actually spend the money in ways that will make me happy.

I also don’t want to refrain from doing things that are good for my physical health out of concern that it will cost too much. If I am conscious that I can afford to spend more, then I think I will be more likely to make healthy decisions.

I think I would just follow the spending advice I laid out above (80-90% of FIRECalc's 100% historical success number). This is pretty much what I've been doing for years, and it helps me sleep better at night knowing I'm not "pushing the limits" in any way.

Thank you. I really appreciate this insight and experience. I know that some people don’t lose sleep at night over financial security and so they will just say to go live. But, just as “financial need” will vary by person, what enables a person to enjoy retirement varies by person. In order for me to spend the money on things that will make me happy and healthy and not worry about it, I need to understand the logic and finances behind it. I grew up financially insecure, and that experience still influences me.

LTC- I figure that just about everything else I spend money on can go to zero in that case. No travel, cars, home repairs/upgrades, charity can go to zero if necessary, My annual spend is close to what LTC would cost.

That’s a good way to look at it. I guess I need to figure out how much LTC would cost or other costs of assistance as I age and see how that compares to what I plan to spend before that. I also could be a bit conservative in my estimates and put aside a buffer as some of you have suggested.

This was me in 2014 when I retired at age 61. I'm at about $3.7 million now. OK, the market has been good to me and my tastes in housing and cars are modest but I've had a lavish travel budget and given generously to charities. I was widowed at 64.

I sort if did it backwards, too. For about 10 years before I retired I had a very simplistic Excel model that projected what I'd have at age 65 given my savings patterns and a reasonable investment return, took 4% of that and considered whether I/we could live on it, taking 3% annual inflation into account. It was reasonably close to what we were spending since we were saving a lot.

The OP is starting with a known portfolio- can he/she live on 4% of that plus pension and, later, SS?

Yes. I can! And I can spend more than I do now. I’m just trying to figure out how much more. So, I’m trying to determine a reasonable amount of money to spend for each year and then I’m trying to figure out how to budget/spend that money.

I was single when I FIRE'd seven years ago, but I didn't move to a new city. I thought about it but never did it, mostly because I had siblings and a parent still living nearby. If I had ended up moving, though, I would have joined a bunch of different Meetup groups in the new city and started going to several meetups each week. IMHO, Meetup.com is a great resource for single early retirees.

Thanks! Good idea. And I’ll actually have time to do it. That kind of thing is just a challenge for me because I tend to be introverted, especially around people I don't know. But, I've got to come up with something, and this is worth a try.

 

[HI Bill]

Stop modeling. Start living.
OP - You will be fine. Frugal nature just doesn't change overnight.

Maybe frugal nature doesn't change overnight. But I went from saving half my income, to spending 100%+ of my pre-FIRE income the month I FIRED (October last year). I've been blowing that dough on many things ($20K in house furniture, scuba compressor, high-end video editing custom-built PC, 6 in-ceiling speakers, two floorstanding giant (and moderately expensive speakers), kitchen stuff, etc.). Pretty much anything I want, I buy. It's awesome!

 

[HI Bill]

NomDeER - If I were you, I'd use the VPW (variable percentage withdrawal) spreadsheet from Bogleheads, and spend the maximum it says each year. For me, at 55, this starts at a WR of 4.9%. Assuming you're the same age, with your asset level, that means you could spend ~$132K (including taxes) prior to the pension and SS, and potentially more, after they kick in. With VPW, you have to be okay setting a 'floor' for your spending, but it's designed to maximize your spending throughout your remaining lifespan. Good luck!

 

[daylatedollarshort]

Anyone with 2.7 mil, 16k in pension, and SS on the way is going to be fine.

If you took all the money and put it under your mattress, consider how long it might last. I'd say a lot longer than you or I shall last.

Now consider your investment returns.

I'd retire and enjoy life. Life can be short.

+1. Unless one has really lavish tastes, that is a nice amount to retire on, even in many high cost of living locations.


NomDeEr - We looked at our retirement income compared to the Consumer Expenditure Survey to get an idea of how our numbers compared. I think you'll find your available retirement income will compare very favorably to the average retiree.

 

[bingybear]

math math forward or backwards.... or whatever way you stand. farecalc being good to go means most people means you are well over funded....in most cases. It is not basic math... but statistics

 

[RobbieB]

A hundred grand.

 

[Time2]

This line jumped out at me.
"so I’m basically self-insured." I hope that is just in regard to long term care ins.
You can certainly afford health insurance make sure you have it, that protects your nest egg.

 

[NomDeER]

This line jumped out at me.
"so I’m basically self-insured." I hope that is just in regard to long term care ins.
You can certainly afford health insurance make sure you have it, that protects your nest egg.

Yes, I am talking about long term care insurance. Not health insurance.

The reason I have not retired yet is because of health insurance. I wanted to have the peace of mind of knowing that I would have it. I have not been certain about that given my age, my health background, and the fact that there have been attempts to do away with the ACA. I know that there are people who stop working with 20 years until Medicare and are fine with taking the risks of health insurance becoming unavailable to them. I am not one of those people.

My "number" in order to retire is not a number relating to my portfolio. It is a date on which I become eligible to take early retirement with the guarantee of being able to buy health insurance. That time is approaching. (Plus, in general, I am someone who likes working, but I am not enjoying my current job, and I think my job is having an adverse affect on my health.)

Some people in this thread have said that I have enough money to be able to retire and that I should retire. That really is not the issue for me right now. I am not trying to figure out whether to retire but instead am trying to figure out how and where to spend my time in retirement and that includes decisions about how much money to spend.

 

[RetiredHappy]

I retired 5 years ago at 53 yo and I buy non-ACA (off-exchange private individual) health insurance essentially for 12 years until Medicare. ACA won't go away and it may change from its current form and I am not concerned.

I had no hobbies before I retired but I now play golf 4 to 5 times a week. At our club, there are various card groups. We moved after we retired and have made new friends, whether it is neighbors or club members. It takes an effort to develop new hobbies.

 

[RunningBum]

I retired 5 years ago at 53 yo and I buy non-ACA (off-exchange private individual) health insurance essentially for 12 years until Medicare. ACA won't go away and it may change from its current form and I am not concerned.

I retired at 49 and bought private insurance before the ACA started. I got good rates because I had just a blip or two on my medical history, neither of which I considered an issue but it apparently kept me from getting the very best rate.

When ACA came I've been on that since. I've had a couple health issues now and if they kill the ACA in the next 5 years I'm not sure what I'll be able to get. I don't think it's likely they will kill it completely, but it's a really important thing to consider, and shouldn't just be brushed off.

Since I'm already retired I'm not going back to work just to lock in health insurance. But if I were looking to retire in my early 50s now and no retiree HI, I'd be a little shaky. I suspect since it made it through 2016-2020 that it will probably stay, but I'm not going to tell anyone not to worry.

 

[RetiredHappy]

I retired at 49 and bought private insurance before the ACA started. I got good rates because I had just a blip or two on my medical history, neither of which I considered an issue but it apparently kept me from getting the very best rate.

When ACA came I've been on that since. I've had a couple health issues now and if they kill the ACA in the next 5 years I'm not sure what I'll be able to get. I don't think it's likely they will kill it completely, but it's a really important thing to consider, and shouldn't just be brushed off.

Since I'm already retired I'm not going back to work just to lock in health insurance. But if I were looking to retire in my early 50s now and no retiree HI, I'd be a little shaky. I suspect since it made it through 2016-2020 that it will probably stay, but I'm not going to tell anyone not to worry.

Even before ACA was enacted, health insurers always had to renew insurance even after the subscribers developed an expensive to treat illness. I know there were reports of insurance being terminated but those insurers ran afoul of the law. For that reason, I was never concerned about health insurance. As long as I stay with the same insurer I am good.

 

[RunningBum]

Even before ACA was enacted, health insurers always had to renew insurance even after the subscribers developed an expensive to treat illness. I know there were reports of insurance being terminated but those insurers ran afoul of the law. For that reason, I was never concerned about health insurance. As long as I stay with the same insurer I am good.

My recollection is that you could stay in the same plan but they jacked up the rates the next year. Healthy people switched to another plan with similar rates as before, and the high risk people were left in the old plan that now had very high rates. They couldn't switch to the new plan with their new health issues. I don't have any links nor first or second hand knowledge as proof, this is just what I recall hearing. Maybe it didn't really happen.

 

[RetiredHappy]

My recollection is that you could stay in the same plan but they jacked up the rates the next year. Healthy people switched to another plan with similar rates as before, and the high risk people were left in the old plan that now had very high rates. They couldn't switch to the new plan with their new health issues. I don't have any links nor first or second hand knowledge as proof, this is just what I recall hearing. Maybe it didn't really happen.

I know there was the worst case/highest cost version called HIPAA rate. As long as you had continuous health insurance, the insurer would issue a "HIPAA" certificate to show proof of insurance and you could go to another insurer if you didn't want to stay with the same insurer.