What's your retirement nut?

[Scorpion Man]

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You have an odd definition of poverty.

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How old are you Zim? Married? Kids? Just curious.

Oh .... and in the Bay Area Celi...$1300 per month is basically property taxes for any homeowner. You cannot retire on those numbers in major metro areas.

in general...perhaps other people think of retirement differently than I did. I wanted to do it young... and I wanted it to be enjoyable and stress free. I did not want, at age 30something, to be donwsizing my house, cutting out my vacations, and selling my car. That is a weird sort of retirement.

And I love how everyone saying $1-2m is enough conveniently leaves out college and the $150k per head in current dollars ($300k by the time your kids get there) it costs. I guess you just tell Johnny he can't go to Harvard, he has to go to State.

The funny thing is...I am not even advocating living high on the hog...just having enough flexibility to do what you want and not be pinching pennies. I would rather work longer and have a relaxed retirement than be snipping coupons.

[Scorpion Man]

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celiboy,

Unless you are moving to Thailand or the pan handle of Texas, you are way off the mark. Maybe you are forgetting inflation or perhaps a downturn in income or overstating your ROI?

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I'm using 8% return during my earning years and in retirement I'm forecasting 4% return. 3% inflation for all years. I have best/worst/probable case scenarios as well. I live in Canada, so one big cost we do not have to factor in is medical/health insurance. My house is paid off in full and right now my monthly nut is $1300 a month so I guess I don't spend as much as other people. Most people die with significant $ left over. I'd rather retire early rather then work until 65 blindly.

Someone already mentioned the earlyretirement forum and I've learned alot from that - some very good info on there.

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ANy of you guys students of the markets? Do you realize that between 1966 and 1982 (that is almost a lifetime for many on these boards) the dow was FLAT in nominal terms and DOWN 40% in real terms? That is was down 90% (yes, that is not a typo) from 1929-1933? That the NDX was down 80% 00-mid 03? That long bonds were down 20-25% in 1994? Anyone here actually had to manage a portfolio and LIVE on it? Models don't pay bills. And drawdowns are MAJOR problems when you are living off the cash flow. Retiring and NEEDING 8% per year to hit your spending is insane. And people are way underreserving for inflation -- its at least 3% of whatever return you are getting. Education and healthcare, 2 major expenses, have gone up much faster than that for years.

[Scorpion Man]

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For those that want to try and figure out what they will need, a rough estimate is a 4% withdrawal rate at retirement. Meaning you'll need roughly 25 times your desired annual income.

So, if you expect to live off of $100,000 per year in retirement, you'll need $2.5m saved by the time you retire.

4% is a rough guideline and YMMV, but it's a good target to plan for.

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This is great if you make sure to DIE.

[Thremp]

Scorpion,

Two comments:

1) I think you are way overestimating college costs. Don't have dumb children and college costs will likely be lower than their education before that. Or atleast have the decency to have children who, if stoopid, can play basketball etc. On a more serious note... I assume your comments on paying for kids education extend mostly for people who want to retire young? Since the vast majority of retirees aren't putting kids through college.

2) I agree with all the retirement stuff. I've looked at some of the models for "normal" retirements (2-3mil taking 4% out) and taking a 8% loss your first year [censored] you over pretty bad. I could imagine that a decent hit to the bond market could cause something similar for most people.

Now I have questions:

1) What are your thoughts on putting some of your equity into semi-passive income? Renting out property or managing a business etc.

[mo42nyy]

unless your kid ois going to an ivy league school pissing away 35 k a year on an average college is just stupid,unless ofcourse you are filthy rich.

[DespotInExile]

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ANy of you guys students of the markets? Do you realize that between 1966 and 1982 (that is almost a lifetime for many on these boards) the dow was FLAT in nominal terms and DOWN 40% in real terms? That is was down 90% (yes, that is not a typo) from 1929-1933? That the NDX was down 80% 00-mid 03? That long bonds were down 20-25% in 1994? Anyone here actually had to manage a portfolio and LIVE on it? Models don't pay bills. And drawdowns are MAJOR problems when you are living off the cash flow. Retiring and NEEDING 8% per year to hit your spending is insane. And people are way underreserving for inflation -- its at least 3% of whatever return you are getting. Education and healthcare, 2 major expenses, have gone up much faster than that for years.

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Scorpion is so right in this post. The 4% rule is just a rule of thumb, and whether you make it to death with your nest egg is essentially a function of whether the volatility that hits you (particularly early in your retirement) is upside or downside. The 4% "rule" is a rule based on monte carlo simulations of market volatility for somebody who retires more or less at the standard retirement age. For people who retire earlier, it doesnt apply as well.

I also agree that you are all discounting the pernicious effect of inflation. I think 3% is too high, since historically US inflation has fluctuated between 2% and 2.5%, but it isn't far off. The other corrosive effect to consider is taxes--money in a tax deferred account (e.g., 401k) needs to be considered in after-tax dollars. Additionally, you need to consider the possibility that the marginal tax rates you will face in the future will be much higher than what you currently have, or that federal entitlement programs will be means tested (so in effect, income withdrawn from a 401k is offset by reduced social security or Medicare benefits). And of course, there's the problem that tax deferred money is illiquid due to the lockup until 59 1/2, so it can't be drawn down for ordinary spending in the interim.

Despite all of this, I fully realize how ridiculous it is for me to set the retirement nut at $5-$10M, since most American will never have their lifetime earnings--let alone their net worth--anywhere near this ballpark. However, I've done the math, and determined that, this is what is required to live an upper middle class retirement in most major metro American cities. (By the way, I dont think the $5M number works in the high cost cities like NY or SF, and our own retirement scenario contemplates living in a lower cost tax haven like Texas or Nevada).

I also see Scorpion's point, though about how the retirement nut is a moving target--the moment you get within a stone's throw of the low end, you just lift the bar. There's some truth to that for our own situation, since I expect that we'll hit the low end of the range in a few years, independent of how the market performs. That said, there's no point in working forever if you dont have to and you dont love your work. My wife and I enjoy our jobs, but we enjoy each other and our family time more.

[DespotInExile]

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Being an accountant I've worked all this out in a huge Excel spreadsheet

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This isn't something that can be done in Excel. You cant think in terms of low, base, and high case. This is something that needs to be modelled, through a monte carlo simulation, based on historical data about market performance for various asset classes, and historical inflation data. For a good treatment of the problem, see the books by William Bernstein.

[DespotInExile]

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1) I think you are way overestimating college costs.

1) What are your thoughts on putting some of your equity into semi-passive income? Renting out property or managing a business etc.

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Not that you asked me, but I'll volunteer a thought. I actually dont think Scorpion is overestimating the cost of education. That category of spending, like medical costs, has historically outstripped the inflation rate. So just as a rule of thumb, if you were to take the cost of a private, 4-year education (and $150 sounds right), and then double it (which is 4% annual cost increases), Scorpion's $300k per head is about right for somebody with an infant.

Which is why my plan is to prefund as much as possible of our daughter's educational costs in the early years, when we are still working, by maxxing out the 529 and Coverdell accounts. We can and do take substantial market risk with this money, since the cost of failure for us on this investment is low--we're still working. My hope is to have sufficient amount pre-funded for education so that we can count on being carried by the market for this, and not having to draw down from the nest egg.

2. As for semi-passive income activities like running a business, renting out real estate, I'm generally opposed to this. Running a business is a good way to turn a large fortune into a small one if you dont know what you're doing. (I know one couple at least that has put $1M plus into their "business" on capex, opex, etc., and has yet to start taking back out a meaningful amount of salary. And this is a highly educated couple, with two law degrees and a CFA, and they're running a low-tech service business.)

Real estate is a different matter. If you're in at a low enough cost basis, I think rental properties can be great investments. My 45-year old dog walker is a millionaire because he has a bunch of rental apartments here in NYC; he was buying them in the 1980s when nobody was, and now each studio probably generates $1700 net before taxes for him each month. I generally dont like the idea of buying property to rent it out; I think you get a negative carry on it, and you basically are speculating that the asset class will go up. Based on historical trends (and common sense), housing can't really outstrip the rate of inflation for that long, which means we're due for some mean reversion. We currently rent for this reason.

[Thremp]

Despot,

Yes, but I think its a little optimistic to book them down for a private school education at this point in their life. Especially for many state programs you can prepay today and fund all their tuition for ~20-23k for an infant. Just move to Virginia and be done with it. But I do see what he was saying about college being more expensive. I just don't think those costs will be realized for majority of kids/parents, even wealthy ones.

On the second point it makes sense. I guess there would be some timing aspects in some markets. I was referring to businesses you ran previously and now turned over to someone semi-trusted, but you still did book work and other work each week so it was semi-auto pilot. Though I do agree that starting a new business in retirement for someone who never has probably isn't the best idea.

Thanks for the response.

[lala]

I agree with the posts about some people underestimating inflation. Inflation for IMPORTANT needs like housing, food, medical, transportation, utilities have gone up a lot more than 2-3% and I don't see why it wouldn't continue in the future. It annoys me how many books brush off inflation lightly when it can seriously damage anyone's assets, considering the compounding of it after many years.