Retirement Savings Question

[PrincessDadx2]

What if your retirement rests solely in the market, which is where many of will be. Well, what if those first years in retirement you don't see the return you expect? Now what? Live on 30%, 25%. No thanks. The most successful retirees are those who underestimated their returns and those who plan on needing more than they may actually need. Anything to the upside is a huge surprise. In other words, I'll take the icing on the cake if its there when I arrive, but I'm planning so at least I have a whole cake .

Again, we're very frugal people. Not many people in their 30s can save as much as we do. Almost all of our friends spend nearly every cent they make. But still, living on 35% of our income would mean a very bare exisistence...and then really, what have we worked and sacrificed for all these years?

I think this is where math and reality meet. Studies consistently show that the most you can withdraw from you portfolio is 4% and maintain a 95% probability of you money lasting 30-40 years due to market fluctuations.

Are you really going to save 25 times your annual salary? For me that would be $2.5 million to ensure me $100,000 per year for life, all things else being equal.

My guess is that most people will plan on taking significantly more than 4%. If I only had $1.5 M and tried to take my same salary there is a large probability that I would run out of money before I died because of market risk.

The two issues:

1. Not being able to take more than 4% safely
2. Not being able to save enough

Would suggest that most people will not come close to being able to withdraw 80% of their income in retirement. However, they only need 33% to live and with SS and savings/inheritance most will come out OK.

 

[DMRick]

Are you really going to save 25 times your annual salary? For me that would be $2.5 million to ensure me $100,000 per year for life, all things else being equal..

If we had done that, I would not have enjoyed the wonderful life that came before retirement. There has to be an equal. We did not want to work just to have a good retirement. We wanted both the before and after to be great..and so far, so good! Especially with the kids out of the house. You have to have kids to really know how much they cost you! That said, we do have a "real" company funded retirement. Most people we know and all three of my kids will also (providing they stay within the places they work now) have some form, if it be retirement income or matching beyond the "expected" social security.

 

[dvcgirl]

I think this is where math and reality meet. Studies consistently show that the most you can withdraw from you portfolio is 4% and maintain a 95% probability of you money lasting 30-40 years due to market fluctuations.

Are you really going to save 25 times your annual salary? For me that would be $2.5 million to ensure me $100,000 per year for life, all things else being equal.

My guess is that most people will plan on taking significantly more than 4%. If I only had $1.5 M and tried to take my same salary there is a large probability that I would run out of money before I died because of market risk.

The two issues:

1. Not being able to take more than 4% safely
2. Not being able to save enough

Would suggest that most people will not come close to being able to withdraw 80% of their income in retirement. However, they only need 33% to live and with SS and savings/inheritance most will come out OK.

That's exactly what I'll have when I retire...actually more than that. But I don't have to actually *save* 25 times my income...I have to invest it. And thanks to the wonder that is compound interest....barring an absolute disaster, we will have more than 25 times our salary when we retire. Obviously, my assets will begin to move toward safer investments as I near retirement. We have a whole lot invested in targeted retirement funds, which automatically do this very thing for you.

The key...start early and invest. My DH and I have been putting the maximum in our 401ks since we were in our early 20s and maxing it out totally by our late 20s. Just on that alone...we'd do just fine. As our incomes have increased...we were able to save much more. Now, a few short years from 40, we are in really good shape. Our plan is to continue to save big at least through our 40s, and then I think we'll be able to back it down a good deal.

Social Security...not planning on it. Just not. I do think it will still be around in some form or another 30 years from now, but not in its current form. However, the age to collect is *definitely* going to go up. It has to. The Brits just *did* this....their "pension funds" were in huge trouble and they were smart to make the changes sooner than later (our method here in America apparently). And we're not going to get as much. We can't sustain it.

Yes, we stand to inherit money when our parents pass. They have homes and assets and key...long term care insurance. But we're not banking on that to be honest with you....too many things can happen. And for those of us in our 30s, inheritences are going to drop pretty significantly. And they aren't that big to begin with. I was even surprised at the numbers. I read an article recently..."Parents are spending their kids inheritence". It is definitely the new trend. And most people *don't* inherit money. 91.9% of us will never inherit a penny. 4.3% of us inherit somewhere between 1 and 25K. 1.1 inherit between 25 and 50K. Another 1.1% between 50K and 100K, and only 1.6% of us inherit over 100K. Here's the link...

http://moneycentral.msn.com/content/RetirementandWills/P62759.asp

 

[Julia M]

That's what we found Julia. It's amazing how much of our income was because of the 3 "kids". We could actually live on much less than we do. Right now I buy whatever I want, without thought...but if we had less money, I would certainly be more careful. Each time a kid graduated from private high school and then college, we felt we got a hugh raise. Then the 2 girls wedding's and the boys partial wedding expenses..wow, what a difference having them all off on their own makes LOL! We just hit our 5th year of retirement, we go to Disney (from NYS..and usually values, sometimes mods) 5 or 6 times a year, plus a couple much longer trips and lots of camping with friends. I'll also be getting SS in 7 years, which will be another raise!

That's what I'm hoping for!!!

I know we are somewhat of an exception, in terms of what we spend on kids expenses. Right now, just for tuition and one activity each: baton and baseball (not all the extras, fundraisers, clothes, FOOD!!!!!!!!, vacations and so on) we are spending about $1700 a month. I don't begrudge it.......we want our kids in Catholic school, and I'm happy that our kids particiapte in extra activities. And with three kids, are expenses are big. But, those expenses will be gone someday.

Retirement savings are like anything else......it's good to read about other people's experiences, and get different advice, but when push comes to shove, you need to know how to meet the needs of your family, not someone elses.

That's why I enoy reading all the different psotings.......good food for thought.

Julia

 

[dvcgirl]

If we had done that, I would not have enjoyed the wonderful life that came before retirement. There has to be an equal. We did not want to work just to have a good retirement. We wanted both the before and after to be great..and so far, so good! Especially with the kids out of the house. You have to have kids to really know how much they cost you! That said, we do have a "real" company funded retirement. Most people we know and all three of my kids will also (providing they stay within the places they work now) have some form, if it be retirement income or matching beyond the "expected" social security.

I agree...and being totally honest, one of the reasons we can save extra on top of the old 401ks is because we don't have children and because our house is paid for. And because we make a good deal of money and haven't sucuumbed to trying to keep up with the lifestyle that many in our income bracket enjoy. We're perfectly happy staying in a nice clean $200 boutique hotel in London whereas many of our friends who earn the same would settle for nothing less than The Ritz.

It's obviously not going to be as easy for a family of four with a household income of 50K to save what a childless couple making over 200K can save. And, we've a few very fortunate financial events occur early on in our savings years. The first was being fortunate enough to in the right job at the right time (my DH was a software exec during the tech boom), and buying and selling a house during an unprecedented real estate boom.

Still, I don't think we could swing it on 35% of our income in retirement and live our lives the way we'd like to live. I don't think it...I know it. However, that's why they call it Personal Finance right...? It's a very personal thing.

 

[PrincessDadx2]

Still, I don't think we could swing it on 35% of our income in retirement and live our lives the way we'd like to live. I don't think it...I know it. However, that's why they call it Personal Finance right...? It's a very personal thing.

That's the key. I actually admire what you have accomplished, but hate to see people get discouraged by artificial targets. You could easily swing it on 35% of your income if you wanted to. I know many people who think $20/hr would be awesome, but that is only $40k per year. If you are not satisfied with that lifestyle then you have to set your goals and go for it.

My only point is that if I saved 15% of my current income for 30 years and earned 8% on avg I would only be able to replace 71% of my income. That would put me in the top % of savers and investors and I still wouldn't reach the 80% number that is thrown around. 40 years could get it done - need to get my daughters started earlier

My guess is that 15% for 30 years with solid investment returns is difficult for most people with college, grad school, kids, braces,weddings, etc. etc. The bad news is most people will never come close to replacing 80% of their income from their investments. The good news is that they don't have to and can still have a very satisfying retirement without working later if they choose not to.

 

[DMRick]

My guess is that 15% for 30 years with solid investment returns is difficult for most people with college, grad school, kids, braces,weddings, etc. etc. The bad news is most people will never come close to replacing 80% of their income from their investments. The good news is that they don't have to and can still have a very satisfying retirement without working later if they choose not to.

Yes, I agree, for most of us that will work. Some will do nicely on less. Obviously, it depends on what you are living on now.

We're perfectly happy staying in a nice clean $200 boutique hotel in London whereas many of our friends who earn the same would settle for nothing less than The Ritz.

And we were thrilled with our hotel room over looking (right on the line) Kennsington and Hyde Park, with an artist show right under our window and a couple blocks to the tube several years ago, for $135 US and breakfast included. However, when my kids go over, they are looking at a B & B for half that..so you could have saved even more LOL! Of course we made less money than you and were still partially supporting that last kids college bill (he was with us, so we needed a room for three..not that easy in London).

 

[dvcgirl]

That's the key. I actually admire what you have accomplished, but hate to see people get discouraged by artificial targets. You could easily swing it on 35% of your income if you wanted to. I know many people who think $20/hr would be awesome, but that is only $40k per year. If you are not satisfied with that lifestyle then you have to set your goals and go for it.

My only point is that if I saved 15% of my current income for 30 years and earned 8% on avg I would only be able to replace 71% of my income. That would put me in the top % of savers and investors and I still wouldn't reach the 80% number that is thrown around. 40 years could get it done - need to get my daughters started earlier

My guess is that 15% for 30 years with solid investment returns is difficult for most people with college, grad school, kids, braces,weddings, etc. etc. The bad news is most people will never come close to replacing 80% of their income from their investments. The good news is that they don't have to and can still have a very satisfying retirement without working later if they choose not to.

I hear that....artificial targets aren't a good thing. The 70-80% figure should be used as a guide, but most should really try to come close to that figure. It's about lifestyle. If you're really digging your life right now at your present income level, and you're going down to 35% of your income in retirement, well, there's bound to be some disappointment in your life. And there really and truly are a *ton* of horror stories out there to go along with the folks posting on the "I retired at 50 on 35% of my income" board . There are more than a handful of retirees who retired in the late 90s with a far too aggressive portfolio and had to go back to work.

Yes, we could live on 35% of our gross income in retirement. But it would be a heck of a lot less fun than the life I have now. And I work really hard now and so I don't have a lot of excess time to travel and spend money. When I retire I'll have all the time in the world. We currently take one really nice trip a year (usually try to go to Europe if we can), and a few shorter trips to re-energize ourselves. In retirement we plan to travel a *lot*. We've even talked about living in different parts of the world. That will cost some money, and we're planning for that life while still enjoying ourselves now. Granted, and I'm not bragging, our income is what it is, we are able to have lots of fun and still save lots by giving up the trappings of six figure earners. We're not into clothes, fancy cars, country club memberships and just stuff....but we love to travel. There is just no way we can do all of that on 35% of my income. For me, it's all about options. Will we want to retire in our mid-50s? I don't think I'll know until we get there. Will we really want to travel all over the place all of the time? Again, I don't know. But boy do I want those options to be there when I arrive.

And yes, to many of you who have children, after many years of paying out thousands and thousands of dollars, when the kiddies move on, there's a whole lot more to save. But with people having children so much later, folks are in often in their 50s by the time the kids are off to college. By then, all of the magic of compound interest is nearly lost. And this is why saving for retirement must come before putting the kids through school. There are million ways for kids to pay for college, but only one way to pay for retirement....unfortunately, that one is up to us alone.

 

[dvcgirl]

Yes, I agree, for most of us that will work. Some will do nicely on less. Obviously, it depends on what you are living on now.


And we were thrilled with our hotel room over looking (right on the line) Kennsington and Hyde Park, with an artist show right under our window and a couple blocks to the tube several years ago, for $135 US and breakfast included. However, when my kids go over, they are looking at a B & B for half that..so you could have saved even more LOL! Of course we made less money than you and were still partially supporting that last kids college bill (he was with us, so we needed a room for three..not that easy in London).

No, that isn't easy in London! Our room was really quite small, but the hotel had just been renovated and so it was great. I love London....can't wait to get back there! We stayed in Mayfair, right near Shepherd's Market.....we loved that area. You got a wonderful deal. Unfortunately, we went just a year ago...December of 2004 when the dollar wasn't exactly holding her own again the British pound . The hotel though, I got that deal on Hotels.com....$200 in US dollars, which was a steal at that time. A cup of coffee at Starbucks...a regular cup, not one of those fancy ones , cost over $4!

 

[joksten2000]

I've tracked our expenses for three years, I'm retired wife retires in Oct 2006
I retired 4/30/2003 (I'm 62 wife 63). Includes food vacations $67,500 a year. SSI 30K her pension 16k mine 19K Total 65K. Want to travel a lot 5 cruises and one family cruise. Need 25K, total 90K Have 750K stocks will draw 35K a year from that. I've looked up and down to cut expenses and really can't find anything. Expect things to rise with gas going crazy. Own a good amount of DVC, enough to take that family cruise. Good luck to you all. I know it isn't easy in this day and age

 

[dvcgirl]

I've tracked our expenses for three years, I'm retired wife retires in Oct 2006
I retired 4/30/2003 (I'm 62 wife 63). Includes food vacations $67,500 a year. SSI 30K her pension 16k mine 19K Total 65K. Want to travel a lot 5 cruises and one family cruise. Need 25K, total 90K Have 750K stocks will draw 35K a year from that. I've looked up and down to cut expenses and really can't find anything. Expect things to rise with gas going crazy. Own a good amount of DVC, enough to take that family cruise. Good luck to you all. I know it isn't easy in this day and age

You sound like you're in good shape Joksten. And retiring now...well, you have Social Security. 20 years from now will it be there for me...no idea. Certainly not in its present form. And you have pensions totalling 35K. Us...nada....we're creating our own. I love that you're pointing out that you need another 25K to travel the way you want to travel (you sound like us!!), and that you *need* 750K invested just to do that. Well, it's not a need exactly, but a want that you've worked and saved dearly for.

Rising fuel prices...yes that will hurt. But Healthcare is the real wildcard in this whole shooting match for those of us who are a ways out. And so is Social security....I think that we're going to see the age to begin collecting hit 70...and they're going to have to do it soon. Anyone who has reached retirement will obviously be grandfathered in, but the rest of us aren't going to get it that early.

 

[DMRick]

No, that isn't easy in London! Our room was really quite small, but the hotel had just been renovated and so it was great. I love London....can't wait to get back there!

Sorry this is OP..but it's what you can do with yoru retirement money LOL.

Are you on travelzoo? Friends recently went over and stayed in a nice converted hotel (much like the one we stayed in) near Piccadilly (sp?) and got a really good deal with air on Travelzoo..paid less than us. I too loved London. Much better than Paris, where we were right behind Notre Dame. Our trips are usually discount trips.

 

[Kramer]

I will be eligible to retire with a guarenteed pension of 65% of my final year's salary when I turn 47. I have done the retirement math with the calculators at work and my take home pay after retirement is only a few dollars a week less than what it would be before I retired. Mostly because I won't be contributing to my pension anymore and I will be paying less taxes.

Overall I will actually get a "raise" when I retire. Besides paying into my pension, I am also eligible to pay into a 457 deferred compensation plan. I currently put around 12.7% of my salary into that investment. I can't make contributions to that once I retire, so I should actually get a 12% raise when I retire - without even withdrawing the money I invested in it. I also contribute to a Roth IRA.

Eventually, my wife will go back to teaching once the kids are in school. We look at her pension and social security as a bonus and don't really factor it into our planning.

 

[ElizaB39]

There are some great posts here. Thanks to all for the info and links. Right now, DH and I are planning on our own retirement savings to fund all of our retirement. And I agree with others here, SS will be a bonus when we retire in 20 years (give or take a few). I *will*? have a federal pension that will be calculated at 14% of my averaged high threes. However, that again will be gravy. Currently we are saving 20% of our gross. Add that to my about 12 years of 401K savings where I saved 15% of my gross annually (started in early 20's). Early saving is the key. I have used an average of a 7% rate of return in all of my calculations. No way would I ever use more than that in my projections. We should be in good shape.

Thanks all.

 

[dvcgirl]

There are some great posts here. Thanks to all for the info and links. Right now, DH and I are planning on our own retirement savings to fund all of our retirement. And I agree with others here, SS will be a bonus when we retire in 20 years (give or take a few). I *will*? have a federal pension that will be calculated at 14% of my averaged high threes. However, that again will be gravy. Currently we are saving 20% of our gross. Add that to my about 12 years of 401K savings where I saved 15% of my gross annually (started in early 20's). Early saving is the key. I have used an average of a 7% rate of return in all of my calculations. No way would I ever use more than that in my projections. We should be in good shape.

Thanks all.

Sounds very solid to me Eliza...and yes, the earlier you start the better. That's why these posts are useful. I think the word "retirement" is so frightening to people. Half of our population doesn't even think about it until they are 45....when years and years of compound interest years are behind them. That's the whole thing that is so important to understand. If you start earlier you have to save far less than you do when you hit your 30s, and *boatloads* less than you do if you wait until age 40.

I'm with you on that 7% figure. Anything to the upside is a pleasant surprise.

 

[MrsPete]

I can't say that I really think about retirement in terms of X percentage of my current salary. It doesn't make sense to me because my life will be very different by that point.

Instead, here are some of my thoughts about retirement:

My husband and I started our 401Ks from our very first professional paychecks; as a result, compound interest has already worked some magic for us and we're in a good place -- especially considering that I'm not yet 40. Because we started right away, we have never felt that we're "doing without".

Our house is paid-for. It's a large, comfortable house in a top neighborhood, but it's not luxurious or modern. This area is growing unbelievably, and I imagine we will be able to sell this house and pay for most or all of a nice luxury townhouse. We do not expect to ever have a mortgage again, and this means a huge drop in expenses.

During the first three years of our marriage we were so poor that we only had one car; when we had to add a second car, we were amazed at the huge increase in our budget. Once we retire, we'll definitely drop back to one car.

Our kids will be out of the house and finished with college. This will mean a huge drop in our daily expenses.

In addition to our savings, I have a traditional pay-X-amount for the rest of your life pension. We expect this will pay for our daily expenses: the electric bill, groceries, etc. We expect that social security will pay something, but we don't expect it'll be a significant part of our retirement income.

We love to travel, and we recently decided to purchase a Marriott timeshare in Florida -- we're shopping for a re-sale right now. We're going to buy a two-bedroom lock-out, which can be split into two weeks and used for two separate vacations each year. Down the road we'll buy a second one, and we'll be able to have four weeks' vacation each year for a reasonable price.

I agree with the person who said that healthcare is the wildcard in the whole plan. I'll have basic insurance paid for the rest of my life, and I'll be able to pick up the same coverage for my husband. I know we'll need something in addition to this, but that's a topic I have not really thought about in detail. The only thing I can say at this point is that I'm treating my body just like my money: I'm planning that it'll take care of me for a long time, and I'm taking good care of it.

So, we're not really comparing our today-salary with our retirement-expectations, but I think our plans are sound.

 

[mickeyfan2]

We are not doing ours by % but the after tax dollar amount in todays dollars that we want.

ETA we set this # by looking at what we actually spent for the year minus costs that are associated with working. We are trying for twice what the average retired couple retires on in the area we live.