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I am in my mid-30s but want to plan for a comfortable retirement for myself and my wife. We are about 25 years away from the finish line. Both of us are putting in maximum contributions to our 401k. I have a pension for my job that will cover about 35% of my salary when I retire. We also put away funds in a taxable investment account - I told my wife, this will be our "fun account" for travels when we are retired. My work allows me to keep my health insurance in retirement. That will keep health care costs down since we plan to retire before Medicare kicks in. Our house and cars will also be paid off before retirement.
I had an interesting conversation with someone who was 60. He told me that you don't need as much money as you think you do. His main premise assumed that you have your house/car paid off and only needed to cover property tax, insurance, food, etc. My old assumption was to try to replace 80% of our household income when we are retired. After this conversation, I went home and did a spreadsheet of my current expenses without a mortgage. The expenses came out to be 15% of our household income. If this is the case, this is lower than my 80% income replacement model.
From an investment standpoint, we use a dividend investment strategy for our taxable investment account. We buy blue chip companies (Cola Cola, Johnson & Johnson, Apple, etc) that pays dividends which are reinvested. Once we are retired, we are hoping to use this income stream that will replace a portion of our working salaries. Our 401ks are invested in index funds for long-term growth. We are not counting on Social Security.
Since a lot of my calculations are based on assumptions at a later stage in my life, I wanted to know from people who are currently retired. How far off are my assumptions? Is there anything I am not factoring in that I should? Was retirement living cheaper than what you expected?
Is anyone currently living off dividends? Is our investment strategy sound?
we are retired and can not just live off dividends . our fund distributions can vary from 29k last year to 69k in 2014 . you have down years principal will be needed to make up shortfalls as well as inflation adjusting and expenses that may exceed dividends .
the biggest issue is sequence risk , that is the order of your gains and losses as they come in . average returns mean nothing when spending down .
pulling 4% inflation adjusted can leave you anywhere from zero to more then 2x what you started with depending on markets , rates and inflation .
we basically set a side cash from all parts equally for the year each jan 1 . we channel the dividends in to accumulating next years money . then we do what we have to to make up any shortfall for that year .
so we are actually keeping 2 years cash liquid . we spend down year 1 and accumulate year 2 .
Last edited by mathjak107; 03-22-2016 at 08:19 AM..
I am willing to bet the OP does not have any kids. If and when you have them, be prepared for some serious expenses.
One issue does not require any guesswork. The OP has started saving for retirement at an early age. That will make a huge difference 30 years from now. Assuming that unexpected events allow that to continue.
To answer the question, how much will be needed in retirement, that is highly variable and personal. I think the 80% estimate has been a good rule of thumb to maintain the preretirement lifestyle. If you move to a less expensive area, then costs will go down and you can adjust your estimate accordingly. Paying off a mortgage will also substantially reduce costs. Paying off the mortgage and moving to a lower cost area can mean maintaining the same lifestyle at 50-60% of preretirement costs. I am still living in a high cost area to be near family and because I enjoy the positive cultural aspects. I am spending more on photography and other activities. I travel frequently for extended periods of time. Usually that is relatively inexpensive travel by RV or to visit relatives, but the costs still become significant. Our healthcare costs have increased greatly. Additional expenses include costs for Medicare benefits, LTC insurance, supplemental insurance ($6k/yr for the two of us) and donut hole drug costs. Plus there have been added costs for dental and eye care. My wife and I are paying at least $15k/yr more than when I had comprehensive workplace medical coverage. For us the 80% estimate is too low.
My wife and I are expecting our first child this year. We are hoping to have two kids long term. That will lower our monthly savings into the taxable account but we are still maxing out the 401k. We are also planning to use the 529 plans for college savings and contribute the max allowable when they are born until they are 18. If that is not enough, they will have to take out loans for the difference. My wife and I both paid for our college educations without any assistance.
We do live in a high cost area and hope to stay in the area for retirement to be close to family and friends. We both love to travel and have done much in the first two years of our marriage. With the kids coming, we will be scaled down. Hopefully, we can travel often again in retirement. We live in a modest 3BR townhouse that is close to our work and serve our needs. We don't plan to upgrade to a big single family home and take on more mortgage/property tax. We want to paid of current mortgage in 20 years.
I am thinking that perhaps 60% income replacement will be comfortable for us in retirement. I keep reading 80% but we are generally frugal people (no luxury car or country club membership). We are happy with a simple life and a few nice things once in a while.
We are retired and have only one child. We continued to travel and save with one. I don't think it would have been so easy with two. He was able to finish his education with no debt. We have not had to help him out as an adult. Many retirees are still supporting their kids. Something to consider before having a second .
This is one of those threads that needs a canned response; it gets asked a lot. The answer always is it depends on a lot of factors but the general idea is to throw a % out there for people who haven't done any realistic number crunching. If you crunch the numbers and come up with realistic expenses; just use those. There really is no point in converting them to a % of salary IMO, except as a point of reference about how far wrong the estimate is using a %.
I would need 80% if I wanted to live exactly like I do now with a mortgage and a car payment. And cover expenses for my son. If I remove all of that, aren't paying into a 401K or SS anymore, then I think my min target is more like around 50%.
So I think that 80% rule is pretty excessive, and hard to hit for the average Joe. Most retirees aren't anywhere near that.
That being said, if I can somehow magically stay employed till at least 65 and the stock market doesn't tank, it's possible to still get to that 80% level if I don't collect SS till after 67.
OP - you're smart to be planning now and putting away so much money. However, life happens and you may not be at the same job in 10 years or you may be divorced, have (more) kids, etc. Build in some flexibility. 25 years is a long time!
Also, I don't understand so many retiree's fear of taking any money out of their accounts. They want to live off dividends and interest. They've saved maybe a million plus dollars and even though MWR is often estimated as 4% a year to be safe, they won't even take 1% out of FEAR.
Think! If you are willing to seriously curtail your quality of life to save that much money and then you don't even spend (the bulk of it) after you are retired then I don't know what you're (that's a universal "you're") doing it all for. Think about what you want your retirement to be and what you are willing to give up for it when you're working to achieve that. Try to make it a balance.
You're on the right path capitalhockey but you also have to plan for the curve ball life may hand you. I believe in back up money for your back up money. There is also inflation which may be a big issue for you in thirty years. I can't believe how much some things cost now vs when we were first married thirty years ago.
A lot of people had to defer their retirement plans after the last recession, or depression, if you look at it through the eyes of the financially devastated.
I felt the same way about social security in my 20's as you do now and we planned accordingly.
As far as not needing as much money in retirement as we needed when we were working? I disagree. Especially if you have a catastrophic illness, or need assisted living. Being forced into some state run nursing home terrifies me. I think it's better to have way more then you need vs just enough to get by. Most of our retirement expense comes with the end of life issues. One partner can totally wipe out what the other partner needs to live on for the rest of their life as well.
Keep doing what you're doing and look beyond just retirement. I think most people forget to plan for that.
The 80% can work for planning at your age but since you are willing to put in a little more work you should make up your retirement budget in today's dollars. Make it in several parts. Basic expenses, Travel, entertainment etc.
Be sure to include all of your expenses such as health insurance, home maintenance, replacement cars etc.
Using the 4% rule multiply your budget by 25 and that will tell you how much money you should have today. Since your retirement could be 40 years or more this estimate is probably on the low side.
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