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How much do you need when approaching retirement?


Cigarbutt
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This is a general topic perhaps not related to a specific investment but potentially worthwhile nonetheless.

 

Link:

 

http://www.cnbc.com/2017/04/21/how-much-the-average-family-in-their-50s-has-saved-for-retirement.html

 

Moreover, I assume that most here are affluent or will be (if past results are indicative of future performance) so the gist of the article may be irrelevant because it concerns the little ordinary guy.

 

If you look at average amounts of lifetime savings for those nearing retirement, my opinion is that it looks insufficient.

If you look at median amounts, then I really start to scratch my head.

Because my thinking is deformed by a deep interest in history, I would submit that, at some point, the tiger may start to roar.

Perhaps worthwhile to think a minute about this issue as I finish my Starbucks extra latte non-fat with a caramel drizzle coffee.

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The tiger?

Mostly, unsustainable trends get resolved over time with "adjustments".

Sometimes, the only solution is to revolt and/or get rid of foundational institutions. Rare indeed, but historically, these situations can occur overnight.

I am a optimistic and a deep believer in the future of USA so my next sentence has to be taken into context.

I have been following the situation in Bolivia. When an animal is cornered, it can do strange and unpredictable things.

Humans can be like that too.

I like healthy compromises and prevention.

I submit that this thing about the elite disconnect is definitely present and is a deep force that is perhaps now under-appreciated.

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None of this matters because with the rise of the AI world productivity will increase by orders of magnitude even beyond our wildest dreams. So long as starvation can be staved off until All Becomes One, all problems of the mortal world will be ceased & moot. That is not dead which can eternal lie, and with strange aeons even death may die.

 

g > WACC = ∞

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Always remember that these are marketing pieces, to increase assets under management at minimal/no additional cost. Get punters to save more, and get paid a quarterly fee on it; 10K of fees on every additional 1M paying a 1% fee.

 

What is retirement? To many its stop work at 65, & never work again – for most that means getting packaged out between 55-65. To others there are actually 3 retirements; young (65-75), medium (75-85), and old (85+) – the ‘75’ is the new ‘65’. Hence it really comes down to what are you retiring to?

 

When you’re working, you aren’t spending; even if you’re either working fewer hours a week, or working full time for just a few weeks/months per year. For most people, when you’re working - $in are > $out – so why do you need 8x existing income?

 

If you’re making your own job, there’s also no ‘retirement’ age; it’s simply when you don’t feel like doing it any more – so why do you need so many years of 8x income?

 

But more importantly, when you’re ‘old’ – staying ‘engaged’ is a life extender; better mental & physical health, better attitude, better everything. So you have terrific incentive to get it right … & have had 30-40 years of practice doing exactly that.

 

Suddenly the marketing piece isn’t looking so good any more.

The bummer is that it’s very hard (but not impossible) to take a tradeable position against the BS that these marketing pieces promote.

 

Probably a good thing.

     

SD

 

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None of this matters because with the rise of the AI world productivity will increase by orders of magnitude even beyond our wildest dreams. So long as starvation can be staved off until All Becomes One, all problems of the mortal world will be ceased & moot. That is not dead which can eternal lie, and with strange aeons even death may die.

 

g > WACC = ∞

 

Yeast in a sugar solution eventually dies either from starvation (ran out of food) or toxicity (alcohol by-product).

Infinity = dead !

 

SD

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None of this matters because with the rise of the AI world productivity will increase by orders of magnitude even beyond our wildest dreams. So long as starvation can be staved off until All Becomes One, all problems of the mortal world will be ceased & moot. That is not dead which can eternal lie, and with strange aeons even death may die.

g > WACC = ∞

Yeast in a sugar solution eventually dies either from starvation (ran out of food) or toxicity (alcohol by-product).

Infinity = dead !

 

Ph'nglui mglw'nafh Cthulhu R'lyeh wgah'nagl fhtagn.

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This is a general topic perhaps not related to a specific investment but potentially worthwhile nonetheless.

 

Link:

 

http://www.cnbc.com/2017/04/21/how-much-the-average-family-in-their-50s-has-saved-for-retirement.html

 

Moreover, I assume that most here are affluent or will be (if past results are indicative of future performance) so the gist of the article may be irrelevant because it concerns the little ordinary guy.

 

If you look at average amounts of lifetime savings for those nearing retirement, my opinion is that it looks insufficient.

If you look at median amounts, then I really start to scratch my head.

Because my thinking is deformed by a deep interest in history, I would submit that, at some point, the tiger may start to roar.

Perhaps worthwhile to think a minute about this issue as I finish my Starbucks extra latte non-fat with a caramel drizzle coffee.

 

Four percent rule?

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In my country (Belgium) I estimate I need about 600k to be financially independent to maintain my current (not frugal but not lavish) lifestyle while investing conservatively.

This assumes a 5% return after tax (so 30k, of which 10k can be saved/reinvested) and my wife still bringing in a least 15k.

This is irregardless of age.

(side note: gains on stocks are not taxed here, only dividend at 30%)

 

Once I hit retirement (at 67) my pension should be more than enough to cover any living/medical expenses, especially with the added pension fund of my employer, even if I have no savings.

I do not intend to work this long full-time though...

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Always remember that these are marketing pieces, to increase assets under management at minimal/no additional cost. Get punters to save more, and get paid a quarterly fee on it; 10K of fees on every additional 1M paying a 1% fee.

 

What is retirement? To many its stop work at 65, & never work again – for most that means getting packaged out between 55-65. To others there are actually 3 retirements; young (65-75), medium (75-85), and old (85+) – the ‘75’ is the new ‘65’. Hence it really comes down to what are you retiring to?

 

When you’re working, you aren’t spending; even if you’re either working fewer hours a week, or working full time for just a few weeks/months per year. For most people, when you’re working - $in are > $out – so why do you need 8x existing income?

 

If you’re making your own job, there’s also no ‘retirement’ age; it’s simply when you don’t feel like doing it any more – so why do you need so many years of 8x income?

 

But more importantly, when you’re ‘old’ – staying ‘engaged’ is a life extender; better mental & physical health, better attitude, better everything. So you have terrific incentive to get it right … & have had 30-40 years of practice doing exactly that.

 

Suddenly the marketing piece isn’t looking so good any more.

The bummer is that it’s very hard (but not impossible) to take a tradeable position against the BS that these marketing pieces promote.

 

Probably a good thing.

 

     

SD

 

well said

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there was an article in the wsj a few days ago outlining how studies of retirement savings by americans had often significantly underestimated the retirement income of retirees.

 

i don't believe this was the one of the main factors in that underestimate, but in my own case, i probably have enough to retire now even though i would appear to be woefully underfunded by any conventional estimate of my finances.  because, although perhaps a macabre point of view, it is a fact that at some point my father will die and when he does, it is probable that i will inherit a portion of his estate. 

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None of this matters because with the rise of the AI world productivity will increase by orders of magnitude even beyond our wildest dreams. So long as starvation can be staved off until All Becomes One, all problems of the mortal world will be ceased & moot. That is not dead which can eternal lie, and with strange aeons even death may die.

 

g > WACC = ∞

 

tAIs.  8)

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Assuming not tAIs, I'd say ~$3M to retire in US.

 

This can be analyzed in couple of ways.

 

Simple/trivial: 3% perpetual withdrawal. 4% is IMO too risky for perpetual withdrawal; even with historical data, you can go to zero in quite a few scenarios. 4% is even more risky if you start at elevated market (as now). There's a study somewhere that shows this, no link offhand.

 

More complicated: live on 1.5M-2M and 1M-1.5M for medical/nursing either through a combination of long-term care insurance or whatever.

 

Even more complicated: what SharperDingaan said about 3 retirements. Analyze in/out for each, add inflation predictions, returns, etc. Left as exercise for detail minded.

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Just don't forget to put a negative value on saving too much for retirement, spending years of your life that you'll never get back piling on money that won't make you happier than the opportunity cost.

 

To invert, if you're not putting a value on your time and a risk on waiting too long to retire, then why not wait to have $50m or whatever? And why not only spend 1% a year to be really really certain. %1 of $50m is still $500k/year, that should be enough to buy the basics of life, I think.

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None of this matters because with the rise of the AI world productivity will increase by orders of magnitude even beyond our wildest dreams. So long as starvation can be staved off until All Becomes One, all problems of the mortal world will be ceased & moot. That is not dead which can eternal lie, and with strange aeons even death may die.

 

g > WACC = ∞

 

Yeast in a sugar solution eventually dies either from starvation (ran out of food) or toxicity (alcohol by-product).

Infinity = dead !

 

SD

 

Of course in the long run you are correct, but the universe is a big place, we can expand exponentially for a long time before running out of resources/energy/space.

If we stay on this planet while we still have the seas, we won't last very long.  Or even if we stay just in this solar system we will last a little longer, but not much.  Humanity needs a much bigger frontier.

 

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Assuming not tAIs, I'd say ~$3M to retire in US.

 

This can be analyzed in couple of ways.

 

Simple/trivial: 3% perpetual withdrawal. 4% is IMO too risky for perpetual withdrawal; even with historical data, you can go to zero in quite a few scenarios. 4% is even more risky if you start at elevated market (as now). There's a study somewhere that shows this, no link offhand.

 

More complicated: live on 1.5M-2M and 1M-1.5M for medical/nursing either through a combination of long-term care insurance or whatever.

 

Even more complicated: what SharperDingaan said about 3 retirements. Analyze in/out for each, add inflation predictions, returns, etc. Left as exercise for detail minded.

I think that's excessive. 1.5 M for just living? A 4% return on 1.5M will give you 60K a year without touching principle. Social Security will kick in another 30k. Maybe in some cases one would also get some sort of pension from the employer. Assuming you have your house paid off, 90k per year just for living expenses excluding healthcare? Then on top of that 1-1.5M for healthcare? I don't know exactly how expensive services are in the US but again it the amount seems large considering that you have Medicare and Medicare-D coverage.

 

I'm sure some people do use the amounts you've stated but that's definitely not how much you would "need". Further proof is that few people in the US have those kinds of amounts when they retire and somehow they manage to live.

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Assuming not tAIs, I'd say ~$3M to retire in US.

 

This can be analyzed in couple of ways.

 

Simple/trivial: 3% perpetual withdrawal. 4% is IMO too risky for perpetual withdrawal; even with historical data, you can go to zero in quite a few scenarios. 4% is even more risky if you start at elevated market (as now). There's a study somewhere that shows this, no link offhand.

 

More complicated: live on 1.5M-2M and 1M-1.5M for medical/nursing either through a combination of long-term care insurance or whatever.

 

Even more complicated: what SharperDingaan said about 3 retirements. Analyze in/out for each, add inflation predictions, returns, etc. Left as exercise for detail minded.

I think that's excessive. 1.5 M for just living? A 4% return on 1.5M will give you 60K a year without touching principle. Social Security will kick in another 30k. Maybe in some cases one would also get some sort of pension from the employer. Assuming you have your house paid off, 90k per year just for living expenses excluding healthcare? Then on top of that 1-1.5M for healthcare? I don't know exactly how expensive services are in the US but again it the amount seems large considering that you have Medicare and Medicare-D coverage.

 

I'm sure some people do use the amounts you've stated but that's definitely not how much you would "need". Further proof is that few people in the US have those kinds of amounts when they retire and somehow they manage to live.

 

I'm not gonna argue with you or Liberty. I fully expected the responses (especially the one from Liberty). Have fun.

Just couple notes:

- 4% is risky as I said

- Social security is nearly BK. I would not expect anything from it

- There are no pensions from employers

- Medicare is mostly a joke, does not cover a lot of things, and also possibly BK

 

50M is a good goal. Might not cover all basics though. Gotta go start working on it, you guys can continue the thread.  ::)

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Like many have said. It all depends. Having some flexibility goes a long way in planning.

As always, margin of safety is important if making a clean and definite break. I would say with markets where they are and fed monetary policy where it is, that margin of safety needed is heightened. Perhaps 50% more is warranted. What is more, since interest rates work like gravity on investment returns, expecting much more than 2.5%, post tax, post inflation(hidden tax) reliably seems like a tall order for most of us mere mortals. Since I consider 100k as a needed baseline income, i would say something in the 4-5M range should give you that comfort of financial independence.

I do not count social security since though I will have contributed much, my view is that means testing is a near certainty within the next decade or so. That will mean that most on this board by definition would have tried and been penalized for having done so. Irrespective of the moral hazard involved, the politics is such that its coming. If they just limit it to UHNW individuals, the savings will be meager, so they will have to get the top 10% or so, I beleive that would mean income over 100k USD a year. Medicare is a joke. Its now a form of corporate entitlement and increasingly dominated by corporate behemoths be they Insurers, PBMs, Pharma, Hospital chains etc. Alas healthcare is a skill and labour intensive service. The end result of marrying the two is inflated costs and less quality care, less provider satisfaction even as flawed "quality metrics" show differently. We the people would all be far better off in a less regulated, freer market with price transparency, but we are a far far way from that.

Neither party is genuinely interested in changing this and the irony is that such a freer market is more easily available elsewhere even if the skills and technology is not as yet. 

 

Finally moving to the other side of the coin. Spending. One should look to see where they can find "retirement value" and that may not always be the US/Can/Europe. On a recent trip to Puerto Vallarta, Mexico, I realized that there were nearly 60k retirees from predominantly the US and Canada living there. Clearly they were not all stupid. Your needs differ as you age. Medications and health care costs generally were a lot cheaper. The weather was amazing. It is a beautiful place, the people are friendly, they generally work hard and honest help is not hard to come by, there were medical facilities catering to expats and tourists and they even had a Costco and Sams club, Starbucks etc if thats your thing. My assessment was that $40kUSD a year would get me a very high quality of life there(something that might easily cost me double that in the USA, and I do not even live in the most expensive part of the USA). In addition at that age, learning a language, meeting new people, engaging in a different culture etc. can be a very invigorating experience. It is something I would consider.

 

 

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Wouldn't the 4% rule already include a margin of safety? I believe the rule works even if you retired right before the Great Depression. If you wanted $100,000 a year, on a $3,000,000 portfolio is 3.3%. I think a 50% increase on the next is a kinda extreme. Keep in mind that a lot of your income if you're retired is taxed at substantially lower rates than ordinary income (possibly as low as 0% for 95% or so of the $100,000).  Plus, if the market implodes, one can always lower their costs. $100,000 a year post tax seems like a ton for me for a baseline (especially if one doesn't have any debt). Keep in mind the rule is for roughly a 30 year retirement. I've seen some numbers that a 3.5% withdrawal rates lasts indefinitely.

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I've looked at various models and everyone always seems to use the 4% rule but realistically if your primary residence is paid off, how much really do you need. Taxes on my home are 16k. Healthcare probably another 15k. 60-75k should be enough for any prudent and fiscally responsible adult. I also question what most consider retirement. Retirement to me is doing what you want on your terms and enjoying life. Running around stressed and under a constant gun is what we strive to free ourselves from. But retirement? Many imply that this is where one officially does nothing and sits on the front porch reading all day. To do this the parameters are far different from a situation I'd more closely associate with retirement where maybe you work by choice doing something you enjoy for a supplemental income.

 

I've also occasionally screwed around with various models that branch off the 4% withdrawal plan. I'm no where near needing to tap into my investment funds but I've always been intrigued with the idea of refining the 4% strategy to something variable. Say, you live off of 50% of the previous years returns, with a cap at 7% and anything after getting thrown into a side account that rests mainly in short terms interest bearing vehicle. This side account then acts as a draw account to live on in years of negative returns. It can also be used to add fresh funds after market corrections. It essentially forces you to cash out a small piece after outperformance.

 

It would look something like this. Say you have $3m and return 20%. You "gain" $600k. Your primary account increases to $3.3m after you withdraw $300k. You live on $210k(I'd still probably spend nowhere near this), and $90k goes to the sub account. Next year you gain 16%. $528k gain, $210k to live on, $54k to sub account. $3.564m in main account. I like something like this because in lean years it forces you to be nimble, and in solid years you are rewarded for great investment returns while still growing your money. Also, provided you can generate a positive return, your safety net account grows and will cushion your down years while also allowing you to have dry powder most who are "fully invested" don't have. As long as your returns are positive, you're never really in bad shape, and honestly, while everyone debates the practicallity of "beating the index", simply generating a return greater than zero is easier than easy.

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Assuming not tAIs, I'd say ~$3M to retire in US.

 

This can be analyzed in couple of ways.

 

Simple/trivial: 3% perpetual withdrawal. 4% is IMO too risky for perpetual withdrawal; even with historical data, you can go to zero in quite a few scenarios. 4% is even more risky if you start at elevated market (as now). There's a study somewhere that shows this, no link offhand.

 

More complicated: live on 1.5M-2M and 1M-1.5M for medical/nursing either through a combination of long-term care insurance or whatever.

 

Even more complicated: what SharperDingaan said about 3 retirements. Analyze in/out for each, add inflation predictions, returns, etc. Left as exercise for detail minded.

I think that's excessive. 1.5 M for just living? A 4% return on 1.5M will give you 60K a year without touching principle. Social Security will kick in another 30k. Maybe in some cases one would also get some sort of pension from the employer. Assuming you have your house paid off, 90k per year just for living expenses excluding healthcare? Then on top of that 1-1.5M for healthcare? I don't know exactly how expensive services are in the US but again it the amount seems large considering that you have Medicare and Medicare-D coverage.

 

I'm sure some people do use the amounts you've stated but that's definitely not how much you would "need". Further proof is that few people in the US have those kinds of amounts when they retire and somehow they manage to live.

 

I'm not gonna argue with you or Liberty. I fully expected the responses (especially the one from Liberty). Have fun.

Just couple notes:

- 4% is risky as I said

- Social security is nearly BK. I would not expect anything from it

- There are no pensions from employers

- Medicare is mostly a joke, does not cover a lot of things, and also possibly BK

 

50M is a good goal. Might not cover all basics though. Gotta go start working on it, you guys can continue the thread.  ::)

 

+1

 

I tend to agree with Jurgis, but there is no mention of the age at which retirement is being planned. A $1 million portfolio at age 70 is going to be quite different from $1 million at age 40.

 

- There is a thing called "Volatility Drag". Which means that you cannot withdraw at your expected rate of return. So if your portfolio returns 5% annually, you cannot withdraw 5% without eating into your principal. This drag depends upon the volatility experienced and ranges from 1% for a 60/40 stock/bond portfolio to nearly 2% for an all stock portfolio.

 

- We are exposed to very asymmetrical risk in retirement. Running out of money at age 80 is so much more horrible than working a few more years in your 30s or 40s. So it makes sense to have a very large margin of safety in your portfolio.

 

- You are more likely to underestimate your actual costs for several reasons - anyone who has run a business or overseen projects would know this. So you need some buffer beyond what you think you need. Any surprises to expenses are likely to be negative rather than positive.

 

Vinod

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Wouldn't the 4% rule already include a margin of safety? I believe the rule works even if you retired right before the Great Depression. If you wanted $100,000 a year, on a $3,000,000 portfolio is 3.3%. I think a 50% increase on the next is a kinda extreme. Keep in mind that a lot of your income if you're retired is taxed at substantially lower rates than ordinary income (possibly as low as 0% for 95% or so of the $100,000).  Plus, if the market implodes, one can always lower their costs. $100,000 a year post tax seems like a ton for me for a baseline (especially if one doesn't have any debt). Keep in mind the rule is for roughly a 30 year retirement. I've seen some numbers that a 3.5% withdrawal rates lasts indefinitely.

 

Many differences with the Great Depression. The dividend yield on Dow I think is in double digits at its lows at that time. So at a 4% withdrawal at that time you are actually investing more into the market at its lows.

 

Vinod

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