How much do you need when approaching retirement?

[KCLarkin]

So there is your answer.  When you can make more from your investments than you did working for someone else then its time to quit, if you want. 

 

Mathematically, this isn't correct. You need to make more from your investments than you would working AND putting your money into index funds.

[Liberty]

So there is your answer.  When you can make more from your investments than you did working for someone else then its time to quit, if you want. 

 

Mathematically, this isn't correct. You need to make more from your investments than you would working AND putting your money into index funds.

 

This isn't quite correct either, because you don't necessarily need all the money you make while working to live. Hopefully you make a big surplus, which is what allowed you to save up and invest in the first place.

[KCLarkin]

Hopefully you make a big surplus, which is what allowed you to save up and invest in the same place.

 

Good point.

[stahleyp]

Financial services assume you spend roughly 85% of your income. That's why the retirement "number" is so huge. Yes, the more you have, the more they collect in fees. If you don't spend 85% of your income, your number can be lower - substantially so. For instance, before I got married, I made a decent income in a low cost of living area. I lived on roughly $8,000 a year. I was socking away roughly 90%+ of my income. If you can get an above average income in a low cost of area place to live, I think that is a much better option.

[boilermaker75]

Financial services assume you spend roughly 85% of your income. That's why the retirement "number" is so huge. Yes, the more you have, the more they collect in fees. If you don't spend 85% of your income, your number can be lower - substantially so. For instance, before I got married, I made a decent income in a low cost of living area. I lived on roughly $8,000 a year. I was socking away roughly 90%+ of my income. If you can get an above average income in a low cost of area place to live, I think that is a much better option.

 

What did the 90% you were saving change to after marriage?

[vox]

Financial services assume you spend roughly 85% of your income. That's why the retirement "number" is so huge. Yes, the more you have, the more they collect in fees. If you don't spend 85% of your income, your number can be lower - substantially so. For instance, before I got married, I made a decent income in a low cost of living area. I lived on roughly $8,000 a year. I was socking away roughly 90%+ of my income. If you can get an above average income in a low cost of area place to live, I think that is a much better option.

 

How long ago was this that you were living off $8,000 a year and were you spending <10% of your pre-tax or after-tax income?

[stahleyp]

The savings rate now is roughly 65% gross income.

 

The $8,000 per year was in 2014 and prior. The 90%+ is on pre-tax and after-tax level.

 

I'm counting 401(k) matching on that total level.

 

To keep things simple, let's say you make $50,000 a year and you pay 10% in taxes but your company matches you 15%. So you pay $5,000 in taxes but you get $7,500 from company. Let's say you spend $10,000 a year. Your savings rate is now - 85%. You're saving $42,500 out of the $50,000 gross.

 

Keep in mind I don't include dividends or capital gains. This is strictly income from labor. If you factor in others things, the spend level is quite a bit lower most years.

[vox]

That's quite impressive that you were able to live off of $8,000 in the US in 2014, the poverty threshold for a family of one is around $12,000.

[stahleyp]

it helps to not have a mortgage or car payment. :P

[rkbabang]

Financial services assume you spend roughly 85% of your income. That's why the retirement "number" is so huge. Yes, the more you have, the more they collect in fees. If you don't spend 85% of your income, your number can be lower - substantially so. For instance, before I got married, I made a decent income in a low cost of living area. I lived on roughly $8,000 a year. I was socking away roughly 90%+ of my income. If you can get an above average income in a low cost of area place to live, I think that is a much better option.

 

How long ago was this that you were living off $8,000 a year and were you spending <10% of your pre-tax or after-tax income?

 

It would have to have been his after tax income.  If he was spending 10% of his pre-tax income he couldn't have been "socking away roughly 90%+" of his income.

Both the 10% and 90% would have to have been after tax otherwise the statement doesn't add up.

 

[stahleyp]

a point of clarification.

 

my company's benefits were quite good (matching, profit sharing). I was also spending less than 10% of income.  That's how I get the 90%+.

[rkbabang]

a point of clarification.

 

my company's benefits were quite good (matching, profit sharing). I was also spending less than 10% of income.  That's how I get the 90%+.

 

Your income = 100% = (salary + bonuses + profit sharing + matching + stock plan purchase discounts + stock awards + capital gains + interest + dividends + etc)

You pay 20%-75% of that in taxes depending on your income sources and where you live (federal/state/local/property taxes/etc)

What you have left even before living expenses is 25%-80%.  It is impossible to save 90% of your gross income before tax in the US.

 

[stahleyp]

a point of clarification.

 

my company's benefits were quite good (matching, profit sharing). I was also spending less than 10% of income.  That's how I get the 90%+.

 

Your income = 100% = (salary + bonuses + profit sharing + matching + stock plan purchase discounts + stock awards + capital gains + interest + dividends + etc)

You pay 20%-75% of that in taxes depending on your income sources and where you live (federal/state/local/property taxes/etc)

What you have left even before living expenses is 25%-80%.  It is impossible to save 90% of your gross income before tax in the US.

 

Right, I didn't include profit sharing/matching/dividends, etc in the gross amount. It was basically salary + bonuses. I also don't see nontaxable events as income.

 

I will challenge you that it isn't possibly to save 90% of your gross pay though. If a married couple has $94,000 (or so) in long term capital gains and live in a no state tax state and no other sources of income, they pay roughly 0% in tax. If you live on $8,000 a year, that's a 90%+ gross. It's a stretch but not impossible.

[TorontoRaptorsFan]

I became a minimalist a couple of years ago.

Best move I ever made. Buying fewer items but of the highest quality has served me well.

I hope to be mortgage free within a year or so. Then really looking forward to seeing what the future holds...

[Txvestor]

Financial services assume you spend roughly 85% of your income. That's why the retirement "number" is so huge. Yes, the more you have, the more they collect in fees. If you don't spend 85% of your income, your number can be lower - substantially so. For instance, before I got married, I made a decent income in a low cost of living area. I lived on roughly $8,000 a year. I was socking away roughly 90%+ of my income. If you can get an above average income in a low cost of area place to live, I think that is a much better option.

 

I think that is a bit extreme. Don't forget to live a little. Life is a journey and it is not just how you finish but how well you averaged it across the whole time that is important. And though money doesn't always get you quality things, sometimes the best things are free, being too frugal can cause you to miss a few experiences and opportunities along the way also.

That said I do agree with the general principle that one should try harder earlier to save, and then somewhat take their foot off the accelerator as they get into each decade of life. Since the time compounding effect of that early career dollar is a lot more than one later on in life. Aside from that your earlier accumulated capital starts to augment you more and more so that even with that increased spending you keep moving ahead.

Even starting at 50% savings in your 20s and working down by 10% a decade should get you plenty ahead. And who knows sometimes spending on a trip where you meet a strongly positive infuence in your life or gain some useful insight cannot be measured. Sitting at home or in some rural area like a hermit isn't always the best strategy.

On a personal level I have never saved more than 1/2 my income, and with that, 2 decades in, I think I am close to being able to generate what I need going forward. I will continue to do what i do for a living becaus it is something I derive immense satisfaction from and I enjoy the company of the people I work with.

[stahleyp]

I'd say you're right under normal circumstances. I looked at it that stocks were pretty cheap and that a few sacrifices in my relative youth would pay big dividends down the road. Thankfully, it worked out pretty well.

[Cigarbutt]

Thought I could bump this up with a new link that I found interesting and relevant.

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2853538

 

Takeaways:

 

-expected returns are too optimistic.

-savings rates need to be raised.

-increased life expectancy is a significant secular trend.

-for some firms with significant pension assets and liabilities, I would expect "adjustments" going forward as the liability will tend to be stickier than the assets.

[Jurgis]

Good paper.

[Cigarbutt]

In the long run, we will all be fine (or dead), I know.

Still interesting to evaluate potential pathways, in terms of reaching destination.

 

https://assets.realclear.com/files/2017/06/609_NYC.pdf

 

https://www.fool.com/investing/2017/06/17/1-chart-may-change-everything-you-know-about-achie.aspx

 

In terms of financial independence (and flexibility), perhaps, many private and most public pension schemes should get inspiration from Mr. Money Mustache.

 

 

[rkbabang]

i don't think people have explicitly mentioned it, but i think some of the divergence in what people think they need is based on some people estimating what they need to live until they die and some people estimating what they need to live until they die and leave an inheritance to their children.

 

How do you plan for needing only exactly as much as you need until you die and no more?  If you retire at 60 and die at 72 that is a very different calculation then if you retire at 60 and live to 120.  Since you have no way of knowing how long you will live, you need it to be sustainable.  In the extreme case it could be even longer than 120. If Aubrey de Grey is correct you may live to be 1000 or more.  Eventually you may look, feel, and perform like you're 25 again, but there is likely to be quite a few decades while they are perfecting all this life extension stuff where you are just being kept alive and healthy, but still elderly.  So do you plan for 10 years of retirement or 60?  Or 150?

 

[SlowAppreciation]

Paper or electronic?

 

(I smell a content marketing deal!)

 

Ha! It's all worthless to anyone but me. But I like it. I tag everything by ticker so I can do a search and find everything I have on a certain company, I highlight key passages so that it's easy to skim and see what each part is about, etc. I like the ability to go back and see what I was really thinking at the time to study past mistakes or missed opportunities, etc.

 

It's digital. Basically just an encrypted Pages document that syncs to all my devices via iCloud, reverse chronological, with today's stuff on top tagged with the date, each part separated by dashes. Very simple.

 

Curious how you structure/organize it (if at all)? Is it just a running daily list with links/quotes/etc that you tag with tickers? Or is there a different overarching structure or tagging system that you use?

[LC]

Thought I could bump this up with a new link that I found interesting and relevant.

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2853538

 

Takeaways:

 

-expected returns are too optimistic.

-savings rates need to be raised.

-increased life expectancy is a significant secular trend.

-for some firms with significant pension assets and liabilities, I would expect "adjustments" going forward as the liability will tend to be stickier than the assets.

 

One criticism is the paper takes a "worst-case" perspective: we will live longer lives with lower expected returns. In that world, wouldn't inflation also be lower? Technology will continue to advance, making it cheaper to simply live. Better medical care. Take a look at retirees now vs. 40 years ago, when rates were higher. Who has the better standard of living?

[racemize]

Honestly, I thought their future returns expectations were still too high.  At least for the next 10 years.  Maybe 8% over 50 years or something like that.

 

I'm expecting more like 6%.

[Jurgis]

Honestly, I thought their future returns expectations were still too high.  At least for the next 10 years.  Maybe 8% over 50 years or something like that.

 

I'm expecting more like 6%.

 

8% annual on stocks for next 10 years is likely optimistic. If it's 8%-above-inflation, then superoptimistic.

 

I'd go with 3-6% annual for next 10 years on broad market. Maybe a bit more with international mix, since international has gone nowhere for a long time and is somewhat cheaper.

 

I don't think they use 8% stock return a lot. They mostly focus on the bond side non-returns. But yeah, even with their assumptions, the portfolio likely needs to be quite bigger than most people expect.