How Much Do I Need To Retire?

The following post is from Todd Tresidder. Todd retired at age 35, publishes the FinancialMentor blog, and lives in Reno, Nevada, with his wife and two children. His ebook, “How Much is Enough to Retire?” reveals the problems behind retirement calculators and explains the solutions he created to plan 60+ years of retirement bliss and security.

The first step in retirement planning is to estimate how much money you need to retire. This is actually a fairly straightforward task because there are simple mathematical formulas and easy-to-use online retirement calculators designed to help you. The process is well understood and the tools are easily accessible on the internet.

What is less well known, however, is how these calculators work and the inherent problems involved in using them correctly. In other words, it is easy to create a retirement estimate but surprisingly difficult to do it accurately.

The reason it is difficult to create an accurate estimate for the money you need to retire is because the accuracy is dependent on the assumptions you use. Many people fuss over whether to use elaborate models like Monte Carlo or simple rules-of-thumb like the 4% rule, but that is missing the forest for the trees.

Huge differences in your retirement planning estimates occur when you vary the assumptions used for spending (have you succeeded at paying off your mortgage?), income, inflation, and other required inputs. The unspoken truth about retirement planning is the validity of the assumptions used to determine how much you need to retire will make or break your financial security.

The Inherent Problem With Making Retirement Assumptions

Below are the six common assumptions required by nearly all retirement calculators to determine how much money you need to retire:

  1. Annual spending budget
  2. Estimated inflation rate
  3. Expected lifespan
  4. Annual income from sources other than savings
  5. Estimated return on investment
  6. Expected retirement date

As you read through this list of assumptions you probably realized something – they can’t possibly be answered accurately. Think about it. All but one requires you to predict the future—something no one can do reliably without a crystal ball. In fact, only one question can be answered with confidence because it is the only one you have any control over (number 6 in case you haven’t guessed).

Amazingly, conventional retirement planning requires you to provide assumptions that are impossible to estimate accurately in order to determine how much money you need to retire. It is insanity. If you vary these required assumptions within a reasonable range of probable outcomes you will find the estimate for your retirement savings can vary by two to three times the original amount.

In other words, one set of assumptions might result in $750,000 of retirement savings needed, and an equally plausible set of assumptions might estimate $2,250,000 in required savings. The difference is huge, and yet both set of assumptions are equally likely to be true. The whole process can leave you wondering what is the real retirement number and how can you ever retire in confidence?

Below we will look at each of the assumptions necessary to accurately answer the question, “How much do I need to retire?” so that you can better understand the issues involved.

How To Estimate A Spending Budget For Retirement

 

Most traditional retirement planning models assume you will need 75% to 85% of your working income in order to maintain your standard of living after you retire. The idea is that you will save on work-related costs like commuting and a professional wardrobe, as well as the expense of raising children. The formulas also generally assume that your home will be paid for and you will enter a lower tax bracket.

The truth is every individual has a unique set of circumstances that affect retirement spending. Today’s retirees lead longer and more active lives driving up the total cost of living in retirement. The expenses of hobbies, leisure activities and travel can easily offset any decrease in work-related expenses.

 

Your health care expenses are also likely to increase as you age, not to mention the price of long term care if you don’t have insurance to cover that. If you still have a mortgage on your house or a child in college, your expenses during your first few years of retirement may be equal to or greater than before.

The reality is you must plan a personalized retirement budget that reflects your unique plans for retirement. Some will spend more than their current income during retirement, and some will spend less. The research on retirement spending indicates a wide variance in retirement spending patterns with most people reducing spending as they get older. Any way you look at it, the 75-85% rule-of-thumb is a dangerous assumption that is best ignored.

Reasonable Assumptions For Inflation During Retirement

Most retirement calculators assume a modest 3% inflation rate. This is based on recent history (the last 20 years or so) and implies that your spending in nominal dollars will roughly double every 24 years.

The problem is if inflation increases to 6% (not a far-fetched possibility) then your spending will double every 12 years instead. That obviously makes a very big difference in how much you need to save for retirement. Rather than watching your expenses double once or maybe twice during retirement you could see them double 3 or 4 times which would drastically affect what you could afford to spend.

Historically, inflation has fluctuated from negative numbers to double-digits during wartimes and has shown prolonged periods of higher rates than the commonly assumed 3%. Given current conditions with high government debt and deficits combined with entitlement funding problems, many credible economists predict increased inflation over the next 20 years.

So how much will you assume for inflation when calculating how much money you need to retire? A percentage point or two can make a dramatic difference. I suggest using a range of assumptions varying from 3% on the low side up to 6% on the high side depending on how conservative you want to be in your retirement planning.

How To Estimate Life Expectancy

 

Isn’t it amazing that retirement planning requires you to estimate your life expectancy? Talk about an impossible task.

Sure, you can estimate your lifespan based on family history and your current health and medical conditions, but no one can possibly know how long they will live with any confidence. There is zero actuarial validity to estimating a single lifespan. You are no more likely to live until age 80 than you are to die tomorrow. For any one person life expectancy is random. It is only a valid statistical concept when large numbers are involved – not individuals.

Yet life expectancy has a major impact on figuring how much to save for retirement. The reason is because funding 20 years of retirement is dramatically different from 40 years or more. In the first scenario you can spend principal and the effects of inflation are reasonably manageable, but in the second scenario you not only can’t spend principal but you must also develop a perpetual income stream that grows faster than inflation. In short, different life expectancies imply dramatically different retirement savings requirements.

The conservative solution is to assume the best and plan on a very long life – longer than the actuarial tables estimate. If you come up short the worst that will happen (besides dying early) is you leave a nice legacy behind. If you live a full, long life you will need every penny. Many complain that a long life expectancy pushes retirement savings goals out of reach, but the truth is roughly half those people will outlive the averages and require the greater savings anyway.

 

Estimating Income From Social Security, Pensions And Annuities?

 

While Social Security will not likely disappear altogether, the inflation adjusted value of benefits will almost certainly decrease – especially for those retiring behind the Baby Boomers. You can check your annual wage and earnings statement from the Social Security Administration to get an idea of how much you’ll receive when you retire. The younger you are today the greater the risk that the inflation adjusted value of your benefits will be less than currently estimated.

 

Pensions, particularly private ones, are also proving to be less reliable than they once were. Fewer companies are offering pensions in the first place, but even those with longstanding traditions of fat pension benefits are backing out of those obligations – just ask airline employees.

Sure, there are protections in place to ensure you don’t completely lose out on what was promised to you, but underfunding is a serious problem with the recent market declines. Should your company default on its pension plan you could be left with a reduced payout. If your pension is frozen, you will still be entitled to benefits already earned, but you will stop accruing additional benefits.

 

In other words, Social Security and pension income may not be as dependable as you thought placing a greater burden on your retirement savings.

 

What Will Be My Investment Return During Retirement?

Most traditional retirement planning formulas assume long-term historical returns from a traditional stock/bond portfolio of 7% to 10%, decreasing to 4% to 5% after retirement as you shift away from equities and toward fixed income.

The problem with these estimates is they are derived from super-long data periods irrelevant to most retirees. What retirees care about are 15-20 year periods – not 100 year market history – and the surprising reality is how variable the returns can be over 15-20 year time spans. Negative to flat returns are entirely possible but are wholly unexpected when using traditional retirement assumptions – just witness the last 10 years for the U.S. stock averages.

This is incredibly important because even small changes in return on investment can dramatically alter your retirement security. It is not realistic to blindly assume long-term historical returns when your investment time horizon is significantly shorter than the data assumes.

When Can I Retire?

Finally, a question you can answer accurately. You choose your retirement date and you are in full control of when that occurs. If you are somewhat flexible in deciding when to retire, you can significantly reduce the amount of money needed to fund your golden years. Working just a few more years allows you to continue building your portfolio while at the same time putting off drawing down your savings. If retiring is not optional, however, due to medical or other reasons, plugging this known figure into your retirement calculator will send you on your way to determining how much you need to save.

In Summary

The key point to notice from this discussion is retirement planning is not nearly as simple as the financial calculators would lead you to believe. Sure, it is easy to create an estimate when saving for retirement, but creating an accurate estimate is an entirely different matter.

The fact is you need to make six different assumptions when calculating your retirement number; yet, only one of the assumptions can be estimated with any certainty. The rest require you to predict the future which is unknowable and impossible to do. Even the experts can’t do it – and neither can you or your financial planner. If you believe otherwise you are just deceiving yourself.

This is a big problem because the answers you assume to these questions will dramatically affect how much money you need to save so that you can retire with financial security. A small change in just one answer can vastly alter the resulting retirement savings requirement. In fact, I highly recommend you test this using your favorite retirement calculator and prove it to yourself. Don’t take my word for it.

Start varying the three most important and difficult assumptions – return on investment, life expectancy, and inflation – and you will be amazed at the dramatic impact it has on how much money you need to retire. Now, imagine if your estimates are off on all five of the variables—your retirement savings could be wildly off target forcing you to work longer, cut back on your lifestyle, or worse, run out of money before you run out of retirement.

What you will see when you complete this exercise is the traditional approach to estimating how much money you need to retire makes you completely dependent on how well your assumptions reflect your future retirement reality. In other words, you have to be able to forecast 20-40 years into the future. This makes the apparent scientific precision of retirement calculators far less scientific.

 

 

Comments

  1. This blog is cool. Although I’m not really retiring yet (far from it), this article gave me an insight as to what I should do when I get there. Thanks!

  2. It seems very difficult to determine because we do not know how things will cost down the road and what will essentially be enough. I am starting young and trying to prepare and learn but so difficult to even think about it, much less a specific #.

  3. So to sum up: get you investments to a point where they will provide you enough yearly income to pay all your expenses and still grow past the rate of inflation, but be ready to jump back into the workforce if you screw up, get sick or the economy tanks. Sounds like something I’ve heard before…not really a piece of blazing new insight.

    It’s hard to argue from a results based standpoint. Mr. Tresidder retired at age 35. Wouldn’t we all like that? What I’m about to say is not a critique of him or his advice, but it does shed some light on how he was able to achieve what he did. Then we can see if his story and advice would apply to us.

    After a few quick Google clicks I find that Mr. Tresidder is a retired hedge fund manager who ‘built a multimillion dollar net worth’. Ah, so that’s how he retired at age 35! I have a sneaky feeling that if most of us were earning 6 (possibly 7 or 8) figure salaries and lived prudently, we too could retire after working only 10-15 years. That would assume we don’t increase our current lifestyles, which is probably bogus. If I earned a million bucks a year, I’d probably increase my spending a teensy bit. Why bring this up? For starters, in the introduction to Mr. Tresidder in this article, he’s introduced as a 35-year old retiree. Doubtless this was done on purpose to shock us into thinking, “whoah, this guy really knows what he’s talking about! If he can retire 30 years before the average adult, what a financial wizard he must be!”

    Slow down cowboy! Now that we know where he’s coming from, let’s dissect a little here. First lesson I learned: get into a career or business that allows you to earn a pile of money very quickly. Second lesson, keep enough of that money to retire on comfortably and write financial ‘how to’ for the remaining masses—people who probably won’t ever earn close to as much money as you. How will his advice pan out for people who have one shot at retirement at age 50 or 60 because the rest of their lives they are striving to build a nest egg equal to his one year salary as a highly paid financial advisor? Sure if he botches his retirement and overspends, he can jump back in and earn another 500K in about 6 months. But what about the school teacher, the fireman, or the restaurant worker? Probably not such bright prospects. If they screw up, get sick, or the market tanks for 10 years (hmmm…that’s happened recently) it’s back to the workforce or hello Medicare/Social Security.

    Again, not criticizing nor envious of what he’s done. His advice is probably sound—for people who earn a pile of money. The rest of us will likely have to be a bit smarter with our money, which is why we come to FrugalDad to learn ways to make the precious money we earn stretch a little further. I do like the fact that Mr. Tresidder tells us not to blindly trust online calculators and to dig deeper, but beyond that there’s not much new. I take it with a grain of salt.

    Oh, and remember to get a good book deal telling other people how to get rich.

  4. Sid
    My question is what took him so long to retire? I’m planning on retiring in about 10 years, I’m 38 now. I’m making OK money, 30K net, and I wasted 15 years of not being overly focused. I did at lest start in a 401K 20 years ago. for the next ten years I have to live on half what I make, then it’s time to sail away.

  5. Dave,
    I don’t know what took him ‘so long’. He probably had a certain lifestyle he wanted to achieve and be able to sustain from investing and freelancing, and that amount of assets took 10 years to accumulate. Your goals and my goals are probably much different from his.
    If I was making hedge-fund manager money, I would be retired in about 2 years if I kept my goals exactly the same as they are today. Meaning, just pile up the money and make no increase to my lifestyle. As I said previously, though, I doubt I’d keep my lifestyle exactly the same. An interesting phenomenon about humans is we grow our lives to fit our incomes/space. For example, I’ve seen families of 4 (two parent, two kids) occupy a 6-bed house and still have no storage space. Then again, other families of 6 can live well in a 3-bed house if that’s what they can afford. It’s only recently that the move away from the McMansion has become popular. I believe once the economy turns around, it is likely that the trend will reverse again. Maybe not into housing, but some other lavish piece of lifestyle showmanship.
    Dave Ramsey makes an interesting observation that I believe applies to this situation: the size of the hole is irrelevant if you’ve got a big enough shovel. I take this to mean that your income is probably the single best tool you have to build wealth. A hedge fund manager pulling in several million a year in salary will hit my retirement goal in less than a year if he lives like I live and adopts my goals as his own. However, I think it is likely that such a person will have much loftier goals. Whereas I’m good cruising around the lake on my paid for 1987 bass boat, the hedge-fund manager probably is looking for a yatch. Ramsey wouldn’t necessarily say his goals or mine are better or worse; however, the hedge fund shovel (oh heck, let’s just call it a bulldozer) is still going to put him in the position where he could retire free from financial want in a few short years if all he desired was a modest

  6. @Craig: I think that is the ultimate dilemma – there are so many unknown variables. What will inflation be in the future? How long will I live? What unforeseen expenses might hit me or my loved one in retirement?

    Sid’s comment (though I suspect some of it was a little bit tongue in cheek) is a good one. The basic idea is to amass enough money to throw off a comfortable enough enough amount of earnings to live a frugal lifestyle well into your golden years, without killing the goose. At least, that’s my objective.

    And yes, it would be much easier to retire at 35 if I made a few hundred thousand a year and lived on $50k, but there have been enough success stories of people who have reached millionaire status on $40k a year…just took them longer.

  7. @John & @ Evan – Thanks. I’m glad you found value in the article.

    @Sid – I’m saddened that you would go direct for the jugular with inaccurate criticism and group me with all the scams out there without digging a little deeper first.

    Just to clear the air, I never earned millions per year and I don’t own a private yacht. If you met me on the street you wouldn’t know me from any other Johnny Lunchbucket. Similarly, if I blow my nest egg it is not a simple matter to return and earn a quick 500K as you claim. I am a lot more like you than you would like to believe.

    In short, your perception of me is way off base.

    The truth is I worked in the hedge fund industry very early in the process back when they were known simply as private placement partnerships. We didn’t rip off our clients with the insane compensation structures you see today. Did I earn good money? Absolutely yes! Was my reality even remotely close to your perception? Not even warm.

    I left the hedge fund business at the end of 1997 because I wanted my life to be about more than just adding a percentage point or two to my rich client’s bottom line.

    I wanted to use the freedom and flexibility I created for myself to share my passion for investing and financial freedom with more people. That is why I started my web site back in 1998.

    At first it was a conventional web site only about financial coaching. I accepted between 5-7 hand picked clients per year based on their need and kept my fees low. My goal in doing this was to figure out how to help regular people working 9-5 become wealthy. I spent years doing this making far less than you probably earn just so I could understand if the goal was even achievable.

    About a year ago I started the blogging process because I now have it down to a systematic approach so I want to convert my knowledge from the years of investment management and financial coaching into an info product business.

    You can be skeptical about that or you can realize it is smart business to apply leveraged systems to deliver knowledge so that millions can access it at a bargain price point. It is good for the consumer as well as the vendor. For example, I consider books one of the greatest values in the information product business. They are a bargain.

    My intention is not $10,000 coaching programs for the rich. My intentions is sub-$100 price points for the masses. I want to help millions and the only way to do that is at an affordable price point.

    I can understand where your skepticism comes from – there are so many scams out there. I even write about these scams on my blog and will provide more consumer protection information in the futre. However, I would encourage you to give someone a fair shake and examine what they are doing before labelling them negatively.

    Think about this from a common sense standpoint…

    As you correctly pointed out, I could make a ton of money in the investment management field if my goal was just to make money. Instead, I have spent years working in the financial education business providing tons of educational writing for free. Years of work for almost nothing (a small amount of revenue from coaching clients and ebook sales).

    Why would I do that unless I was pursuing my passion. My intention is to help.

    Again, I understand where you are coming from. You are correct to be skeptical. I would, however, encourage you to look a little closer.

    I provide tons of free educational material with more to come and you never have to pay me a dime.
    If that is a scam then I am one very stupid scammer. If the benefit in this process is flowing to me instead of the consumer then please show me what I’m missing.

    Instead, maybe it is someone who is legitimately trying to be helpful and share knowledge that has made a huge difference in his life by giving it back to others.

    Just maybe there is something of value there for you…

  8. @Sid – I read your comment again after my reply and realized I was so distracted by the inaccurate personal stuff written that I completely overlooked your assessment of the article in the opening paragraph…

    You summarized my article as being another repetition of “raise your income to the point they cover your expenses” and “not really a blazing piece of insight”.

    Strange you saw it that way…

    I personally thought the article was about how the assumptions required by traditional retirement planning made no sense thus invalidating a process that millions of people base their retirement security on every year.

    My experience in working with people on these issues is most have no clue how the process works and how invalid the assumptions are behind the process. Most people find these concepts quite eye opening.

    In fact, what I showed was the industry standard approach is invalid. Honestly, I expected the criticism to be that my viewpoint was radical – not mundane. I expected people to say the industry standard was sound and I would have to defend my belief to the contrary.

    Anyway, I thought it was important to clarify the message I intended to provide with this article. I thought it was important to share because I see so many people making the mistakes that the education in this article can correct.

    Hope that helps…

  9. Hi Todd,

    I think you misunderstood me as much (if not moreso) that you say I misunderstand you. Re-read my initial post: I clearly say (twice) that I am not critiquing you nor your advice. See paragraphs 2 and 5. As a matter of fact, I actually liked what said and gave specific praise to you in paragraph 5. Please explain to me how that is “going for the jugular”. The only assumptions I made about you were that you probably had a 6, 7 or eight figure income (the site converted my 8 into a smiley face for some reason). I don’t know when you retired, but adjusted for inflation didn’t you make at least $100,000 in today’s dollars? And I never said you were a dishonest hedge fund manager: I said you were a hedge fund manager, which is what your website says about you. I think you are projecting the current medias anti-hedge fund manager bias into my comments (i.e. putting words into my mouth).
    No, if you read carefully, you’ll see that my critique is valid when it addresses your message in this article. Bottom line is, I’m going to guess you make more money than about 90 – 95% of Americans, based on an average disposable income of around $87,000 annually. Please reference the most recent US Census bureau report for more detail. http://www.census.gov/prod/2008pubs/p70-115.pdf While I am not 100% certain, I’m going to stick out my neck (and prepare to get it chopped if necessary) to say you have a better average income than that. The fact that you were able to retire by 35 shows you must have at least your basics covered. Or maybe not. Maybe you’re living in a ditch somewhere and have access via a laptop to the local coffeehouse free WiFi. Ok, tongue in cheek there. Yet your website again introduces you as a multi-millionaire. Whether that money was made thru investing or working for someone else is immaterial: the fact is your income “shovel/bulldozer” is a lot bigger than most readers on FrugalDad.
    Therefore, one must, as a critical reader, consider that your “starting point” in finances was better that the average reader of this article. This is all I really set out to discuss. And yes, the “retired at 35” IS meant to be propaganda. Why else include it? I don’t think it’s bad propaganda, but it is propaganda. I wouldn’t want the advice of someone who took until 85 to retire. Everyone who’s selling something needs propaganda. It’s called advertising.
    If you will carefully look at paragraph 5 again, you’ll see the heart and soul of my argument and I’ll state it again here for anyone who missed it: when you start with more it’s easier to end up with more. Not guranteed, not easy in itself, but easier. There comes a point where, as FrugalDad agrees, one’s investments generate enough income to ditch the everyday job and get on to wonderful stuff like making money using money instead of sweat. To me, that’s the ultimate goal when it comes to financial freedom. You got there at age 35. Bravo, bravo! But odds are most of the reader here won’t get there as fast because their shovel isn’t as big as yours was at a young age. Now your website does say that you went from less than zero at age 23 to multimillionaire at age 35. Assuming the definition of zero is zero and multimillionaire is at least $2 million, you’d have had to have something like $35,000 per year to invest and make an average annual return of roughly 25% to get there in 12 years. So my assumption of the size of your shovel compared to the average reader is probably at least somewhat accurate.
    As to the ‘freshness/newness/uniqueness’ of your article’s ideas: let’s look at them one at a time. 1) Estimate a spending budget. Successful people have done that since the dawn of time. 2) Estimating inflation is impossible. Stuff gets more expensive and no one knows how fast that will happen. Ok, again I think we can agree we know that already. And is 6% really reasonable? Based on what numbers? You leave the door wide open here and give no definitive source for your figure. 3) Predicting your lifespan is impossible…who doesn’t know this? 4) Projecting your income from investments and pensions/Social Security is impossible. The last 10 years have re-emphasized this basic tenant again. 5) Predicting results of investment during retirement is impossible. This is the same essentially as # 4, though from a source a person controls rather than their employer or the government. There is nothing really new here other than one shouldn’t trust online retirement calculators because they make assumptions about these rather vague areas.
    Is that going for the jugular or just an honest critique? I’m not attacking you personally, but I find your ideas based on tried and true common advice available on most any personal finance website or blog and your numbers don’t have any sources attached. I am sorry that you found my initial and subsequent posts a personal attack against you. It was not intended that way and I hope this clears the air.

  10. I’m sure that Mr. Tressider is right, but I’m not sure how to use this information! Maybe it’s just a call to make sure not to rely on optimistic expectations about social security, inflation, and return?

  11. @Sid – You sure know how to welcome a guest post writer to this site:-)

    Here is a statistic for you just to put this to rest.

    My net worth exceeds the sum total of my lifetime earnings as measured by my Social Security statement.

    Most people would be happy to have ten cents on the dollar saved for every dollar that passed through their hands. I have more than one dollar to show for every dollar I have earned.

    The only way you can achieve that result without a trust fund or inheritance is to be an outstanding investor and manager of your personal finances.

    In other words, my financial freedom did not come from a big shovel as you claim. It is mathematically impossible to have your net worth exceed your lifetime earnings using the big shovel approach.

    I grew my net worth the same way you and most people on this site will do it – by being a careful manager of my personal finances and an outstanding investor.

    Maybe I read too much between the lines in your comments, but my sense is you are determined to discount what I did as not applicable to your situation or unrelatable to readers of this blog.

    Maybe, just maybe, the differences are less than you would like to believe. Maybe there is something positive that can be learned here…

  12. @ Sarah – Exactly right!

    My concern is too many people bet their retirement on what I call the “single number myth.” The idea that there is just one magic number that depicts the savings required to retire is dangerous.

    The process is “shades of gray” when the industry depicts it as “black and white”.

    By embracing “shades of gray” and realizing you are not trapped in a black and white box then you can develop creative solutions to figuring out how to retire.

    Hope that helps.

  13. Todd, my goal is not to welcome or exclude anyone. My goal is to discover, through rigorous application of logic and math, if what you’re doing was easier for you to achieve due to a higher than average income. I’m sorry you feel the need to keep defending yourself from this as if it were a person attack: it is not, but the fact that you keep referring to me ‘going for the jugular’ and ‘welcoming you to the site’ (smiley face meaning you’re being tongue in cheek) dislodges the topic of discussion. So, let’s get back to the numbers.
    Since you insist that you and I have more in common than I believe, I’ll assume you also mean your income was not much different than mine. My example above of $35,000 a year to invest at 25% average is pretty extravagant, I’ll agree. I have approximately $10K a year to invest. Since you say ‘we are alike’ then you’re in the same situation as I am however long ago you started investing. If you invested 10K per year for 13 years, you’d have to average a 35% rate of return, reinvest all dividends, and pay no taxes on gains to achieve multimillionaire status (defined as $2 million investable assets).
    Just about every financial expert and advisor I’ve ever heard of or read says that the market averages about 9% a year (range of 8 – 11 depending on who’s talking). You are able, strictly and solely through your financial savvy and system, to more than triple the stock market’s average return for 13 years. Is that what you are saying? If yes, fine. If not, please correct my understanding of what you are saying, and preferably back it up with some hard numbers.

  14. While I have enjoyed the banter of comments, I will comment only on the post itself. I gained from the post that nearly all assumptions made with slick retirement calculators require knowledge of the future that we don’t possess.

    The plan for retirement, therefore must be to learn how to manage our assets throughout our lives, create diverse income streams and plan on being ready to continue to work (hopefully pursuing a passion) later in life.

  15. Some good conversation here! Let me simplify for you guys.

    Take how many thousands you need a month and multiply it by 25. That’s what you need to retire. You get that figure, you’re likely never going to starve.

  16. I enjoyed trying out your retirement calculator at your financialmentor site. I noticed though that the final estimated figure was significantly lower than what I’ve calculated it to be. Reviewing the report, I noticed what I think caused the difference: my estimates anticipate that my yearly salary will increase with time, and so will my contributions to retirement. Your report shows me contributing the same dollar amount to retirement this year as when I’m 60. I’m a 15%-towards-retirement kind of guy, so surely as my salary increases, so will my contributions.

  17. @Sid From Missouri – I guess that is why they call Missouri the “show me” state…

    I will provide one last comment reply to respect your inquiry, but I have to end this dialogue and get other things done. I hope that is reasonable.

    In your last comment you quoted passive investment, buy and hold type returns from equities as your benchmark for analysis. Again, your assumption does not apply. I think that is part of what is causing the trouble here. The assumptions being made are inaccurate.

    (Funny, because that was the whole point of the article… Hmmm, maybe there is something to that?)

    I did not earn a “bulldozer” income as you claim and I’m not a buy and hold investor as you assumed above.

    I am an active investor. The reason is because I do not believe the risk to reward ratio from passive investing is acceptable except during periods of low market valuation. At that point, “buy and hold” is the best strategy in town. Unfortunately, those conditions have not yet existed in my adult lifetime so I have had to learn how to manage risk actively to achieve my investment goals.

    For example, buy and hold investment returns for the last 10 years is zippo or negative give or take a few percent. I would be broke long ago if I had to live off that.

    During that same period I have had years in excess of 100% gains and other years with very small losses (but no major losses). For example, in 2008 during the asset meltdown my portfolio had roughly a 17% return. That is all investment accounts and positions put together – winners and losers combined. Hopefully that gives you the hard numbers you are looking for.

    As I said earlier, my wealth was not from a fat income. It is primarily from investment skill compounding over many years combined with prudent, frugal management of personal finances.

    As I said in the pior comment, that is the only way I know that you can build a portfolio that exceeds your total lifetime taxable earnings (without inheritance, trust fund, or winning the lottery).

    If you really want to twist your brain around the numbers try this one on for size – all the numbers I am telling you include the fact that I have been living off my assets since 1997 supporting a middle class family of four on the west coast (expensive) with kids in private school (expensive).

    Just imagine what my asset position would be if I had been earning a decent income during that time period rather than primarily living off the assets. A huge difference.

    Finally, Sid, I will close with this comment. I was not born a skilled investor. I’ve had to work hard to learn these skills. I’ve read literally hundreds of books on investment strategy. So many in fact that I auctioned several hundred on Ebay a few years back just to make room for the new stuff.

    I spent ten years programming and testing computerized trading and risk management systems to understand the markets.

    I’m a perpetual student and have paid a price for my knowledge. You could do the same if that was your priority. Everything I learned is publicly available information. I have no investment “secrets”. The price of entry is determination and work.

    This might also be why we have such differing opinions on the relevancy of this article.

    I find great freedom in the points made in this article. Once I understood how the calculators worked and the invalidity of the assumptions (similar to the assumptions you are making in these comments) it allowed me the freedom to rework the whole retirement planning model.

    For example, my investment returns completely change how much money I need to retire because the spread between inflation and my returns is so wide. The flip side of this same equation is it puts tremendous pressure on my investment activities to perform without error. There is no free lunch.

    People reliant on passive returns face a very different picture. The spread between investment return and inflation is so small that a lot of assets are required to provide an acceptable income plus the risk is much higher because the return stream is irregular.

    Anyway, there are many creative ways to play with the numbers once you fully understand how the models work and shift the assumptions. Investment returns was my approach. Others choose frugality to reduce expenses. Still others choose lifestyle businesses to bring in additional income. The choices are limited only by your creativity.

    Hope that helps, and best of luck to you.

  18. Samurai, so if my expenses were $3000 per month, I would need only $75,000 total to retire. Hmm, I think that would be committing financial seppuku. How would 75K generate 3k of income per month?

  19. Almost There – Good catch. Sorry, ANNUAL income requirement X 25. So $36,000 X 25 = $900,000. Or, divid $36,000 by 4%, which is the realistic risk free rate of return.

    Seppuku, I like that. May have to start a series!

  20. Todd, thanks for the answers. I consider my time well spent…and based upon the advice you give and the time it took you to read and write these comment vs. your standard hourly earning, I consider myself to have come out ahead in the bargain. A frugalista to the end.
    Ok, I did play hardball with you, but no more hardball than I would with anyone who purports themselves to be a financial expert. I say that now conviced that you have made your case, you have ‘showed me’. Either that, or you’re a really good smoke blower…it’s hard to tell unless someone is willing to open their books up to you.
    I’m not asking for anymore–and per your last response it sounds like I wouldn’t get any more. You will–undoubtely–encounter many such super scrutinizers such as myself throughout your career if you haven’t already. I’ve found the only way to separate the winners from the losers in the arena of financial planners is through tough questions. When I choose someone to advise me on finances, they better be able to prove to me–through rigorous analysis and math–that they’re worth the sizable chunk of change I’m preparing to set at their feet (and the commissions I’m preparing today). They get paid whenever I take the class or buy through the brokerage account whether I win or lose. So they better frickin’ know what they’re doing. Maybe my tough questions/assumptions are not what you’re used to, but believe me it’s no more than I’d ask anyone else.
    And by the way, I thought about your comment about ‘going for the jugular’ more on the way home from work. In the rough and tumble arena of personal finance, I want an advisor who goes for the jugular. I don’t want some 2nd class ‘nice guy’. Now, I also don’t want a crook or an immoral weasel, but like you observed, there are tons of ‘average, passive’ investors and I find that’s true for advisors as well. I want a high-octane advisor. Maybe that’s someone like you.
    So thanks for your time and willingness to answer some questions. I hope I didn’t needlessly offend you. I still think you probably made more money as a hedge fund manager than I ever will as a computer programmer, but perhaps the shovel argument is best laid aside (for now). Cheers.

  21. @midwest bird – Thanks for trying my retirement calculator.

    It is designed for quick and easy creative scenario analysis. The idea is to be able to vary one or more inputs while leaving everything else fixed to see how it affects the results. My experience is the key in retirement planning is not tweaking the details but in varying the critical assumptions.

    After reading this article you will likely notice what a huge impact the various assumptions have on the end result.

    It can be a very productive approach to solving people’s retirement planning problems.

  22. The retirement the article recommend doesn’t work. I changed the current saving to zero, the result still showing as I don’t need any more saving for retirement.

  23. Thanks for your very informative articles for retirees. In my point of view you should save maximum for your retirement. The maximum you can but don’t cut the necessities of today’s life. Anyway, you have given lots of suggestion for retirment planning for elderly.
    Tha

  24. Something’s missing from the calculations in some of these comments. The Rule of 25 suggests that if you estimate how much you’ll need to withdraw from savings during your first year (annual expenses) of retirement and multiply that amount by 25 to determine your savings target. For example, if you need $2500 a month to live on, multiply that by 12 months. Take THAT amount (30,000) and multiply times 25 ($750,000), and that is your target savings amount. (For additional years of income, multiply by whatever number of years you will likely live after your retirement age…and you will never go hungry.)

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