Almost five years ago I did some basic calculations to set my retirement number. Recently I decided it was time to update those projections as well as get a bit more specific. After all, I am five years closer to retiring. ;-)
So here's what I did:
- I started by setting a baseline -- where my assets were at the end of 2010. I did this for every major asset group -- retirement accounts (401k and IRAs), personal investment accounts (taxable), 529s, house, savings accounts/cash, and so on. Since I have no debts, these numbers summed make up my net worth.
- I then assumed a given return/growth rate for the next 14 years (when I hit 60) for each group. For investments, I assumed 8%. For house, savings and so forth, I assumed 0%. These numbers give me an estimate of what my current assets will be worth in any given year.
- I then selected a savings goal for each year -- what I can add to my net worth out of current income (as you know, I'm a pretty big saver). I estimated that the amounts saved would earn 8% every year after I saved them. This then gave me a value each year for the worth of my additional savings.
- I then subtracted extraordinary expenses in certain years. The only ones I really have (other than saving for retirement) are college costs for my kids. I added in a healthy amount even though I have 529s for them. If anything, I think I may have too much saved for college. Then again, it's better to have too much than too little IMO.
When all of the above are put together, I get an estimate of what my net worth will be in any given year. If I had access to all the money (much is in retirement accounts that I can't get to for some time), I could retire without having to work AT ALL by the time I'm 52 (the year both of my kids will be in college). But I don't have access to it all -- unless I want to initiate a SEPP plan. I need to investigate this more before I have an opinion one way or the other. It may prove to be a valuable way to help me transition into retirement.
Anyway, now that I have a decent guess of what assets I'll have at various points in my life, here are some options I can consider:
- I could retire completely at 52 with the aid of a SEPP plan. Then I could volunteer, start my own business, or do any one of a number of other things I enjoy (or find some new things I like to do.) My annual income from my savings (not having to dip into the savings at all -- just live off the earnings) would be about $30,000 higher than my annual expenses even assuming conservative earning rates. Inflation will eat into this a bit, but I have a cushion.
- I could take early semi-retirement at 52, working part-time until I'm 59 1/2. At that point, I could keep working or retire altogether. I'm confident that I could earn enough even while working part-time to cover our annual expenses, so our nest egg would continue to grow for the seven "in-between" years. My wife could start working as well at this point since the kids will be out of the house.
- I could work until 59 1/2, then retire. I could either work part-time or not at all. If not at all, I'd have enough savings (not having to dip into the savings at all -- just live off the earnings) to replace my current income. Inflation will eat into this too, of course, but there's a huge gap between what I earn and my cost-of-living.
- I could work as long as I can, probably well into my 60's. At that point, Social Security would be available when I retire (assuming it's still around), but I wouldn't really need it.
These are just a few of the options my wife and I will need to consider. An additional one is that I could ramp up some side business interests for the next few years that would super-charge our savings and make retiring (either full or partial) at 52 much more comfortable.
So, anything you think I'm missing or that I should consider? I know health care is a major factor with not working. Anything else? Or perhaps you have some suggestions. What would you do in a similar situation?