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May 22, 2013

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These comments are fine... but are they truly helpful?

The truth of the matter is- I am finding that retirement planning is tough. I am maxing out my 401K (and have been for years)- but compared to other goals, retirement planning seems to constitute a serious moving target.

*How long will you live?
*Will your expenses increase or decrease?
*Maybe initially increase but decrease as you age?
*What about taxes?
*Healthcare?
*Interest rates?
*Stock market risk?

Too many unknowns.

And trying to duplicate your current income is a daunting task at best. Say you make $100K. That is $8333/month. How can you get that as "passive "income?

*$2000/mo social security (maybe)= $24,000/year
(still need $76K/year from savings)

*$1 Million at 5% only generates $50K (and who has $1Million?)

(still $26k/year short)

* maybe a rental property or two could make up the difference? Possibly.

Now throw in the possibility of trying to retire early. No social security available. The $1 Million needs to be outside of retirement accounts. And you have to plan for a retirement of 40 or 50 years rather than th standard 30 years.

Is anyone looking at this differently? Thoughts welcome.


I found the post a bit weird and not very helpful. "Asking some real people" sounded interesting but most of what followed sounded like expert advice and some of it not retirement-oriented (budget after savings for example). Only the practicing and maybe a bit of the discounts part sounded like real people experience.

@JNEW
I don't think duplicating the current income is the right way to go (you are presumably saving out of it for retirement, right? Also the expenses profile may look quite different.
We have our current budget and we have also done an expected retirement budget, which is actually about 50-75% of it. We went a bit granular and did 2 of those - "early retirement" (more travel) vs "late retirement" (more sedentary, healthcare costs increase) - which maybe a bit much for some people. But in any case mortgage is out, kids expenses are out - these are our 2 biggest items anyway. There are some adjustments we did in places, but even thinking through the biggest categories will give you a good perspective on the needs, much better than looking at current income.
We've also projected the income and expense flows year by year (before you ask, not counting social security), with all the elements you mentioned above, plus accounting for house ownership, kids college years, etc, etc. Based on the model 30 years post-retirement for us is looking not too bad at all - and we plan to adjust the model as the years pass and see if we stay close to the projections. Of course everybody's situation is different, but I found this another useful exercise to allow me to model our particular milestones, rather than rely on a "black box" retirement calculator.

I really like the idea of practicing retirement before retirement. You never really know what things will cost or how much you plan to spend. Remember also you will have a lot more time at home which could me more on food and gas if you drive more. When we had our baby our gas went up. The car wasn't parked for 8-12 hours. Practice but remember there are a lot of things up in the air that you really can't adjust until it happens.

@IVY

That is a good point I failed to mention. I actually agree that future expenses-- not income is the way to go as well. I simply failed to accurately state that point.

I haved also played around a bit on a spreadsheet trying to anticipate future expenses in retirement from various perspectives as well-- and -like you- I have also determined that --it seems- my expenses will drop to 50-75% of current needs in retirement. The main reasons-- as you stated are the elimination of "Kid expenses", our mortgage, and aggressive retirement savings.

What is interesting is that fact-- that I think expenses might go DOWN- scares me. Could that be right? I keep thinking I am getting the elimination of current expenses right but not properly anticipating new expenses. Again...its the unknow and all the "projections" that make me uneasy.

Thanks so much for your thoughts....

We have been retired since 1992 when I was 58 and my wife 59.
The first essential for a secure retirement is to own your home outright. It also helps if you live in a state like California where property taxes are limited to a 2% increase/year. We stayed put when we retired because there was nowhere else we would rather live than where we already were. Our home is larger than 2 people need but it's better than being cramped. I also made a host of improvements since buying the home in 1977 and there was no good reason to move elsewhere. The climate is great and we have found that the house stays very comfortable without A/C even on the hottest days because the trees that we planted 35 years ago provide shade where it's needed.

Between 1992 and 2010 we had at least one expensive overseas vacation every year but with 2 pensions, 2 SS checks, and a rising stock market from 1992-2000, and income investments from 2000 to the present our assets have grown steadily with never a losing year. With an ever increasing net worth, the absence of our 3 children, and the continuance of our frugal spending habits we could live forever without running out of money. I don't think that our situation is very common these days because our working years were particularly good times with nice raises and promotions for me as an engineer and my wife as a part time teacher. I have never had a day's unemployment in my life and we have never cultivated expensive lifestyles. I think that being raised during WWII in England with working class parents we have always been savers and have never thrown our money around needlessly.

@JNEW
In answer to your question, "Who has $1 million?"
On 12/28/92 soon after we retired we had $320K. I started investing actively from then on, rode the Internet Bubble up to the peak, got out completely during the 4 trading days following the peak, and invested in more conservative funds from then until 2007 when I went entirely into bonds. Here's an extract from my daily record.
12/28/92 $320K
08/06/97 $1M
11/16/99 $2M
02/29/00 $3M
09/05/03 $4M
03/14/06 $5M
04/07/09 $6M
07/20/12 $7M

I used to practice "fund selection" primarily but I also practiced some "market timing". The market was slower acting back in the early days as there were fewer participants and the Internet was just coming of age. These days things are very different with the Federal Reserve's QE program that funnels billions to the big banks who use it with their computerized trading programs to manipulate the markets at will for their own benefit while keeping the S&P 500 average steadily increasing and boosting consumer confidence, however ff you examine the statistics of the economy you see a quite different picture. From the days when I was an active trader I am still on the distribution lists of several daily, weekly, and monthly market and economic analysis newsletters.

@ Old Limey

Your story is one that is encouraging. It shows it can be done. But, as with anything else, some luck played into your success as well. You were lucky to live during a timeframe when the internet bubble occurred. You had enough money invested for the internet bubble to make a discernable impact on your nest egg. And you were lucky to get out just at the right time and avoid the huge losses that occurred when it burst.

I am sure that your background, experience and research played a significant role as well...... but as they say, timing is everything. You did indeed put yourself out there and it seems you were willing to take on pretty significant stock exposure risk even after you retired. That aggressive portfolio that you managed paid off for you....

I am hopeful that I will be able to navigate the markets as well as you have and hopeful that lady luck will shine down on me the way she has for you as well.

Despite my comment, I have every intention of having $1 Million (or more) when I retire. But for that to happen-- I need the stock market and my other investments to flourish. I am steering them in the right direction (I hope) but to say I have TOTAL control of what happens would be foolish.

Thanks for sharing your story--it is inspiring and interesting to me.

@jnew
There are certainly things that happen in your life that are based upon Luck but there are quite a few others that are based upon a carefully thought out decision.

For example, in 1960 I was 26, we were living in Denver and I was working for a small aerospace company that paid a decent salary but offered no benefits. I started looking around my office and soon realized that if I wanted to have a great career I would need to get an MS degree. I started asking around and found that the major aerospace comapnies helped their engineers to get an MS as well as paying the tuition and allowing them to work flexible hours.

I then sent off three job applications to Boeing in Seattle, Lockheed in what is now Silicon Valley, and Lockheed in the Los Angeles area. To my surprise within a few days I had 3 phone calls promising a job, and a letter to follow. We looked through the material they sent and the location we fell in love with was Lockheed in what was then known as "The Valley of Heart's Delight" because in the springtime you could look down on the valley and it was a sea of fruit blossoms from all of the orchards. Lockhheed had recently moved to the area on land donated by one of the cities, and was working on some great projects in missiles and satellites.

I gave in my notice and off we went with our two small daughters. The job was as a junior stress engineer on the Navy Ballistic Missile program. I also enrolled in a part time program at a nearby university to work on my MS degree. In thos days, even at a private university the tuition was only $30/unit but Lockheed paid it and I was only responsible for buying my books.

That was one of the best decisions I ever made. The best was marrying my childhood sweetheart, the second was emigrating from England, and the third was moving to California.

There was one other decision that has had a crucial impact on my life and that was responding to an ad in the Wall Street Journal after I retired that led to me becoming a subscriber to a company that maintained an extensive mutual fund database with some great charting and analysis software that helped me to develop my investing skills. Through the company and their annual conferences at different cities I met loads of other subscribers and eventually with the company's cooperation I wrote some software that complemented theirs by adding lots of different analysis tools. I was then able to market my software eventually to over 1600 subscribers.

Thus, what may seem like luck, isn't always just luck, it also involves keeping your eyes open for opportunities and then acting upon some of the good ones.

jnew,

I also expect to reach $1 million, but I also expect it to generate income much greater than 5%. My primary investing method is with real estate, and the 3 homes I own so far (purchased in the past 3 years) have a cash return around 15%, with another 4-5% if you consider principal reduction. With the real estate market starting to trend upward, the asset values could increase as well, which could substantially improve the overall return depending on when I sell.

At 29, with about 3 years of investing for cash flow under my belt, my cash income from investments will likely near $25,000 this year (along with thousands more in income via principal reduction). We make good but not remarkable incomes from our day jobs, live modestly, and limit our discretionary spending without ever feeling pinched. We also give away significantly more each year than we earn from our investments. We're not near $1 million yet, but I suspect that within a decade or two we'll have a net worth in the multiple millions and would be able to "retire" comfortably if we chose. It can be done.

@ Old Limey

I absolutely agree. I did not mean to imply that your success was just happenstance. I apologize if it came across that way.

Making the right decisions in life, taking measured risk and taking advantage of opportunities that present themselves can mean the difference between great wealth and mediocracy.

Just by chance-- was that company you referenced Value Line?

One other thing that's worth mentioning is that I retired as the result of a one time incentive program that my company offered after the Cold War ended and they needed to start reducing headcounts. The incentive was a week's salary for every year of service, and I had 32 years with the company. This incentive produced a flood of voluntary retirees and the company generously instituted a program where they hired outside consultants to put on a lecture series for both the retiree and their spouse where they presented slides and handouts on just about every factor that is going to be extremely important to new retirees. The lecture series took place all day on several consecutive Saturdays and was very helpful indeed, especially since many of the attendees had made an impromptu decision to take early retirement. I was planning on retiring in April 1993 but moved it up to September 1992 to take advantage of the incentive payment.

If you retire "Early" and have longevity to look forward to, the 4% "rule" of withdrawls can be devastating in a bear market! 2008/2009 as an example....don't fall for it, you MUST have some guaranteed income (via an annuity, pension, etc.,) to cover the basic expenses of living and hopefully allow the normal+ years). There are some great financial products this last decade that do just that. Howeveer, the fees are high and you must know the complex rules. They can be appropriate for 20-50% of a portfolio though depending on your situ, goals and desires. Don't just think $2M~ balanced are mostly stock portfolio is $80K~ forever w/ inflation, or that real estate rentals are the answer, nope: THAT will NOT work. As a financial planner for 16 years who did retire in 2007, I've lived the worst time to stop working, my net worth is still almost the same ,thnaks to a recovering market,with time on my side, guaranteed products and the right mix of stock investments. ....

@Old Limey

Those were the days when there was longevity & loyalty both for a company (from employees) and from a company (to employees).

Those days are pretty much gone and would be a great topic for another day on FMF.

Now-a-days:-- from what I gather, pensions are pretty much a thing of the past. Taxes are higher. 401K matches are not as common as they should be. Company paid health benefits for retirees are nonexistant. Employers still pay for education at big companies (if you are lucky to work for them).

Generations following Old Limey into the retirement wilderness are going to have a little bit harder time getting to the "comfort" stage.

But through hard work, luck and investment knowledge etc.... I agree with jonathan above....it is possible.

@jnew
The database company I mentioned is called Investor's FastTrack. Their database starts on 9/1/1988. I receive a complimentary subscription to their Mutual Fund, ETF, and Market Index data but have no need for their database of individual stocks. Their system has a steep learning curve. Fortunately for me, now that I'm getting up in years and my memory isn't what it used to be I no longer have much need for the database now that most of our assets are in CDs, Corporate Bonds, and Muni Bonds. The only mutual fund that I own is the absolute best out of all the income funds which is PIMIX ($100K min) and PONDX ($2.5K min). At Fidelity PIMIX has a $75 transaction fee, PONDX has no transaction fee. PIMIX has a slightly higher monthly dividend than PONDX. The funds have ANN values of 20.15% and 19.86% respectively since 12/30/2011 with hardly any volatility.

@jnew
If I was a young graduate engineer today I think I would be taking a good look at getting a city, county, state, or federal government job since they still have great benefits.

Sydney has a great retirement blog. Doing a retirement test drive is the only to find out if you can handle it. If you can get a sabbatical or unpaid time off, that would be the way to go.

@Jeffinwesternwa

"or that real estate rentals are the answer, nope: THAT will NOT work."

Please add supporting facts.

@Old Limey

I don't know about the others that lurk on this forum, but i love when you give specific funds for the group to consider. I remember that you and I agreed on Vanguard Wellesley as a great fund----but I was not familiar with PONDX.

I just research PONDX and , you are right, that is a great option if you are looking for a multi-sector bond fund. Great returns, low volatility, 5 star rating, fidelity fund pick,and the manager is rated a "master" by fundmojo--one of my favorite sites. It is also in the top 2% in its catagory per Yahoo Finance.

It has a .09% annual expense fee- which is higher than a Vanguard fund or ETF-- but being below 1% still gives it bragging rights as low cost and sometimes you gotta pay for outstanding performance. I am interested.

But with interest rates at historic lows-- I wonder how PONDX will be affected by the FED's ultimate raising of interest rates. I have been of the opinion that buying bonds in this environmrnt might be "bad timing". On the flip side, I am getting about 1% on my cash in a high yield savings. PONDX has a 3% yield and at least historically-- appreciation that is terrific.

Thank you for the specific fund reccomendation.

Sorry for the typo--

The expense ratio is about .90% (not .09%)

Advice from real people is key.
My mother in her 80's lives well on only her SS check and has not touched her sizeable nest egg. SS is sufficient to cover her expenses because her home is paid off and her health is excellent. She requires no medications and gets plenty of exercise, weighing today what she did on her wedding day in the 1950's.

She prepares most of her own meals, and stays away from restaurants where she can't control the fat & salt content. An avid reader, she is actively engaged with others on a daily basis, does volunteer work and goes dancing regularly. She has no need for cable tv, viewing it as a waste of money for the one hour per day she would watch it.

Like any other solid retirement plan, she didn't just stumble into this. It took a series of decisions throughout her life to eat a healthy diet, pay off the home and separate needs from wants. It is just as important to get on the right road with regard to spending as it is with regard to saving and investing.

@JNEW
Yes, there are a lot of uncertainties, but it should be easy to get your expenses down well below $8,333/month, especially if you've paid off a mortgage by the time you retire. My husband and I own two homes -- a primary residence and a vacation home that we don't rent out, but both are paid off, and our total spending is running about $5k/month (about 1/3 of our monthly after-tax income). When we retire in two years (late 50s), we'll sell our primary residence and move to our vacation house. Even if we have to pay $13K/year for health insurance (the current rate for company retirees), that would just about offset the cost of upkeep on our primary residence ($12K/year). We're still looking at spending only $5k/month.

@oldlimey, one political party has declared war on the public sector. Witness what has recently happened in Wisconsin. Federal benefits remain good, but federal employees are paying an ever-increasing percentage of them. Those jobs are no longer safe, I wouldn't necessarily recommend them.

As you move up into the mid to late portion of your retirement your expenses should go down if you're anything like us. The reasons are:

1)We don't stray very far at all from home these days when we go out to eat. Since we like a bottle of wine with our dinner we have switched to getting take-out from 3 places that are about a minute away. We don't have to worry about getting a DUI on the drive home, we eat in much nicer surroundings watching a good program on our DVD or something good on PBS. We also don't have to tip or pay the huge mark up restaurants charge for their wine - our supermarket has a great Napa Valley Chardonnay that is only $2.49/bottle by the case. Other than dinners twice/week my wife cooks all of our other meals from scratch because we don't believe in microwave ovens. We are also very particular about our diet and control our sugar and fat intake very closely - no sodas, ice cream, steaks or ribs ever under any circumstances.

2) We stopped vacations after 2010 because my wife's arthritis prevents her from doing a lot of walking, especially on cobbled streets in Europe or in picturesque villages built on the side of a hill, like those in the coastal parts of Italy or the South of France.

3) Our monthly clothing budget is close to zero since we have everything we need, and then some.

4) We gave up entertaining years ago - it's just too much work and many of our friends either live too far away or have passed on already.

5) One fill up at Costco easily lasts us a month because we do so little driving these days. Many days our only trip is 1/2 mile to the Post Office to return a NETFLIX DVD, and we only shop once/week.

6) Our '91 Mercedes only has 89,000 miles on it, and our '98 Mercedes has 68,000 so maintenance costs are also very low. Both cars were purchased "used" a long time ago.

7) We don't pay for cleaning ladies, gardeners, or car washes, we take care of all the chores between us.

8) We have found a small produce market that has superb fruits & vegetables at less than half the supermarket prices. You know you're getting great bargains when you see mainly recent immigrants shopping there.

I warn you, once you become a real saver it's a hard habit to break even after you become wealthy.

@Paul
I just read through the Google topics for the cuts to public sector workers in Wisconsin. They are certainly very drastic. The US government is also not functioning like it used to years ago. There is no compromise taking place and both parties just dig their heels in and refuse to budge. I think part of the problem is our two party system. If, like many other countries, we had more than two parties there can be coalitions formed that get legislation through but the way things are we have a stalemate on so many issues and nothing good happens.

Old Limey -
Thank you for such detailed comments, including your growth of assets over time. Fascinating story told in those numbers.

To what extent have your pensions & SS covered your expenses since retirement -- has that been one of the key secrets to your net worth growth (ie, touching very little of assets), in addition to the market beating returns?

Also, numerous calculators/planners suggest having 10x salary at retirement.....I realize you had a pension, but roughly what ratio to salary (not your spending) did you have?

Lastly, how common (among your engineering peers within your age cohort) would you describe your experience regarding level of wealth, spending patterns, etc. over these last 20 years?

Thanks for your insight from someone that is in retirement, not planning for it.

@oldlimey I completely agree. Even 3 parties would force 2 of them to form a coalition, if none had a majority. I keep waiting for a viable 3rd party to form.

@M
Our pensions and SS more than covered our normal monthly expenses so we seldom had to withdraw money from our investment portfolio. The few exceptions were major expenses such as a new tile roof. Our Credit Union Savings accounts continued to grow every month and most years they were sufficient to cover our overseas vacations. The last couple of years of our travels we flew Business Class on long trips and we made some small withdrawals from our investments to cover that. Once we turned 70.5 we were forced to take taxable distributions from our IRAs that were very large and greatly increased our tax liabilities so I had our estimated taxes witheld from the distributions. Even so our IRAs don't seem to ever get much smaller because the income they generate is far more than the money I use to pay our taxes.

My closest friend at Lockheed was the smartest guy in our group, surprisingly he didn't have an engineering degree but had an MS in Physics. He was a whiz at software and wrote some analysis programs that the whole corporation used. Shortly before I retired he left to start his own company. His wife went back to work as an RN for a short period until his company was making money. His company is a story in itself. It's a 2 man company, he hired one of Stanford's smartest PhD graduates and together they have built software that they sell to large corporations for graphically displaying the results of finite element analyses. His first customer is quite a story. He was sitting in his office one day when the phone rang. He answered it and the caller told him that they were interested in leasing his software. When he inquired who the caller was the caller said that he represented General Motors. My friend thought it was a prank call and hung up. Shortly therafter the caller rang back and it really was General Motors. Soon after that Ford and Chrysler also leased his software and used it in doing crash test anaysis on their automobiles.
20+ years later it's still a two man company but now they have a long list of major companies that use it. He now lives in a beautiful home, on a hill with great views of the Santa Cruz Mountains, in one of Silicon Valley's most prestigious areas and I am sure that he is wealthier than me but we never discuss money. He is a very frugal guy and has the same two vehicles he had when I first knew him, a Volkswagen Bug and a Volkswagen Van. We recently had a getogether of our old group at his home and it was nice to talk about old times when we worked on the submarine launched Trident missile program.

One minor quibble with the article: "A budget is the single most important tool to financial stability. There is no other way to understand where the money goes."

If you use financial tracking software, like Quicken,you can easily see where your money is going (barring the use of a lot of cash transaction since cash is much harder to track than credit card transactions).

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