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May 23, 2014

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Ok, I'll chime in with some real world data. Yes, it takes decades to amass. Also, I wouldn't rush to retire too early...say before your 50's. You'll find your friends are still working and you'll likely be bored...maybe even a little guilty that you made it "out" before your friends did. I suggest you keep earning a paycheck and growing your retirement funds to provide that extra cushion. You're going to need extra funds to cover your healthcare, Obamacare or not. I took a small layoff package in my early 50's, my wife is planning to do the same in the next year (don't quit, negotiate with HR for layoff). Since I am a fully capable DIY person, I'm doing all sorts of home maintenance tasks that have been deferred for years. I have old cars and motorcycles that I plan to repair in my barn. Also, planning to teach myself how to weld, start a large garden, cooking, camping, travel, etc. No lack of things to do for me.

We have no debt and I tracked our budget for several years prior to pulling the trigger. I'm planning no part time work for either of us in retirement. I've also planned to withdrawl no more than about 3% during our first five years in retirement. Under 2% withdrawls after that (when our modest pensions with no COLA and then Social Security start to kick in) so our funds "should" never be exhausted. This assumes no major healthcare event. I maintain a spreadsheet with this financial plan and update it monthly. I plan for 3% inflation and 5% total return on our retirement funds, or a real 2% increase annually. I'm still planning to invest in stocks, but my expectations on returns are conservative.

I hope this helps others in their planning. Good luck!

My hubby and I retired at age 55 and 53 respectively. We rely primarily on his great pension for living expenses. This pension has a COLA provision although it is tied to the Soc. Sec. adjustment which for a couple of years was held back. We have retirement and taxable accounts that throw off approximately $70,000 a year through dividends and interest. So far, 8 years later, we still have not touched any of the retirement accounts, thus allowing them to continue growing. I will start getting Soc. Sec. this fall, however at a very inconsequential amount. I worked for the government most of my career and when I left I rolled the pension and thrift saving accounts into my IRA. Therefore, Social Security was only earned during the last 10 years of my working. Our son is grown, education and self-supporting. No debt. No mortgage. Basically, our plan is to continue using the pension for living expenses and if necessary only using the return on our investments, never invading the principle. Hopefully, we should be able to adhere to this.

FMF,

I think you should have listed:

Total first-year spending goal (including taxes): $110,000
Minus rental income: ($60,000)
Minus Social Security: ($30,000)

20k gap * 25 = 500k target retirement portfolio. Clearly those other sources of income could reduce this amount.

The fact that your goal is 2M outside of rental properties (2M * .04 = 80k) is the answer and not an input.

I retired in 1992 at the age of 58. My wife retired the following year which gave me a whole year to complete quite a few home projects.

Each of us had a pension and we retired debt free so we did not have to withdraw any money at all from our investments accounts until the age of 70.5 when mandatory distributions on our IRAs kicked in. These distributions unfortunately are taxable and pretty large and this year amounted to about $167,000. Fortunately our pension and SS checks are more than enough for our monthly needs, and along with the income from our investments our net worth continues to grow year by year.

One truism in life is that the only two things in life that are certain are Death and Taxes.

Erik --

Unless I already have the $2M (or am close to it). ;)

The article makes a good point in that there are programs telling you how much to save and what you will need but few on how to spend and what you can spend.

Speaking from the experience of my in laws, they did not know how to spend there savings and now they have none. Only the FIL pension which is just enough to exist.

Matt:
You make an excellent point.

There are things you have to buy (or spend money on) in order to exist, i.e. property taxes, utility bills, health insurance, food, car insurance, mortgage payments etc. etc.

The problem that unsuccessful people seem to have is that they lack will power and discipline when it comes to buying non essential things they really can't afford, such as expensive cars, tuition to expensive out of state universities, and expensive weddings for children, as well as expensive vacations for themselves. They are also far too quick to use credit rather than waiting until they can afford it.

Kathy,
I understand rolling your TSP into an IRA, but how and why would you roll your government pension into an IRA.

What am I missing?

Thanks.

My current plan is pretty basic, somewhat traditional and follows something like:

70% of current income = planned retirement income goal
35% pension
35% from nest egg
0% from Social Security (deferring)

Then upon hitting full retirement age for SS:

70% planned income goal
35% pension
10% from nest egg
25% SS

This is workable plan for me based on our current spending and savings and my projections. The 70% is more income than I'm living on now, and it just considers no significant change, i.e. I keep my current employment, no major medical issues, no side work, no downsizing, etc. it also takes into account payment of taxes. So there is plenty of room for adjustment as I near my point of ceasing the 9 to 5.

I think its good to have an understanding and a plan with some conservatism, but at the same time we are talking a lot of years of projections, so flexibility is important to.

@ Joe,

Not to speak for Kathy specifically but in general under the federal government system I'm pretty sure you can take a cash out for the money you paid into your pension fund when you leave and forfeit receiving any pension from the Government in the future. Either you pay taxes on that money upfront or I believe you can roll it into a retirement fund.
I could throw an estimate at you but in general if you were under the old system putting in the required minimum of 7% of salary for 20 years, used mid 1990 estimates for the market (e.g. 10-12% long term), and couldn't collect the pension for another 20 years or so (since it would have to be deferred), I can see where a case could be made that you'd be better off taking the money out and investing it with your TSP into an IRA to generate a bigger income than the pension would provide.

I retired at age 50. For 10 years I worked part time and lived off savings and 72T distributions until age 60. I retired again once I was able to get survivor benefits from social security. I plan to hold collecting my own social security until age 70 as long as my health holds. Currently 75% of my income is from IRA and 25% from social security survivor benefits. Once I reach 70 things will be reversed. 75% or more from social security and 25% or less from IRA. If I do not need the money from my RMD I plan to reinvest or save it. But knowing how laws change, health fades, and emergencies happen I need to remain flexible. I have no debt, no mortgage, and live a minimalistic life.

Many of FMF readers have sizable SS and Pensions, this inspires me to take a look at my SS benefits if I were 65 today, it is $283. This comes from my early years working in the kitchen washing dishes in my teen decades ago.

I started and directed my own company, I took the minimum amount of income so I paid zero taxes. I dont have workplace pension. I always believe in self-reliance. I am retired and do whatever I like not for money. The whole country can blow-up, I will be ok.

getagrip is correct about why I rolled the pension into my IRA. I would never have qualified for a pension because of when I left government service so the contributions I paid in were returned to me either in the form of cash or roll over to IRA. I chose to roll it into the IRA. I will mention that in this one instance, there wouldn't have been any taxes on this pay out since they were already taxed before I made the contribution.

FMF, great post and the comments are fantastic. If I may add a thought about financial calculators, they are just a tool and guarantee nothing. I had used four separate software tools, all well-known, all using Monte Carlo simulation, and several using Social Security payout and taxation scenarios. In addition, I built my own fifth model. All of them showed that we were good to retire in 2006 with a NW of $2mm and a small pension and S.S. for the future. NOT ONE OF THE SOFTWARE MODELS PREDICTED 2007-09, and a 57% drop in the S&P500. No model could have predicted 7 years of ZIRP for fixed income. Building in a cashflow cushion, as your scenario does and Old Limey's does, will never be something to regret.

My way was earning high and spending low. In my line of work silicon valley pays the best, and cost of living can be very high here, but it doesn't have to be. Low end rentals are out there if you can live small. Over the past decade my total living expenses (excluding income taxes) stayed less than 10% of my AGI so savings accumulated pretty fast. I'm also an active stock trader, although my long term record shows a return of only 9% per year so maybe I would have been better off in an index fund. In my case it was the savings rate that made it happen.

Sometime during the next year I'm looking to buy something beachfront in the southland and officially retire. Retirement spending I'm thinking somewhere between double and triple my current rate (excluding income taxes), hopefully that's enough to fill the time. Income will be portfolio only; no rental, SS, side business or part time work for me. I'm fine with depletion at a sustainable rate.

Great post FMF!

I am in the process of figuring out when I can safely retire.
I turn 50 this year.

I have a net worth of about $3 million.

You would think that would work but assuming
$120k/ year spending after tax
increasing at 3% and
2 % real return
Life up to 90 and 95 for the wife

All that---
Gives me a 76 % possibility of success in the worst
Case Monte Carlo simulations.

I need better than that to pull the trigger.

2007-9 could happen again.

So I save some more and keep looking for a better
answer on a few years.

@M19
I started moving into municipal bonds near the end of 2007 when the McClellan summation indexes for the S&P 500 and Nasdaq markets were showing lower highs and lower lows which is a sign of bad times ahead.

Our Trust account that contains these bonds now has a market value of $3.951M for which my cost was $3.751M. These bonds currently produce an annual income of $182,203 which I reinvest into buying more bonds. For a California resident, bonds issued by local cities and agencies are free of state and federal taxes, other bonds are free of federal taxes.

Our IRAs generate an annual income of $117,285 which is tax deferred but as I have mentioned in prior posts, since we are over 70.5 we have to make MRD withdrawals every year and pay taxes on them. We find that our living expenses are very modest, it's been many years since we bought a car, I do my own gardening and almost all of the maintenance and we live comfortably on our pension and SS checks.

What we have found as we have aged is that our expenses have gone down considerably. Now at 79 and 81 we are basically homebodies and lead a very quiet life. We made our last foreign trip in 2010. I no longer drive at night since the roads are too dangerous. You will also find that life changes a lot as you age because of all the societal & technological changes that take place. Lifestyles in the 60's when we arrived in California were totally different from today. The population was a lot lower and I might add, so was crime. It seems that hardly a day goes by that some heinous crime makes the headlines.

I personally haven't done the early retirement thing, but I have some friends who have. They were using strategies similar to yours. I think the main stumbling block is consistency. You need to develop the plan and actually follow through on it. Ultimately, its only as good as your ability to follow through.

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