My Retirement Plan (Updated)

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?

Comments

[Matt]

College costs.

This is a major consideration right now seeing that my son will be starting in the fall.

This is putting limits of what I could be saving outside retirement.

[Mark]

How good has the 8% number been looking back on your past investment performance? Seems pretty high to me.

[Robert M]

Inflation may play a greater role in the near future. Consider the reduced NAV of your bond funds when interest rates start moving up.

That said, if your house is paid for, then you don't really need a lot of cash flow to be fairly comfortable.

[Money Reasons]

I've come to the realization that I won't have enough money by the time my son starts college in 8 years.

By my calculations, I'll have over $100,000 saved up, but that won't be enough. And lately, he's been proving that he has an affinity for academics.

Congratulations on going such a great job, sounds like you'll be on easy street!

I'm sure you'll keep blogging, so if you need to, you could always divert that money back to the profit side vs the charities that you are contributing too now via this blog.

Wow, you really are doing great!!!

[Squirrelers]

First off, it seems as if you're doing really well. I'm a big believer in the approach of maximizing the gap between income and expenses, and investing that amount for as long as possible to take advantage of compounding. Essentially, it seems as if we take the same approach, though my picture is not close to being as rosy as yours at this stage. I'm working hard toward that goal for later in life.

Anyway, the one thing I ask here is whether or not you're considering time value of money here, and taxes (for taxable accounts), when you put forth the 8% rate of return on investment.

[bb]

Kids hate you when you retire and travel while they have a huge college loan.

[CoolMouseLuke]

I'm the same age, and went through a very similar exercise this past weekend. My kids are in college three years later at 55. I anticipate having a lot inside my IRA's, and recently found out about the SEPP. Having it as a possibility does open up several new options, similar to what you outlined.

My wife and I didn't totally determine what we would do at that point either, but it was good to know what point we could be at with a mortgage paid off, kids off to college, and $1 million in net worth. At that point I will have 36 years in IT, and want to get out of the wake up to the alarm clock, commute to the office routine. I have a fair amount of real estate, even inside my IRA's, so I could manage that and possibly a franchise or two to keep me busy. We decided that from 55 to 67 we could stop contributing to retirement savings if we kept our return on what we already had at about 8%. That would allow us to not have to earn too much during that time, just living expenses.

[Old Limey]

The 8% APR may be very hard to obtain over the next 10 years using Buy & Hold.

A very simple strategy that I feel is far preferable and that has worked very well over the last 10 years is as follows.

Invest in one of the high yield bond funds that has been around for many years.
Sell it the day after it drops below its 50 day moving average and park the money in a MMF.
Buy it back the day after it moves above its 50 day moving average.
A well known fund that has been around since 1950, current assets of $759M, has these results for the last 10 years.
Buy & Hold, APR=5.53%.
Timed with a 50 day Moving Average, APR=12.59%.

I have used this fund many times and my business has always been welcomed. There are a great many such bond funds to select from.

[Brent]

My comments -

1) 8% return seems high going forward

2) What are you allocating for healthcare for your scenarios? If you are paying for your own healthcare now it would not take much to adjust for inflation but if you are under an employer health plan, this will usually be much more out of pocket.

I am not sure how old you are but it seems like you have a good foundation set and will adjust accordingly when 'things happen'.

[tllstaco]

My wife and I plan on 5% growth for our investments. For our desired income, we figured out what we want in today's dollars and then adjusted with 4% inflation until we decide to retire.

[FMF]

I was traveling on Monday and catching up on Tuesday, so I'm just getting to the questions today. Here goes:

1. The assumptions on return rate and saving result in my net worth growing at 9% to 10% per year. Over the last 15 years, I've averaged 13% to 14%, so I think I have some safety built in for inflation, return rate fluctuations, and taxes.

2. Yes, blogging full-time could be the way I add some extra income during retirement.

3. Old Limey -- When you say "high yield bond fund", can you name some specific examples? Are you talking about junk bonds? I assume not...

4. I don't think 8% return is going to be as hard as many people seem to think. But we'll see.

5. Healthcare is something that has to be accounted for and is the reason I'll more than likely keep working enough to have some health benefits.

[Andrew Thomas]

What’s your plan for healthcare? As you know, healthcare costs can become an issue for anyone who isn’t employed and covered by employer health insurance. If your healthcare costs increase as you age and you dip into savings, cutting into your principal will obviously reduce your interest income – you could find that your expenses are increasing at the same time that your income is decreasing. It looks like you’ve planned a lot, so I wondered whether you’ve planned for this? Have you considered working a few more years?

[FMF]

Andrew --

As I noted, healthcare is a big issue. It's a likely reason I'll remain working at least enough to get health benefits for some time.

[Bruce]

I am assuming your retirement income from savings is after tax

[Ginger]

You could also find out what COBRA costs and budget that in for 1.5-3years. In California COBRA is allowed for three years and then you are eligible for insurance through the state (if you are uninsurable otherwise). My COBRA costs were $550 and the uninsurable plan was $450 but required copays. However, that will eat into the extra $30,000 but not by too much.

[Strick]

Given your idea of full retirement is starting your own business and your idea of semi-retirement is one where you confidently make enough income to cover your expenses, you can do whatever you want to do starting TODAY, not 6 years from now. In fact, using these definitions I've been retired or semi-retired most of my life.