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September 08, 2014


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"To reach this savings goal this household would have to save 15% of every paycheck starting at age 35. But if the household planned to work to age 70—or started saving five years earlier—it would need to save just 6% of every paycheck."

I don't think the numbers work for this. Assuming wage growth follows inflation it would take a 20% annual return after inflation for 35 years at 6% savings to match 30 years at 15% savings. I think a more realistic average return rate would be 7% after inflation, and this would take 10% savings for 35 years. Your November 18 post reached a similar conclusion (+46.9% for five extra years). More time buys a lot but not this much!

This is an oversimplification that likely doesn't help anyone.

My experience on retirement is based upon having already been retired for 22 years.

If you are fortunate enough to receive a pension, that makes a huge difference.
If you are eligible to receive SS at age 62 that also helps a great deal.

Rather than follow the plan that you should amass enough savings so that upon retirement you just start burning through it with the hope that the money will last at least as long you do I favor a different approach.

We have both pensions and SS but not everyone is that fortunate.
However I very much favor acquiring municipal bonds, preferably issued by entities based in the state in which you pay taxes, that way the interest is free of both state and federal taxes.

When municipal bonds mature you receive the coupon value back which is typically $1,000 per bond. If you purchased a bond for less than its coupon value you still get the $1000/bond which means you also receive a small capital gain. Municipal bonds pay interest twice per year at 6 month intervals, the dates vary between bonds. My bonds, for example have maturities ranging from 11/1/2014 to 8/1/2050 and currently generate income of approx. $185,000/year. Since we don't need anything close to that amount to live on because of pensions & SS we reinvest all of the interest into more bonds as it arrives, thus our income is constantly growing rather than shrinking. Now that we are debt free and the children are long gone our living expenses are also quite low, especially since 2010 when we took our final overseas vacation because my wife's walking abilities are unfortunately not what they used to be.

I never give credence to such generic advice. It doesn't take into account other investments, or individual situations like health concerns, desire for travel, paid off mortgage, etc. Just another assumption that everyone must be the same whether it be in retirement or in life.

It may not be perfect advice but it at least gets the point across that you need to save, save, save. The other benefit of living on less than you earn is that then your cost of living is reduced so the amount you must amass to fund your future is less.

Old Limey - how old should one be before acquiring municipal bonds as a part of an investment strategy?

@freebird You're missing the fact that they need 5 years less of savings (so if life expectancy is assumed to be 90 in both cases, they only need 80% of the money they otherwise would). Without the full analysis, it's hard to know if they made other assumptions (some papers I've seen assume that expenses decrease after, eg. 80 years old ... which can be reasonable).

I didn't start acquiring municipal bonds until 7 years ago when I was almost 73. However I started investing in mutual funds when I was 58 just after I had retired in 1993 and had consolidated all of our investments (both IRA and Taxable accounts) at Fidelity Investments. I actually made a large portion of our money during the bubble years (January 1993 - March 2000) after I had retired. My main motivation for going into muni bonds (in our taxable accounts) and CDs and corporate bonds (in our IRA accounts) was that our investments had grown to the point where the stress of coping with market volatility was starting to get to me. It was becoming more important to me to not lose a lot of money than it was to make a lot of money. My market indicators were also flashing warning signs that were the prelude to the "Great Recession" that started in 2007.

You really need to watch broad market indicators. The two that I tracked were the McClellan Oscillator and the McClellan Summation Index for the NYSE Composite. When the McClellan Summation Index in particular starts to show a pattern of "Lower Highs" and "Lower Lows" be prepared to bail out. When that indicator is showing a pattern of "Higher Highs" and "Higher Lows" it's a sign of a strong market that you can stay in until it falters.

@r_meister, good point on the back end, but it was the 5 years head start option that got me wondering.

If a pair of twins has identical wage history and both get the same returns, one starts saving 6%/year after age 30 while the other does 15%/year after age 35, I think the second twin is ahead at age 65 if the return rate is less than 20% inflation adjusted. My point is that someone who starts a 401k at age 25 should put in more than 3% (it should be 7%).

Years on the back end offer more leverage-- if you work until the day you pass, a 0% savings rate is enough!

I agree with FMF. I want to live off the interest and dividends-- and never have to touch principal. However, I agree that is a lofty goal.

My plan is to have a "floor" of income that is safe. I'd like to obtain this through pensions, social security, AAA rated municipal bonds and potentially simple fixed inflation adjusted annuities and longevity insurance. This income 'floor" would be in an amount that covers my essential costs ( food, healthcare, housing etc..)

Above that floor I would invest the balance of my net worth in a conservative portfolio of stock/ bonds. Probably 60/40 or 50/50 allocation. This money would fund non essential costs like travel and would eventually be my inheritance to my kids.

If my net worth ever grew to be much larger than I would ever need-- I would take the route that Old Limey took and get into the slow lane with all of it.

I only want to take the amount of risk needed to reach my goals-- no more no less. Once the goals have been reach it would be all about conservation and utilizing the money for it highest and best use (charity, helping family etc).

That's the plan.

By the way-- my biggest obstacle ( or at least the one that I don't have a viable solution for) is how to deal with the "GAP" if I am lucky enough to retire a bit early.

A lot of my money is tied up in 401K/ IRA/ Pensions that are unavailable to me before 59 1/2. So while my net worth is pretty good-- I cannot get my hands on the money until later.

So if I want to retire before 59 1/2-- how do I fund my expenses during the gap?

Thoughts from the FMF crowd would be great !

M19 --

Options I've considered:

1. Work until 59 1/2. This could be at my current profession or downsize to a level where I can at least cover expenses.

2. I was going to type out several more, but this article summarizes them well:

@M19, it looks like you could do it now. As of your post in Jan'14 (likely written a few months before that) your age was 49, taxable savings was $450K, and rentals clear $22K/yr. You spend $60-80K/yr.

If you truly don't want to touch pre-tax savings, you can divide your post-tax savings by 10 for @$50K/yr, plus $22K/yr for a total of $72K/yr. You won't need to save anymore, and your taxes will decline substantially. If you really get in a bind, sell one of the rentals. But it looks like you wouldn't have to, and are already there without changing your lifestyle.

My own thought is to start withdrawing your pre-tax using IRS rule 72(t) SEPP, which has been discussed here and elsewhere, because without your salary it will be taxed at far lower rates; if you wait until 59.5, your RMD/SEPP will be greater, and when combined with rental income, pension and Social Security (up to 85% of it is taxed after a certain income threshold).

Well done!


I just found out about this “retire early” 401k provision a few months ago; it may have been from a commenter on this blog. I also have seen other articles saying that you can take a loan or early periodic distribution from your 401k even before age 55.

Thank you both for your thoughts.

I have considered these options but have not determined which is best. I simply see pros AND cons on both sides !

What I struggle with is the use of principal to live-- I want to live on the interest/dividends and preserve the principle like FMF's strategy. Basically, I want to preserve the "goose" and live on the 'eggs".

So-without having the vast majority of my funds available, the amount of interest/ dividends available to me is not enough to live on-- so I will have to dip into principal. Which , of course, lowers the amount of interest & dividends forever on into the future. Also-- taxable stocks are one of the best buckets of money to leave your kids because they get a stepped up tax basis on it-- effectively giving them all gains you have tax free. Lowering the ability to pay interest & dividends and utilizing the bucket that is best for inheritance purposes are both big "cons".

On the flip side-- a big "plus" is having my earned income drop drastically ( if I lived on taxable savings for a few years) which would allow me to convert my pre-tax 401k and Ira's to a Roth -paying the lowest tax rates available. This would then allow that converted ROTH money to be tax free forever and significantly reduce future tax burdens based upon RMD's and Social security.

There must be a right answer-- I just cannot seem to find it.

Thank you M-20 !

That is a great thought-- if I am at least 55 when I retire early --than this becomes another option. I could combine the interest and dividends from BOTH my taxable and my 401K accounts without penalty to live on (without diluting principal). And avoid the "substantially equal payment rules" to follow.

And I could probably still convert my IRA's to a ROTH simultaneously. And convert the 401K once I turn 59 1/2 and roll it to a IRA.

That might work !

I need to go "map this out" now......


If you can make it to 55 at your current job there is a special 401-k rule that allows you to withdraw from a 401-k after age 55 penalty free if you were working at the job that holds your 401-k when you were 55. That means that if you have a 401-k from a previous employer that won't qualify. If you quit your current job prior to 55 that won't qualify. If you have rolled your 401-k to an IRA that won't qualify. But if you have a 401-k at the employer that you just quit working for and you are at least 55 when you quit, then you can start taking withdrawals from that 401-k, and that 401-k only, penalty free.

If by early you mean 55 and not 52 then this may be an option for you.

I think the 15% number is realistic for those who want to retire at 65. The other thing that's tricky is that a lot of people don't work 40 years straight. A lot of women leave the workforce to raise kids. And a lot of folks lose good paying employment in their 50s. You have some control over this by taking care of yourself and keeping your skills up do date, but you don't have complete control over it. A lot can go wrong over a 40 year period, so 15% might actually be a low estimate.

@M19, just making sure you are looking at your principal, and your interest/dividends as fungible. By that I mean, you can spend down all of your post-tax funds, as long as your pre-tax funds are growing by more than you spend. The interest/dividends then become principal. $1 equals $1, no matter which pocket you pull it from.

I'm in this very situation right now. My NW excluding home is $2.1mm (up from 2.0 last year). Your NW excluding home was $2.1mm last year (probably more now with add'l savings and another year of growth). It would have to grow by 2.38% to meet a drawdown of $50K/yr; does that sound doable? My NW is still growing, because my interest/dividends are greater than my expenditure of principal.

Once you actually start to buy municipal bonds I doubt very much that you will buy only AAA bonds.

There is a trade off to be made over:
..The asking price of the bond
..The bond rating
..The yield to maturity
..The maturity date

I find that I usually settle for an AA bond from my home state with a 5% coupon. Just as in the stock market there are times when bonds are cheap and times when they are expensive - it's all about Supply and Demand.

@ Apex-- thank you.

@M9-- That is a good point. I actually wasn't looking at it that way. Its always the obvious stuff that seems to escape me. But you are right.

Are you already retired? How old are you? It seems like we are in similar circumstances indeed. I should go back and read your profile as well.

My NW excluding my home is now about $2.4M (Obviously, I am a prodigious saver). So if I spend 3%/ year ( about $72K) I should be ok as long as the portfolio gains more than the 3% I took-- even if its unavailable to me. Funny I wasn't thinking that way-- but it makes sense. Thank you.

@M19, I'm now 54, retired at 52, click on the 'posted by: M9' will take you to my profile. You are doing great, are good at your job, I think(?) it was you who said your job may be ending at the end of this year? In any event, every extra year you work will let you take another step away from the wall (you know, the one our backs are all up against!:-)) Good for you, the answer you pick will be right for you.

@M9-- It looks like my job may be safe for another year or two ( or 3 maybe). Who knows-- its hard to read the tea leaves-- but I still feel like its a high possibility things will end sooner rather than later. At 49 years old-- I would love to make it a bit further before being forced into early retirement. I still have kids I need to get through college. Every extra year I get-- is a blessing and will solidify my position. And of course I could get another job ( I am good at what I do) but I doubt that I could match my current salary and perks. Age discrimination is out there and it is very real. If all goes well-- I won't "have to" get another job and THAT is what I have been working towards my whole life. With my growing net worth I will have options---and actually, to me anyway, that is what FI is all about. To do what YOU want, when you want, under your own terms. While on the treadmill---with big bills due every month-- you hardly have options.

M9---Was your retirement forced or voluntary?

I NEVER thought that I would be forced out. I suppose no one does. But if the owners decide to close is what it is. But I sure am glad that I was a saver for all these years and was always striving for FI. It turns out that my quest for FI looks like it will be my saving grace.


I just have to ask....please tell me if you don't want to disclose this stuff. Your 54, retired at 52. You have a NW excluding your home of $2.1 M ( I think you said).
That is so close to my situation in age and NW that I am intrigued.

So how is it going? Do you live on 3% or 4% of your saving? About $63K? Is it just you and a wife? Is that adequate? Do you live in a high priced area?

Since you retired-- I assume your taxes dropped dramatically ( probably your expenses too). Is that accurate? If true-- could you expound a bit?

Do you travel? How about healthcare?

If you are willing to share how you are allocated and the basics of how you have replaced your income I am interested. Probably many others lurking are interested as well.

I totally get it if you don't want to get into the detail I have requested--- not a problem at all.

I am jealous that you made the plunge and curious about the specifics so that I can buld my confidence that I have "enough".



I just read your interview again. I remember it now.

No need to repeat info already disclosed.

My Dad is 86-- so we have that in common as well.

M19, yes we do have much in common. I have written two other essays which answer any questions you may (and many you may not) have. The only question not answered in them is Healthcare, which is now a bare-bones catastrophic policy; last year our rate for two healthy middle-aged adults with no pre-existing conditions increased from $9,000 to $18,000 (100%) so we decided to self-insure costs over $6,000/year. We haven't spent anything so far in 2014.

This essay is about being laid off.

And this one is about my most horrendous financial mistakes, including losing $1.2mm in NW during the last market downturn which was only five years ago. The US equity market has tripled since then, and nothing has changed. I don't get it, but I'm quite content with my decision and my low-impact, low-profile lifestyle choices. Hope it gives you a smile.

M19 -

My plan is to get just enough in taxable accounts to cover the GAP.

Additionally, I am hoping (but who knows what the tax laws will look like at that point) to slowly convert by IRA on an annual basis to a ROTH to the extent of keeping myself in the lowest tax bracket.

The key is to making your taxable accounts as efficent as possible through holding only equity index funds, using specific identification for basis, tax loss harvesting, etc.

Why father did this for a couple of years while covering the "GAP" and it really surpised the heck out of me how low thier taxable could get.

I guess my wife and I should be glad that we are over 65.
The only surgeries I have needed have been two lens implants. My wife on the other hand has had 2 hip replacements, a colon surgery, and an intestinal blockage - all very successful - and all paid for by Medicare. Medicare also saves you a bundle on prescription drugs, especially any new ones that aren't generic.

@M9 --I just read the two additional essays you wrote. Fascinating. Thanks for sharing. My favorite line?

"Markets can stay irrational a lot longer than you can stay solvent - "

@Ed--- thanks for the comment. I agree and hope to the same. Good luck!

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