Sorry for the infrequent posts, work and life have been busier than normal.
I read an interesting article by Ben Stein on Yahoo that on its surface is quite grim. He is very concerned that the standard of living for baby boomers is going to decline in an ugly fashion because baby boomers are not saving enough for their retirement.
He says you will need 15 times your income need saved to generate enough income to live comfortably. Maybe he is factoring in getting social security but I think it is more like 20 times your income need. If you buy into taking no more than 5% out for income, I think that gets you to 20 times.
A slightly different spin would be the things I have talked about. Whatever dollar amount you have, that's it. You can't take more than 5% out per year. If that 5% is not enough you need to find ways to build the remainder of your paycheck.
That people won't have enough is not new. The thinking behind Mr. Stein's article is the catalyst for this site in the first place. More and more people will need to find innovative strategies to fund retirement. This ties in with an even bigger theme which that the US' economy will have to evolve, as it has always done, to still be a great country. I have no doubt it will but it won't be simple or painless.
The article underscores the importance of having some sort of clear and simple plan in place and a way to monitor your progress vs. the schedule of your plan. For example if your 401k needs to be at $420,000 by age 52 and you only have $310,000 at age 51 you can know this and implement a strategy, with a time table, to catch up.
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11 comments:
Roger
I disagree with the 5% figure for funding retirement. With a secular bear market and still low bond rates 4% is more prudent.
Mitchelg
5% is a pretty standard number and if you do math works just fine. obviously 3% would be better than 4%
I have always read 4% was the highest you should take. If you have montecarlo data or other research that supports 5% I would appreciate you writting about it. It makes a big difference in my planning whether I need 20, 25 or 33 times income
As for Ben's article, I think he indicated 15 times income as a minimum and was for people who would certainly get social security. I think many of your readers should not plan on getting social security.
I retired to Prescott, AZ from Rochester , NY at age 52. I was not "retirement eligible" from my large Northeast company (55 was the minimum age with 30 yrs service) so my wife and I have to rely on our financial investments and a small pension (no COLA) to fund our retirement and healthcare. I base our living expenses each year on a 4% withdrawal based on total assets. So far it has worked for us. I'm 59 now.
i'm sorry but I don't use monte carlo in my practice.
If you are wrestling with 4 or 5 or some other number I would say to play around with the numbers see the margin of error and pick what is right for you. I'm sure for some folks only 2% would be comfortable.
Hey Prescott neighbor, thanks for stopping by.
Since I love spreadsheets, I ran a lot of them and came up with 4.3%, but how long you live and what percent confidence (never less than 90) that you will run short can make a big difference. One of the most best articles I have ever seen indicated that the 4 was too low since it failed to take into account that spending does decrease with advancing age.
http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm
Contains an interesting perspective on the ammount of money needed for retirement.
I've read the explination about spending decreasing with age and I believe it has been true, but it may not continue to be true. If more numerous and more expensive drugs are available in the future and these costs are left to the retiree to pay as I expect. Then costs will either stay flat or possibly increase for future retirees.
great chatter!
the spending less as you get older has more to do, as I understand it, with the fact that you travel more in your late 60s than early 80s.
4.3% is interesting, given all the back and forth about 4 versus 5.
Longer life is going to create a lot of finanical issues. I don't know about problems per se because I think more people will be able to work at part time "hobby" jobs than in the past
Why worry? RETIREES... Spend as much as you can, as fast as you can. Then claim yourself to be a victim of a heartless cabal of neo-coms. Following quickly, actively campaign for the any Democrat on the ballot.Then,let that party soak the middle class and rich, i.e., the motivated workers and risk-takers of our society, with taxes which will be targeted for the aforementioned retirees.National defense, infrastructure, research and development? Let it go to hell.
Ben Stein and Phil DeMuth (in their book "Yes, you can still retire comfortably") came up with an initial withdrawal rate of 4.7%. This assumed a couch potato portfolio (50% stock index, 50% bond index) and a minimum 30 year survivability with 99% certainty in a Monte Carlo simulation. Their results also indicated that the percentage withdrawn can increase in later years. Might come in handy paying for prescription drugs! Their book is a good read.
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