Nest Egg number question

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Topic Author
Gardener
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Nest Egg number question

Post by Gardener »

I am trying to create a simple ball park nest egg number that I believe my wife (28 years old) and I (29) will need to retire on. Is the way I came up with this ball park number far too simplistic? Have I made any egregious errors?

Formula A: Yearly Estimated Retirement Living Expenses X Estimated Years in Retirement (in our case it would be 48k X 45 years= 2.16M)

Formula B: 12 X current income (in our case it would be 12X165k = 1.98M) (I heard about this basic formula in msn money, I believe)

I came up with the number of 2M, truthfully, because its a clean, easy to remember target number and between form.A and form.B . Other calculators are also putting me in this same $2M ball park.

Assumptions that I made:
We retire at 50
We kick the bucket at the exact same time (peacefully in our sleep) at 95
We have living expenses of $48,000 per year

Any comments or guidance would be appreciated!
rex
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Re: Nest Egg number question

Post by rex »

Good way of estimating - i did something similar myself. The only thing I'd suggest is to account for inflation (2%?) using excel or something similar.
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22twain
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Re: Nest Egg number question

Post by 22twain »

Remember, if you retire at 50, you'll have to pay for 15 years of private individual medical insurance, unless you're lucky enough to retire under an employer who will pay it for you for that long. (Assuming no changes from the current situation with Medicare, of course...)
Meet my pet, Peeve, who loves to convert non-acronyms into acronyms: FED, ROTH, CASH, IVY, ...
sscritic
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Re: Nest Egg number question

Post by sscritic »

What will the inflation rate be between now and when you retire? Your nest egg numbers are in today's dollars, assuming your income needs are in today's dollars. And then there is your personal lifestyle inflation to consider.
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Joe S.
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Re: Nest Egg number question

Post by Joe S. »

This is a good ballpark estimate. You do have to correct for inflation. If you retire with a 50% stock allocation and slowly decrease it, your portfolio will probably outpace inflation early on, but may drop below inflation later on. Also, living costs tend to decrease slightly as you get older. a 50 year old tends to go out a lot and spend money. An 85 year old tends to sit at home and watch TV. You also have to consider social security income. However, it is still a reasonable ball park estimate.

I may point out that there are a lot of retirement calculators on the web that you can look into:
https://www.google.com/search?q=retirem ... channel=np
Last edited by Joe S. on Sun Dec 02, 2012 10:35 am, edited 1 time in total.
Topic Author
Gardener
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Re: Nest Egg number question

Post by Gardener »

Rex and sscritic- Inflation was a concern of mine, but in my situation, I dont believe that it will throw off my target number too much. Two factors that I believe will make up for inflation are that:

1) I believe that an average proabability exists for my wife and I to receive social security and
2) there would be an above average probability for my wife and I to receive an inheritance of $150,000 or more.

None of these factors appear in the formulas. If one or both of the above factors occured, inflation impact would be negated.
sscritic
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Re: Nest Egg number question

Post by sscritic »

Gardener wrote:Rex and sscritic- Inflation was a concern of mine, but in my situation, I dont believe that it will throw off my target number too much.
I wasn't thinking of inflation after you retire, but before (and that is what I wrote). If inflation is 5% per year over the next 20 years, $2 million in 2032 dollars is only worth about $750,000 of today's dollars. Can you retire on $750,000? When the time comes, you will shake your head and say "a million just ain't what it used to be." To have $2 million of today's dollars, you will need $5.3 million in 2032. Inflation might not be 5%, but I doubt it will be zero for the next 20 years.

P.S. and you won't get SS at age 50.
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Gardener
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Re: Nest Egg number question

Post by Gardener »

22twain wrote:Remember, if you retire at 50, you'll have to pay for 15 years of private individual medical insurance, unless you're lucky enough to retire under an employer who will pay it for you for that long. (Assuming no changes from the current situation with Medicare, of course...)
Great point and I did consider this when coming up with my number.

I have a fairly large amount in the budgeted amount for our future medical expenses. I factored this in when I considered the amount of future estimated retirement expenses in formula A (future yrly retirement expenses X amount of years in retirement) , but it is a weakness of formula b, as formula b assumes that you will be retiring ( I believe) at 65 and not 50.
HoosierJim
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Re: Nest Egg number question

Post by HoosierJim »

22twain wrote:Remember, if you retire at 50, you'll have to pay for 15 years of private individual medical insurance
Note: If you structure your taxable retirement income properly along with supplementing your income needs with previously saved post tax money, the Affordable Care Act will pay your health insurance from age 50 to medicare. Also, as posted on other threads, your strategic timing of when to take your SS payments may also play into the mix.
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Gardener
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Re: Nest Egg number question

Post by Gardener »

Joe S. wrote:This is a good ballpark estimate. You do have to correct for inflation. If you retire with a 50% stock allocation and slowly decrease it, your portfolio will probably outpace inflation early on, but may drop below inflation later on. Also, living costs tend to decrease slightly as you get older. a 50 year old tends to go out a lot and spend money. An 85 year old tends to sit at home and watch TV. However, it is still a reasonable ball park estimate.
Great points! Thanks Joe.
Calm Man
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Re: Nest Egg number question

Post by Calm Man »

OP, I applaud you for the act of planning at such a young age. Rather than comment on the individual components, I would suggest that nobody has any idea what expenses you will have 40 years from now. Tax rates could be lower or higher. Social security could be the same of lower. Inflation could be low or high. Medical costs are a complete unknown. You do not know if you will earn a lot more or nothing at all if you both lose jobs. At 28 retirement is way off in the future. I would suggest you save as much as you can and invest in an allocation with which you are comfortable. At about age 45 or even 50 you can begin to get more precise on your estimates. But again, you are doing a great job looking ahead.
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Gardener
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Re: Nest Egg number question

Post by Gardener »

sscritic wrote:
Gardener wrote:Rex and sscritic- Inflation was a concern of mine, but in my situation, I dont believe that it will throw off my target number too much.
I wasn't thinking of inflation after you retire, but before (and that is what I wrote). If inflation is 5% per year over the next 20 years, $2 million in 2032 dollars is only worth about $750,000 of today's dollars. Can you retire on $750,000? When the time comes, you will shake your head and say "a million just ain't what it used to be." To have $2 million of today's dollars, you will need $5.3 million in 2032. Inflation might not be 5%, but I doubt it will be zero for the next 20 years.

P.S. and you won't get SS at age 50.
Thanks sscritic. I appreciate your input. Its challenging me to sharpen up the details on my retirement plan. I will certainly have to give inflation impact additional consideration. Here is my take on inflation and its impact on my portfolio:

Once retireed, wouldn't even an extremely conservative retirement portfolio be able to generate a return to meet or beat inflation ( wild estimate would be that inflation will be somewhere between 2-4%) ?

Also, I didn't mention this in the first post, but I think a number of my assumptions are very conservative. For example, I estimated that my wife and I would pass at 95, and I imagine that that will be the top of the mark. I also estimated pretty high estimated future retirement expenses, but would not be surprised to find that I have overestimated them by 25% or more. I mention these conservative assumptions because I believe that they will also negate the impact of inflation on our portfolio.
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Gardener
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Re: Nest Egg number question

Post by Gardener »

Calm Man wrote:OP, I applaud you for the act of planning at such a young age. Rather than comment on the individual components, I would suggest that nobody has any idea what expenses you will have 40 years from now. Tax rates could be lower or higher. Social security could be the same of lower. Inflation could be low or high. Medical costs are a complete unknown. You do not know if you will earn a lot more or nothing at all if you both lose jobs. At 28 retirement is way off in the future. I would suggest you save as much as you can and invest in an allocation with which you are comfortable. At about age 45 or even 50 you can begin to get more precise on your estimates. But again, you are doing a great job looking ahead.
Thanks Calm Man for the encouragement. Agreed that there are a ton of unknowns this far out from retirement. I wanted to get a definitive nest egg number, frankly, because I have the OCD type of personality where it makes me anxious not to have one. I think that I just like having a goal in writing to keep me accountable.
letsgobobby
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Re: Nest Egg number question

Post by letsgobobby »

I believe $2M 40 years from now will not be sufficient to maintain 30 years of spending $45,000 in real purchasing power. Not even close. Assuming inflation of 3% per year, $2M in 40 years will have the purchasing power of $613,114. A sustainable withdrawal of 4% is only $24,524, in today's dollars.

You inheritance of $150k will mean very little 50 years from now.

social security may help mitigate inflation but will not make it inconsequential, and counting on an unchanged benefit is probably a bad idea.

Assuming 100% living expenses in retirement is reasonable, but could be too low - it assumes you don't need long term care, which I believe 1/3 of all people eventually require. It assumes Medicare won't change. It assumes you will retire from your benefit-providing job the day after you become eligible for Medicare, and not before due to disability or layoff. 50% of all people are retired by age 62, whereas Medicare eligibility is age 65.

Consider my proposal for a different method of measuring your progress against your own goals.

http://www.bogleheads.org/forum/viewtop ... =1&t=99448
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Watty
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Re: Nest Egg number question

Post by Watty »

I would NOT recommend doing it when you are relatively young but another cross check to see if your retirement savings target goal is in the right ballpark is to see what a single premium immediate annuity would cost.

You can check here to see what a single premium immediate annuity would cost today for people of at various ages.
http://www.immediateannuities.com/
Formula B: 12 X current income (in our case it would be 12X165k = 1.98M) (I heard about this basic formula in msn money, I believe)
Be careful with this. Was this assuming that you are retiring at 65 and not trying to retire at 50?
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Joe S.
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Re: Nest Egg number question

Post by Joe S. »

letsgobobby wrote:I believe $2M 40 years from now will not be sufficient to maintain 30 years of spending $45,000 in real purchasing power. Not even close. Assuming inflation of 3% per year, $2M in 40 years will have the purchasing power of $613,114. A sustainable withdrawal of 4% is only $24,524, in today's dollars...
The 2M will be invested, and hopefully the investments will keep up with inflation. If we estimate he would be 50% invested in stocks at age 50, dropping down to about 30% by age 70 and then staying flat, he will probably keep up with inflation. He can consider buying an annuity around age 80 or so, which will protect him if he or she accidentally lives to long.
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nedsaid
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Re: Nest Egg number question

Post by nedsaid »

If you end up with $2 million and you follow the 4 percent rule for withdrawals, your portfolio income would be $80,000. It seems than in my 30 year worklife so far that the cost of living has about tripled. My back of the envelope guess is that in 20-21 years that $80,000 will be more like $40,000 to $50,000 in today's money. Add to that Social Security and I think that will be a good retirement.

Keep family relationships in good shape because ultimately it boils down to people relying on each other. I think the whole retirement model is not going to work for most people. I would bet that most people at my workplace will have Social Security and maybe between $100,000 and $300,000 in retirement savings when they retire. Most folks are not going to have $1 million or $2 million saved and a long term care policy by the time they retire. It is a pretty daunting task to save that much money, I am saving really hard and have been doing so since I started working. It is possible that despite my best efforts that I won't reach those benchmarks. A lot depends on how the markets perform between now and then.

Looks to me like you are doing great and that you are on track.
A fool and his money are good for business.
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backofbeyond
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Re: Nest Egg number question

Post by backofbeyond »

You already received some pretty sold advice from the Boglehead team.

So I'll only add that like you I planned on early retirements when I was in my 20s, made a plan and more or less stuck to it. However, instead of just planning for a lump sum, I also tried to collect as many income streams as possible. Easy one of course is SS. But add pensions, annuities, etc. By age 67, my wife and I should have 6. Of course they come "online" at different ages, but if I stay employeed until 67, they will consist of 113% of what I currently make (apples to apples comparison i.e. inflation adjusted)

Also, I had a target date of retirement, which for me is 56 (as that is when I qualify for early retirement) but as I grew into my career, I found out that I love it and IF I stay healthy, I'm pretty sure I will continue to work until age 67. So, I'd recommend that you continue to plan and shoot for your target date, but know that you may want to extend as you get closer...which means you will be in dynamite shape when you actually do.
The question isn't at what age I want to retire, it is at what income. - George Foreman
letsgobobby
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Re: Nest Egg number question

Post by letsgobobby »

nedsaid wrote:If you end up with $2 million and you follow the 4 percent rule for withdrawals, your portfolio income would be $80,000. It seems than in my 30 year worklife so far that the cost of living has about tripled. My back of the envelope guess is that in 20-21 years that $80,000 will be more like $40,000 to $50,000 in today's money. Add to that Social Security and I think that will be a good retirement.

Keep family relationships in good shape because ultimately it boils down to people relying on each other. I think the whole retirement model is not going to work for most people. I would bet that most people at my workplace will have Social Security and maybe between $100,000 and $300,000 in retirement savings when they retire. Most folks are not going to have $1 million or $2 million saved and a long term care policy by the time they retire. It is a pretty daunting task to save that much money, I am saving really hard and have been doing so since I started working. It is possible that despite my best efforts that I won't reach those benchmarks. A lot depends on how the markets perform between now and then.

Looks to me like you are doing great and that you are on track.
The OP is 29. If he retires at 53 then 3% inflation will increase his current $45k annual spending to $90k. That is a 4.5% initial withdrawal, far above the safe rate for a 40 year period. It also excludes health care. Relying on a static number for something nearly half a century away is very risky.
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mlewis
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Re: Nest Egg number question

Post by mlewis »

IMO neither formula A nor B make any sense.

Formula A assumes you just draw down principal and never have any growth.

A formula often used is 25x yearly expenses, which would work out to a 4% withdrawal rate, which you could supposedly keep up on a sustainable level in real (inflation adjusted) dollars. That may be a little aggressive in today's (or tomorrows) environment. Perhaps 3 or 3.5% withdrawal would be better, so maybe 30x expenses. 45x expenses is excessive (but very safe!)

And, like others have said, consider how your savings and investing will stack up in real dollars, to account for inflation.

malcolm
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Littlefinger
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Re: Nest Egg number question

Post by Littlefinger »

I say shoot for the 2 mil and reevaluate along the way. It's impossible to do all the math now for the variables in the unknown future. Good luck!
umfundi
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Re: Nest Egg number question

Post by umfundi »

Gardener wrote:I am trying to create a simple ball park nest egg number that I believe my wife (28 years old) and I (29) will need to retire on. Is the way I came up with this ball park number far too simplistic? Have I made any egregious errors?

Formula A: Yearly Estimated Retirement Living Expenses X Estimated Years in Retirement (in our case it would be 48k X 45 years= 2.16M)

Formula B: 12 X current income (in our case it would be 12X165k = 1.98M) (I heard about this basic formula in msn money, I believe)

I came up with the number of 2M, truthfully, because its a clean, easy to remember target number and between form.A and form.B . Other calculators are also putting me in this same $2M ball park.

Assumptions that I made:
We retire at 50
We kick the bucket at the exact same time (peacefully in our sleep) at 95
We have living expenses of $48,000 per year

Any comments or guidance would be appreciated!
Gardener,

I'd do the calculations in constant dollars, assuming inflation will mostly take care of itself. You do need to watch your assumption on real investment returns. 4% is my suggestion.

What is your savings rate? If your income is $165k I would suggest that needs of $48k is very much a low estimate. You'll grow into your income, or you'll be misers and not enjoy it.

My SWAG is if you want to retire at 50, your savings rate should be 30%. Then, you will need 80% of expenses: 0.8*0.7*165k = $88k. At 4% that is a nest egg of $2.2M.

Which, I think, is too conservative. If you retire early, your big withdrawals will be early, before you have pensions, SS, Medicare and the like. I would SWAG $3M.

Keith
Déjà Vu is not a prediction
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