25 years to retirement; assume 0 future contributions

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Topic Author
EthanAllen
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25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 10:10 am

Would welcome thoughts on the following atypical scenario (and I know it requires making a number of assumptions, but please bear with me as a hypothetical exercise):

- couple in late 30s; husband works; wife will be homemaker
- assume a hypothetical $1 million in net assets between his and her retirement plans and taxable accounts; rent so no home equity, but also no debt
- assume adequately insured (assume both have significant life insurance; husband has disability insurance; best healthcare plan imaginable)
- assume husband has as secure a job as you can get (govt; civil service protection)
- assume that there will be no additional contributions because transitioning to one-income family will net out income and expenses to approx $0 (will aim to save but put that aside and assume no additional contributions for foreseeable future)

So at bottom, assume a 25-year runway with a million dollar portfolio with no additional contributions expected, but no withdrawal expected for 25 years either.

What do you do and how do you invest?

rantk81
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Re: 25 years to retirement; assume 0 future contributions

Post by rantk81 » Thu Jul 11, 2019 10:20 am

EthanAllen wrote:
Thu Jul 11, 2019 10:10 am
Would welcome thoughts on the following atypical scenario (and I know it requires making a number of assumptions, but please bear with me as a hypothetical exercise):

- couple in late 30s; husband works; wife will be homemaker
...
What do you do and how do you invest?
The same way as if I had a $0 net worth to start. A mix of stock index funds and an age appropriate amount of bonds.

mchampse
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Re: 25 years to retirement; assume 0 future contributions

Post by mchampse » Thu Jul 11, 2019 10:28 am

How much do you want to have each year in retirement? Take that amount and then divide by .03 as 3% is generally considered a safe withdrawal rate.

The number you get is how much you need on the day that you retire in today’s dollars. Divide that by 1,000,000 to get the compounded rate of return that you need. Take that to the power of .04 (1/25) and subtract 1 which will give you the average rate of return you need ABOVE inflation to retire under that scenario.

For example, let’s say you want $50,000 per year in retirement.

50000/.03 = 1,666,666
Div by 1,000,000 = 1.66
1.66^.04 = 1.021
Subtract 1 = 2.1% return above inflation

Inflation right now is 1.8%, so you would need a return of 3.9%. Hope that helps.

mbasherp
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Re: 25 years to retirement; assume 0 future contributions

Post by mbasherp » Thu Jul 11, 2019 10:30 am

Investments would probably be best between 60/40 and 100/0. That’s obviously a broad range. Your timeline suggests stock heavy but your inability to save more suggests a conservative approach. The variable here is that you have no space in your budget to absorb financial shocks. If you need to draw on this money for any reason (job loss, unforeseen expense) you’ve no longer fully funded your retirement.

I think it’s wisest to invest aggressively but also find space in your budget to cut if needed. There’s no such thing as auto pilot for 25 years.

rj342
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Re: 25 years to retirement; assume 0 future contributions

Post by rj342 » Thu Jul 11, 2019 10:32 am

re "renting so no debt"...
Technically correct but inadequate characterization --unless living in car and tent there IS an ongoing permanent obligation for roof overhead $$s, though not "debt".

Quirkz
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Re: 25 years to retirement; assume 0 future contributions

Post by Quirkz » Thu Jul 11, 2019 10:51 am

rantk81 wrote:
Thu Jul 11, 2019 10:20 am
The same way as if I had a $0 net worth to start. A mix of stock index funds and an age appropriate amount of bonds.
+1

Investment money is investment money. Lump sum or extended trickle doesn't change it much.

Hand-waving this hypothetical, given 25 years, it'd be easy to double, and likely to triple or possible to quadruple this money. If they think they can live on 2-4 million when the timer is up, this becomes a mostly boring exercise in the three-fund model with gradually increasing bonds.

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Watty
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Re: 25 years to retirement; assume 0 future contributions

Post by Watty » Thu Jul 11, 2019 11:16 am

EthanAllen wrote:
Thu Jul 11, 2019 10:10 am
$1 million in net assets between his and her retirement plans and taxable accounts

What do you do and how do you invest?
This is what I would do.

1) Max out the work retirement account contributions each year by living on money from the taxable accounts.

For example in the 25% tax bracket have 401k payroll deductions of $1,000 a month and spend $750 a month from the tax taxable account each month. The difference is because of the $250 in tax savings.

If it makes sense in your tax situation you could contribute to a Roth 401k instead.

That would also get you any 401k match. Always get any 401k match that is available.

2) Max out Roth IRA accounts each year using money from the taxable accounts. If eligible you may be able to make deductible IRA contributions instead if your income is low enough.

The income limits for the deduction are after a bunch of subtractions, including 401k contributions, so you have to look at the details of your numbers to see if you are eligible.

https://www.irs.gov/retirement-plans/20 ... an-at-work

3) If the stars align just right it is also possible that you could qualify for up to $1,000 retirement savings credit because of all the 401k payroll deductions.

https://www.irs.gov/retirement-plans/pl ... ers-credit

4) With the deductions above and the child tax credit is is possible that you could get to the point where you are effectively in the 0% or 10% federal tax bracket. If so then do Roth conversions in December up to the top of the 10% federal tax bracket.

5) As the husband gets future raises I would save part of any pay increase in a house fund to be able to buy a house or condo some day. At least for me having a paid off house made my retirement numbers work a lot better and I don't need to worry about being forced to move when I am 75 because my landlord is not renewing my lease. Likewise if you buy a house you will not be forced to move and have your kid change schools at a bad time. Renting for life can work for some people but it would be good to have the option of buying a house some day so it would be good to have enough saved up to keep that option open.

Topic Author
EthanAllen
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Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 12:05 pm

mchampse wrote:
Thu Jul 11, 2019 10:28 am
How much do you want to have each year in retirement? Take that amount and then divide by .03 as 3% is generally considered a safe withdrawal rate.

The number you get is how much you need on the day that you retire in today’s dollars. Divide that by 1,000,000 to get the compounded rate of return that you need. Take that to the power of .04 (1/25) and subtract 1 which will give you the average rate of return you need ABOVE inflation to retire under that scenario.

For example, let’s say you want $50,000 per year in retirement.

50000/.03 = 1,666,666
Div by 1,000,000 = 1.66
1.66^.04 = 1.021
Subtract 1 = 2.1% return above inflation

Inflation right now is 1.8%, so you would need a return of 3.9%. Hope that helps.
Thanks. This made my head hurt and I’m not savvy enough to check this math, but assuming your math is right, that’s helpful and doesn’t seem as huge of an ask as I had feared.

Topic Author
EthanAllen
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Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 12:07 pm

rj342 wrote:
Thu Jul 11, 2019 10:32 am
re "renting so no debt"...
Technically correct but inadequate characterization --unless living in car and tent there IS an ongoing permanent obligation for roof overhead $$s, though not "debt".
Of course there will be ongoing housing costs, but the rent is captured in the expenses which is why I’m assuming no contributions.

I meant no debt to clarify that 100% of the assets were liquid and there is no home equity and conversely no mortgage loan either.

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LinusP
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Re: 25 years to retirement; assume 0 future contributions

Post by LinusP » Thu Jul 11, 2019 12:08 pm

I think Watty's approach is spot on.

My wife is staying at home with our two kids (ages 10 months and 1 year 10 months). We had saved up a bunch of extra cash to use in supplementing my income after she stopped working. I also have some taxable stock funds slated for retirement, and intend to sell those down as needed to continue to max out retirement accounts (as Watty recommends). In the two years since my wife stopped working, though, we haven't drawn any of our accounts down - our expenses dropped enough that my income can cover both our expenses and continuing to contribute the max to retirement accounts.

We don't necessarily expect this to continue, as kids start spending some time in day care, they pick up activities, etc. - but your hypothetical couple may well find that their budget doesn't tighten as much as expected when they transition to a single income with kids.

Topic Author
EthanAllen
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Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 12:13 pm

mbasherp wrote:
Thu Jul 11, 2019 10:30 am
Investments would probably be best between 60/40 and 100/0. That’s obviously a broad range. Your timeline suggests stock heavy but your inability to save more suggests a conservative approach. The variable here is that you have no space in your budget to absorb financial shocks. If you need to draw on this money for any reason (job loss, unforeseen expense) you’ve no longer fully funded your retirement.

I think it’s wisest to invest aggressively but also find space in your budget to cut if needed. There’s no such thing as auto pilot for 25 years.
Thanks. And agreed. But i wanted to do this as a hypothetical exercise because it is much different from our prior phases of life (where income was much higher and which allowed us to save up the current portfolio while starting from $0. Indeed, we actually started from a six figure negative number based on educational loans.)

I say that just to provide background that we are people who aggressively manage costs/try to save and aggressively invest, so will try to continue doing that if possible. My assumptions are conservative because I still plan to maximize retirement plans.

But I wanted to see how bad things might be if we can’t make any additional contributions and at best break even on net income for the foreseeable future.

Topic Author
EthanAllen
Posts: 62
Joined: Sat Mar 02, 2019 9:50 am

Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 12:16 pm

Watty wrote:
Thu Jul 11, 2019 11:16 am
EthanAllen wrote:
Thu Jul 11, 2019 10:10 am
$1 million in net assets between his and her retirement plans and taxable accounts

What do you do and how do you invest?
This is what I would do.

1) Max out the work retirement account contributions each year by living on money from the taxable accounts.

For example in the 25% tax bracket have 401k payroll deductions of $1,000 a month and spend $750 a month from the tax taxable account each month. The difference is because of the $250 in tax savings.

If it makes sense in your tax situation you could contribute to a Roth 401k instead.

That would also get you any 401k match. Always get any 401k match that is available.

2) Max out Roth IRA accounts each year using money from the taxable accounts. If eligible you may be able to make deductible IRA contributions instead if your income is low enough.

The income limits for the deduction are after a bunch of subtractions, including 401k contributions, so you have to look at the details of your numbers to see if you are eligible.

https://www.irs.gov/retirement-plans/20 ... an-at-work

3) If the stars align just right it is also possible that you could qualify for up to $1,000 retirement savings credit because of all the 401k payroll deductions.

https://www.irs.gov/retirement-plans/pl ... ers-credit

4) With the deductions above and the child tax credit is is possible that you could get to the point where you are effectively in the 0% or 10% federal tax bracket. If so then do Roth conversions in December up to the top of the 10% federal tax bracket.

5) As the husband gets future raises I would save part of any pay increase in a house fund to be able to buy a house or condo some day. At least for me having a paid off house made my retirement numbers work a lot better and I don't need to worry about being forced to move when I am 75 because my landlord is not renewing my lease. Likewise if you buy a house you will not be forced to move and have your kid change schools at a bad time. Renting for life can work for some people but it would be good to have the option of buying a house some day so it would be good to have enough saved up to keep that option open.
Interesting and helpful. Thanks. I had not considered that even if family expenses and income netted out to $0, it may make sense to take money from taxable accounts and continue to put money into tax deferred accounts.

lakpr
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Re: 25 years to retirement; assume 0 future contributions

Post by lakpr » Thu Jul 11, 2019 1:55 pm

Have you heard about the Rule of 72? Basically it states that, given a fixed interest rate, the amount of time it would take to double the original investment is 72 over the interest rate. Conversely, if you have a fixed time horizon, the interest rate you need to double the initial investment within that time horizon is 72 over the time window.

Since you have 25 year horizon, your $1 million would double to $2 million at an interest rate of slightly more than 3%. Now, you can treat this 3% as a reasonable assumption of return in a 60:40 allocation of bonds, above inflation. Historically stocks returned, on average, between 4 and 5% above inflation. Bonds returned about 1% above inflation. A 60:40 blend of stocks and bonds therefore is expected to return 0.6*4% + 0.4 *1% = 2.8%. If you are lucky to get a 5% over inflation in stocks return, you will end up with 0.6 * 5% + 0.4 * 1% = 3.4%. 3%, therefore is very much in the realm of possibility. And 60:40 blend is quite conservative enough, a good balance between preservation of principal and capturing market returns.

Since this is return above inflation, you are going to end up at $2 million in 2019 dollars at the end of 25 years.

A safe withdrawal rate of 3% to 3.5% on this portfolio will give you about $60k to $70k.

Do you think you can live the life style you want on $60k to $70k today? This will have to include all taxes etc.

If yes, you are golden. Even with $0 further contributions, your retirement is set. If no, you may have to throw a few more contributions into the pot.

Edited to add: If 60:40 sounds good, you can also throw everything into a Life Strategy Moderate Growth Fund, which would rebalance your assets on a daily basis to 60:40. One fund, simplicity!

renue74
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Re: 25 years to retirement; assume 0 future contributions

Post by renue74 » Thu Jul 11, 2019 2:09 pm

The part you will have issues with is "assuming" you won't touch the $1M.

I sold a business about 6 years ago for $1M. At that time, I added this to our existing (small) portfolio and looked at those 25 year numbers also...like we would never touch it.

But, then I decided to get into some rental properties recently have have taken some $ from my taxable account to buy properties. So then your portfolio looks lower because you've spent $XYZ amount on other investments.

I'm 45 and we have a 65/35 AA and it's fine for us.

ohai
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Re: 25 years to retirement; assume 0 future contributions

Post by ohai » Thu Jul 11, 2019 2:23 pm

I don't know what asset allocation you'd choose, but it's clear that you'd be somewhat more risk adverse, since your cumulative expected retirement contributions will be lower.

If you have $1 million in savings and $1 million in future contributions, you can survive stock market going to zero today, because you'll save more later.

If you have $1 million in savings and 0 future contributions, you cannot survive a one time downturn.

Topic Author
EthanAllen
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Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 2:35 pm

ohai wrote:
Thu Jul 11, 2019 2:23 pm
I don't know what asset allocation you'd choose, but it's clear that you'd be somewhat more risk adverse, since your cumulative expected retirement contributions will be lower.

If you have $1 million in savings and $1 million in future contributions, you can survive stock market going to zero today, because you'll save more later.

If you have $1 million in savings and 0 future contributions, you cannot survive a one time downturn.
This is partly what I’m struggling with as a theoretical matter. Do my set of assumptions suggest being more risk adverse for the reasons you mention? Or conversely, do they call for more risks in the next few years because there is a greater need to maximize returns if no additional contributions?

Topic Author
EthanAllen
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Re: 25 years to retirement; assume 0 future contributions

Post by EthanAllen » Thu Jul 11, 2019 2:37 pm

lakpr:

Thanks for your post. I will try to process, although posts like yours make me think I’m not as good at math as I thought I was ...

ohai
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Re: 25 years to retirement; assume 0 future contributions

Post by ohai » Thu Jul 11, 2019 4:13 pm

EthanAllen wrote:
Thu Jul 11, 2019 2:35 pm
ohai wrote:
Thu Jul 11, 2019 2:23 pm
I don't know what asset allocation you'd choose, but it's clear that you'd be somewhat more risk adverse, since your cumulative expected retirement contributions will be lower.

If you have $1 million in savings and $1 million in future contributions, you can survive stock market going to zero today, because you'll save more later.

If you have $1 million in savings and 0 future contributions, you cannot survive a one time downturn.
This is partly what I’m struggling with as a theoretical matter. Do my set of assumptions suggest being more risk adverse for the reasons you mention? Or conversely, do they call for more risks in the next few years because there is a greater need to maximize returns if no additional contributions?
What does your utility curve look like? For most people, a loss is worse than a gain of the same amount. Therefore, you will reduce risk.

Ask yourself, if you are forced to retire today, would you prefer, 1) $1 million for sure 2) 50% chance of $500k and 50% chance of $1.5 million? Most people would/should choose the first option.

https://www.investopedia.com/terms/l/la ... tility.asp

bltn
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Re: 25 years to retirement; assume 0 future contributions

Post by bltn » Thu Jul 11, 2019 9:10 pm

lakpr wrote:
Thu Jul 11, 2019 1:55 pm
Have you heard about the Rule of 72? Basically it states that, given a fixed interest rate, the amount of time it would take to double the original investment is 72 over the interest rate. Conversely, if you have a fixed time horizon, the interest rate you need to double the initial investment within that time horizon is 72 over the time window.

Since you have 25 year horizon, your $1 million would double to $2 million at an interest rate of slightly more than 3%. Now, you can treat this 3% as a reasonable assumption of return in a 60:40 allocation of bonds, above inflation. Historically stocks returned, on average, between 4 and 5% above inflation. Bonds returned about 1% above inflation. A 60:40 blend of stocks and bonds therefore is expected to return 0.6*4% + 0.4 *1% = 2.8%. If you are lucky to get a 5% over inflation in stocks return, you will end up with 0.6 * 5% + 0.4 * 1% = 3.4%. 3%, therefore is very much in the realm of possibility. And 60:40 blend is quite conservative enough, a good balance between preservation of principal and capturing market returns.

Since this is return above inflation, you are going to end up at $2 million in 2019 dollars at the end of 25 years.

A safe withdrawal rate of 3% to 3.5% on this portfolio will give you about $60k to $70k.

Do you think you can live the life style you want on $60k to $70k today? This will have to include all taxes etc.

If yes, you are golden. Even with $0 further contributions, your retirement is set. If no, you may have to throw a few more contributions into the pot.

Edited to add: If 60:40 sounds good, you can also throw everything into a Life Strategy Moderate Growth Fund, which would rebalance your assets on a daily basis to 60:40. One fund, simplicity!

Nice straightforward analysis.

Mike Scott
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Re: 25 years to retirement; assume 0 future contributions

Post by Mike Scott » Thu Jul 11, 2019 9:24 pm

Chances are SS and pension would cover most of your expenses at "normal" retirement. Plus you would start with a million more in savings/investments than most people would ever have. Invest the million somewhere between 60/40 and 80/20 and let it ride.

MotoTrojan
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Re: 25 years to retirement; assume 0 future contributions

Post by MotoTrojan » Thu Jul 11, 2019 9:57 pm

bltn wrote:
Thu Jul 11, 2019 9:10 pm
lakpr wrote:
Thu Jul 11, 2019 1:55 pm
Have you heard about the Rule of 72? Basically it states that, given a fixed interest rate, the amount of time it would take to double the original investment is 72 over the interest rate. Conversely, if you have a fixed time horizon, the interest rate you need to double the initial investment within that time horizon is 72 over the time window.

Since you have 25 year horizon, your $1 million would double to $2 million at an interest rate of slightly more than 3%. Now, you can treat this 3% as a reasonable assumption of return in a 60:40 allocation of bonds, above inflation. Historically stocks returned, on average, between 4 and 5% above inflation. Bonds returned about 1% above inflation. A 60:40 blend of stocks and bonds therefore is expected to return 0.6*4% + 0.4 *1% = 2.8%. If you are lucky to get a 5% over inflation in stocks return, you will end up with 0.6 * 5% + 0.4 * 1% = 3.4%. 3%, therefore is very much in the realm of possibility. And 60:40 blend is quite conservative enough, a good balance between preservation of principal and capturing market returns.

Since this is return above inflation, you are going to end up at $2 million in 2019 dollars at the end of 25 years.

A safe withdrawal rate of 3% to 3.5% on this portfolio will give you about $60k to $70k.

Do you think you can live the life style you want on $60k to $70k today? This will have to include all taxes etc.

If yes, you are golden. Even with $0 further contributions, your retirement is set. If no, you may have to throw a few more contributions into the pot.

Edited to add: If 60:40 sounds good, you can also throw everything into a Life Strategy Moderate Growth Fund, which would rebalance your assets on a daily basis to 60:40. One fund, simplicity!

Nice straightforward analysis.
Agreed but I am not a fan of the phrase "your retirement is set". There is a risk of not achieving 3% real returns over 25 years at 60/40 IMHO. I'd still aim to contribute more or further reduce my retirement spend (but these are equivalent in some regards).

"Golden" would be if 0% real would meet your goal and you just held TIPS.

clip651
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Re: 25 years to retirement; assume 0 future contributions

Post by clip651 » Thu Jul 11, 2019 10:55 pm

If you run into trouble several years down to road, would it be an option for your wife to go (back to?) work? If so, having that as a potential plan B gives you another margin of safety.

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