Determining your "number" when you want to leave nothing

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jjunk
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Determining your "number" when you want to leave nothing

Post by jjunk » Sat Feb 07, 2015 9:03 pm

I'm interested in retiring as early as I can (currently 41). My spouse and I dont have any children and dont have any living family members that would benefit from any legacy we might leave behind. We already give and support the charities of our choice every year. When I've read about others retirement planning and generation of the proverbial "number" it usually includes components of legacy that I dont need. I'd like to die penniless or as close to it as possible, leaving the remainder to charity. Given that, how does that impact the amount needed for retirement? Obviously you cant know the date of your death, but most of my calculations are using 85 as the age we're both no longer on this rock.

Assuming I need $60k in today's dollars to live for the next 44yrs, what number should I be shooting for to be exhausted given a 70/30 portfolio?

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Re: Determining your "number" when you want to leave nothing

Post by Gill » Sat Feb 07, 2015 9:05 pm

How would you feel if you reach age 85 and your money is exhausted and you're not?
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Re: Determining your "number" when you want to leave nothing

Post by jjunk » Sat Feb 07, 2015 9:14 pm

It would leave me an interesting choice thats for sure :happy

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Re: Determining your "number" when you want to leave nothing

Post by jjunk » Sat Feb 07, 2015 9:28 pm

And in all seriousness, no one in my family has ever lived beyond 80. I picked 85 for myself in the event that I'm an outlier.

As far as I can tell, 1.2M @ 4.5% - 60k/yr would still leave me in the money at 85, albeit not by much. I'm trying not to account for SS in my calculations since it may or may not be there. I realize this is an oversimplification and linear in the mathematics of the problem but I'm trying to get a feel for what initial amount would get me close. Does 1.2M sound correct for those math wizards out there?

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ResearchMed
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Re: Determining your "number" when you want to leave nothing

Post by ResearchMed » Sat Feb 07, 2015 9:36 pm

You aren't the only one here without any serious legacy desires, although those of us in that category are certainly in the minority.

You might want to search for some threads on SPIA's (the most simple form of annuity).
And if you are planning for an extremely long retirement, you might also want to consider either an inflation adjustment and/or a deferred single payment annuity (of a lesser amount) or perhaps more than one, to kick in later for that likely pesky inflation problem.

I don't see this as an issue about "the number" or not, however.
The "number" is about expected amount needed eventually, regardless of whether that includes legacy desires.

One important thing to remember is not to annuitize everything. You'd still want to be able to access some chunks of money for big ticket costs (car, health care, roof, vacations...).

Also, for such a long retirement, you'd probably want to keep some in "the market", in equities, given the assumption (and that's all it is, looking forward) that equities will outperform inflation. Over many decades, this would really add up.

As much as we'd like to have that final check bounce the day the last of us dies, that isn't possible.
But that's quite different than wanting to leave a nice bequest for children or other family members.
(We have a sort of pseudo-family, and we are enjoying taking them on vacations and doing other things with them. They'll probably oversee whatever "care" we need at some point. And much of what *is* left will go to them, with the rest to a few charities/non-profits that we also support.)

One nice feature of this is that we don't feel torn about spending on nice vacations (or even nicer retirement facilities) for us, when there is any trade-off about leaving more for heirs.

Our biggest concern is that there be *someone* to watch over us as we decline, since there isn't going to be family to do that.

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Re: Determining your "number" when you want to leave nothing

Post by ThankYouJack » Sat Feb 07, 2015 9:38 pm

You could punch the numbers into firecalc. I think it'll give a 53% chance of success.

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Re: Determining your "number" when you want to leave nothing

Post by Userdc » Sat Feb 07, 2015 9:47 pm

Get a SPIA quote.

If you put zero value on a bequest, it's hard to beat the safe withdrawal rate of a SPIA.

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Re: Determining your "number" when you want to leave nothing

Post by jjunk » Sat Feb 07, 2015 9:49 pm

I'll look more into SPIAs, its not something I really considered previously. I also punched this into firecalc at 1.2M and received an 87% chance of success, what were you using that got 53% TYJack?

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Re: Determining your "number" when you want to leave nothing

Post by lack_ey » Sat Feb 07, 2015 9:50 pm

jjunk wrote:And in all seriousness, no one in my family has ever lived beyond 80. I picked 85 for myself in the event that I'm an outlier.

As far as I can tell, 1.2M @ 4.5% - 60k/yr would still leave me in the money at 85, albeit not by much. I'm trying not to account for SS in my calculations since it may or may not be there. I realize this is an oversimplification and linear in the mathematics of the problem but I'm trying to get a feel for what initial amount would get me close. Does 1.2M sound correct for those math wizards out there?
Oh, I was going to post around $2 mil to be on the safer side (and that's including help from SS), considering the long drawdown period, and then I saw this post. It really depends on how flexible you are with taking less than the target or going back to at least some part-time work if things go south. My $2 mil figure is assuming some modest degree of flexibility. Ultimately, how bad is working 5 extra years vs. having to cut back a whole lot and downsize at 60 because the markets haven't been favorable? That's only something you can answer for yourself.

There's not really much math wizardry to be done. The spread of possible outcomes over a 40+ period are immense, and small changes in modeling assumptions change everything drastically.

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Re: Determining your "number" when you want to leave nothing

Post by The Wizard » Sat Feb 07, 2015 10:02 pm

There's a certain something, akin to machismo, in having a decent remaining nest egg.
Do you really want to be age 80 with just $50,000 of financial assets remaining and having to squeak through mostly on SS checks since you can't be certain of dieing on time?
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Re: Determining your "number" when you want to leave nothing

Post by randomguy » Sat Feb 07, 2015 11:32 pm

Userdc wrote:Get a SPIA quote.

If you put zero value on a bequest, it's hard to beat the safe withdrawal rate of a SPIA.
SPIAs for 41 year olds don't make sense. The quick quote I got was 4.18% noninflation adjusted. That is going to require a heck of a lot more cash than holding something like a 60/40 AA. Now when they turn like 70 (or even 60), shoving huge chunks of the cash into one might make a ton of sense. Obviously dealing SS(yes it will be there) is likely the best way to get an inflation adjusted income source, but you could guessitmate how much you need out of the portfolio in 30 years to fill in the gap. I would say ~500-600k in todays dollars.

But the problem is covering those 20-30 years. The easy answer is go with the 4% rule and odd are you will have about 2x as much as you started with so that isn't aggressive enough so you could up that to 4.5%. The downside though is that 20% of the time you will be pretty much out of money (either broke or well below 500k), so you either get more conservative than the already conservative 4% rule and reduce your rate to lets say 3.5% (increases the odds of you ending up with a big pile of money which means you worked too long) or your accept you might have to cut your standard of living along the way (see the vanguard paper on dynamic withdrawal strategies) if you happen to retire in a bad year.

For most people being too conservative and working too long is pretty much an unavoidable problem. For an early retiree, you can be more aggressive with SWR if your willing to go back to work. The 80 year old is going to have a problem finding a job if 15 years into retirement money is running short. A two 55 year old's should be able to find some job to bring in the 20k needed to prevent portfolio depletion. But you might prefer to work your current job 2-3 years more to avoid that possibility.

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Re: Determining your "number" when you want to leave nothing

Post by Cyclesafe » Sat Feb 07, 2015 11:34 pm

Per Jim Otar's Single Asset model:

Annual withdrawal of $60k from age 41 to 85 would require a 70/30 equity/fixed portfolio of $2.5M for 90% of the 70 past rolling 44 year financial market conditions (including actual inflation rates) to yield at least $60k (in 2015 dollars) on the year of your death. 10% of the time you will have run out of money earlier than 85. Of course, if events occur worse than what has been experienced since 1900, you will run out of money sooner. Also, going forward, can we really expect equity and fixed income investments to return what they have in the past? Dunno.

Bear in mind that employment value deteriorates rapidly after you are retired for awhile. I don't think you want to work as a box boy to make up for a future shortfall. I see plenty of elderly people today working in menial jobs likely because they couldn't/didn't save enough for a proper retirement.

A 30 year 4% SPIA yielding $60k/year (non-inflation adjusted) would cost $1.059M. You'll need to call a provider to get current SPIA terms to get to 85 as it would cost much more today. For example, a 44 year SPIA at 2% would theoretically cost $1.744M. But inflation, even at 2% per annum, would eat you alive. Also, 90% of the time, with a 70/30 (but probably also with a 50/50 or even lower equity) allocation, you will have potentially a great deal of money left over when you die. With the SPIA you are locked in at $60k (real or nominal, your choice), without it, you can ramp up your spending well before you actually die.
Last edited by Cyclesafe on Sat Feb 07, 2015 11:39 pm, edited 1 time in total.
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Re: Determining your "number" when you want to leave nothing

Post by DG99999 » Sat Feb 07, 2015 11:35 pm

I'd tend to agree with lack_ey's two million number. If you like the old William Bengen paper introducing the 4% rule than you can look at figure 1A showing that a 3% withdrawal rate survives for at least 50 years for all periods studied. This would give $60,000/0.03 = $2,000,000.

At 4% ($60,000/0.04 = $1,500,000) all periods do not give 44 years of withdrawals.

So just using data from this one paper the number lies somewhere between the two figures. Some (including Bengen) say that portfolio design can increase the safe withdrawal rate (SWR); at the same time others are suggesting that valuations of stocks and bonds at this level will decrease the SWR. Many more sophisticated papers and calculators can be consulted, but my cautious nature would lead me to the $2MM figure, some of which I would annuitize.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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Re: Determining your "number" when you want to leave nothing

Post by Watty » Sun Feb 08, 2015 12:05 am

In your
jjunk wrote:Assuming I need $60k in today's dollars to live for the next 44yrs, what number should I be shooting for to be exhausted given a 70/30 portfolio?
In your calculations be sure to take Social Security into account. If you need $60K (including taxes) and you will get $20K in social security at the age of 70 then you only need $40K a year after that.

You will also need to run yours number three ways, as a couple and with either of you surviving the other.

Userdc wrote:Get a SPIA quote.

If you put zero value on a bequest, it's hard to beat the safe withdrawal rate of a SPIA.
Inflation is a big potential problem with a SPIA, especially the the younger you get one.

You might want to consider having one of you delay when you start social security until you are 70 to get a larger inflation adjusted social security check. You could also buy an SPIA when you are 75 or 80 since their would be fewer years for inflation to be a problem.

The whole idea about a safe withdraw rate is pretty academic and it really does not reflect the real world since your spending at different ages will vary a lot and if your portfolio starts getting lower than expected you would just reduce your spending some.

Trying to have enough to totally retire in your 40's pretty challenging. If you look at the numbers as if you each have $10K in income a year from part time work that would make the numbers work a lot better and you would likely get a lot larger social security check too because of the extra years worked.

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Re: Determining your "number" when you want to leave nothing

Post by celia » Sun Feb 08, 2015 12:40 am

jjunk wrote:Assuming I need $60k in today's dollars to live for the next 44yrs, what number should I be shooting for to be exhausted given a 70/30 portfolio?
Even if you think you will need $60k in today's dollars for the rest of your life, don't you expect to have some years with "emergencies" happening in them? Typically people in retirement spend less in clothing and lunches and transportation to work since you don't have to go anywhere. If you have a mortgage now, it will likely be paid off at some point. But as you get older, you tend to spend more for health care. Many people tend to travel more in their early years of retirement, and not so much when their bodies wear out. Travel can cost any amount, depending on your preferences.

What do you plan to do in retirement? That is the first thing you need to answer. Are you going to watch TV every day or walk to a local restaurant for the "senior dinner"? Are you going to persue new hobbies or pick up older ones you didn't have time for earlier? Are you going to volunteer for something, run for office, learn a new language and travel the world? The answer to this could have a big impact on your future spending.

All this leads to realizing you won't be spending the same amount every year. In the last 10 years, did you spend the same amount every year? Was your past 10-year spending basically the same as you expected it to be when you calculated it 10 years ago? :happy

Most likely, one of you will die more than a year before the other. What will the survivor do differently when alone? Possibly re-marry or move?

If it was me, I'd plan on living to 100, just in case, possibly in assisted living. As you can see, this is more than a financial question. Your dreams, your fate, and your health all impact this planning.
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Re: Determining your "number" when you want to leave nothing

Post by market timer » Sun Feb 08, 2015 1:54 am

Do you have any interest in earning a small amount of part-time income during early retirement? I think it is very risky to rely completely on financial assets and lose all attachment to the labor market--you might also find it boring after a while. Instead, I recommend saving up a sizable nest egg, then working intermittently (e.g., seasonally, like a ski instructor, or on a short term project basis) or part-time in a profession you enjoy, maybe teaching. This gives you more flexibility and allows you to have a larger safe withdrawal rate, since you can potentially ramp up your working if investment returns fail to meet expectations. Previously, a major obstacle to such a lifestyle was the cost of health insurance, but now with Obamacare, it is much easier to have a life that doesn't revolve around working for a single employer and 9-5 face time. With income of $60K/year or less, you'll qualify for substantial subsidies on health insurance.

If I were in your situation (and my plan is actually similar), I'd delay Social Security until age 70 and buy a SPIA around that time with most of my wealth. Assuming you'll get $35K/year in SS in today's dollars, you could probably get an annuity that pays out $25K/year (inflation adjusted) for around $400K at that time. You should also look to downsize to a rental around that time so you don't have any home equity--don't want to leave anything on the table. You'd probably want another $100K liquid, so the target should be roughly $500K by age 70. So, basically, you need enough wealth at the time you pull the plug and retire early to generate $60K/year minus whatever you can earn from your part-time work, and still end up with $500K (inflation adjusted) by age 70. Assuming you can earn $25K/year, I think you could get away with retiring on around $800K net worth invested in a balanced portfolio plus whatever home equity you have, and drawing 4.4% initially. Since $60K/year leaves plenty of room to cut back spending if necessary (the average retired household spends less than $40K/year), you have some flexibility if investment returns are lackluster. Plus, hopefully you'd have some flexibility to increase earnings marginally from the assumed $25K/year. Rental properties would be one way to kill two birds with one stone--finding a part-time job plus an income-generating investment.

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Re: Determining your "number" when you want to leave nothing

Post by jjunk » Sun Feb 08, 2015 2:21 am

Thanks for the thoughts and advice so far. I'll try to answer a few of the questions that have been asked:

1. What do I plan to do in retirement? We're actually both planning to work part time doing things we enjoy (or at a place we enjoy) like Disney World or the zoo. It wont pay much but there's a tangible satisfaction that comes from those places I dont currently get at work now. Teaching would also be something I'd enjoy so thats another consideration. The main objective is to reduce my overall stress from work as soon as I can as I work in a high pressure environment with long hours. I'd consider finding another job but I'm not likely to find one thats less stressful in my field and I'd also take a hefty pay cut. We dont plan to travel or assume any additional hobbies and the hobbies we enjoy now are not expensive. We'd likely get a pet, which we dont have time for now.
2. About the 60k figure and emergencies/additional expenses: 60k is actually my "high" number and has a 10-15k annual buffer built in for things like emergencies, healthcare, extra unforseen expenses, etc. My current expenses are $3500/mo and havent changed much in the last several years. They've went up significantly when we moved to the west coast for housing but we anticipate that going way down in retirement. We're very frugal having both grown up poor. The amount we've earned/saved to this point is more than either of us would have dreamed of in our wildest imaginations. Going back to living that way of life isnt scary to either of us so dyning old and poor wouldnt be much different than I came into this world (note: that isnt my preference either :) .
3. About part time work: As I said above, we actually plan to work because we'd go crazy if we didnt, I'd just prefer to not be reliant on a paycheck to make that happen if I didnt have to. If that means 2M is the number (which I dont have right now) then I'd split the difference and call it 1.5M because by the time I get to that level, I'd have to work 4-5 more years and that would remove some of the longevity risk

Additional things. I dont own a home, nor plan to. We like renting and being able to move around if we want to. That is something we're likely to do during retirement. We've even considered an RV but thats probably a better dream than the actual reality. We live in a high COL area now so moving will dramatically cut our expenses there. Rent is more than half of my current expeneses, I should be able to save ~700-1000/mo elsewhere vs. where I live now.

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Re: Determining your "number" when you want to leave nothing

Post by Cyclesafe » Sun Feb 08, 2015 9:37 am

Oh, and don't forget taxes. If pulling from taxable or deferred, Uncle Sam needs to get his first.
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Re: Determining your "number" when you want to leave nothing

Post by bowtie » Sun Feb 08, 2015 9:58 am

Regarding an SPIA ...is there a best age to consider getting one?

I would think that 65 or so would be a good starting age but to me it seems too expensive to get one in one's 40s or even 50s.
Good wishes to the O P. Sounds like you are just seeking a lower stress way of working.

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Re: Determining your "number" when you want to leave nothing

Post by Toons » Sun Feb 08, 2015 10:01 am

2 Million +Social Security :happy
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Re: Determining your "number" when you want to leave nothing

Post by jjunk » Sun Feb 08, 2015 10:51 am

So seems like 2M is a popular number w/o part time work, less if I plan to work P/T. Seems like I'm still a ways away, bummer :)

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Re: Determining your "number" when you want to leave nothing

Post by lack_ey » Sun Feb 08, 2015 11:15 am

Yep, with part-time work the number drops, definitely. And if you move out of your HCOL area, maybe you can get a sense of how your spending might change. Flexibility is key. If willing to compromise and if $60k was the high target, I wouldn't be too afraid to stop well short of $2 mil.

By the way, you probably wouldn't need or want to take a SPIA that early, but here are some considerations:
  • If still working some other lower-paying job, risk from a heavy market decline drops by a lot, so you don't need a SPIA instantly or anythingg.
  • If considering SPIAs, use primarily in place of what your bond allocation might be. You still want stocks for growth. You probably still also want a bit of bonds or cash for liquidity.
  • Figure out how much the state association insures and don't go over that.
  • Take out multiple SPIAs over multiple very stable providers to further mitigate the risk of the company going under.
  • Spread multiple SPIAs over time to mitigate interest rate risk.
  • Currently inflation-indexed SPIAs tend to be a bad deal relative to the normal ones, but maybe if more people become interested in the product, they might be more competitive in the future. One can hope.

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