smitcat wrote: ↑
Thu Nov 08, 2018 8:53 am
CyclingDuo wrote: ↑
Wed Nov 07, 2018 8:48 pm
smitcat wrote: ↑
Wed Nov 07, 2018 2:28 pm
The chart ony comes close if each category saves 10% of gross each year - no matter if they make 60K or 300K.
It only works if they need about 80% of their gross salary for expenses after retirement.
It only works if their investment retuirn is 6% annually.
It only works if their Fed and State taxes are "average".
It is misleading at best and potentially detrimnetal as a planning tool.
If the chart is so misleading at best and is potentially detrimental as a planning tool to determine a 4% withdrawal rate based on a nest egg to cover the required income to cover expenses or gap from SS/Pension and other sources of income, what do you propose is a better method?
I prefer to use a % of expenses but a % of net income would even be better than gross - rather than using a chart that takes gross income and spans many different income levels.
Why the chart is misleading...
Lets say I work as a nurse at a DR office and compare me to the Dr I work for.
Say we are typical in that we are both married and say I make $60K gross per year and he makes $1 million gross.
So we each save 50% of grosss as a working example.
Me at $60K gross per year:
I save $30K per year
My taxes are maybe $5K per year
My imputed expenses are then 25K per year (60-5-30=25)
Results are that I save 1.2 times my expenses each year - without any gains I reach 25X expenses in about 21 years
The Doctor has 1.0 Million gross per year:
- He saves $500K per year
- His taxes are maybe $400K per year (might be a little less)
- His imputed expenses per year are then $100K (1000K - 500- 400= 100)
- Results for him are that he saves 5 times his expenses each year - without any gains he reaches 25X expenses in 5 years
The chart may work for some due to many reasons but is is misleading for many if your retirement sucess is based upon expenses.
Let's call the Doctor a bonafide outlier! Anyone making $1M per year is a special very small subset of the 1% of top earners in the US. In other words, wouldn't even register on any chart or graph designed to target 99.x% of the population.
We live in a LCOL area with what we consider fairly average expenses (mortgage, connectivity, insurance, food, pets, utilities, garbage, hair care, charitable giving, home maintenance, auto maintenance, travel, entertainment, clothing, etc...) which at age 57 & 60, we expect to continue being very similar going forward. Basing our success in retirement absolutely revolves around meeting those expenses going forward once our human capital of producing income is no longer able to contribute to the household cashflow. Why do you feel that a retirement income stream to meet expenses in retirement is misleading?
No doubt that the struggle of the financial planning community to come up with a one size fits all
savings rate with regard to what percentage of income one should save for retirement throughout their working careers will continue. 10%? 15%? 20%? 25%? Save as much as you can percent?
Likewise, the struggle to point out that a one size fits all
percentage of income savings rate does not apply to everyone will most likely continue. Perhaps that is why such charts, graphs, multiples, etc.... are developed to show a starting point before considering all the outliers.
Even one of the studies linked in my original post mentions this.
http://longevity.stanford.edu/sightline ... rt-mobile/
Why is retirement financial success
based on an income stream that is high enough to meet your expenses? Because for most, the income stream from their human capital of producing a regular paycheck is no longer one of the legs of the income stream(s) multi-legged stool that can be relied upon once the working years are completed to meet monthly/annual expenses. Even the traditional stool is devoid of the human capital portion of producing a regular paycheck in retirement:
The original post and data concerning a third of the baby boomer generation who did not have any retirement savings in 2014 at age 58 may indeed lead to a compromise of several things to finance the latter years. Social Security, pension, part-time work for longer years than originally planned, altered expenditures that may not be as ideal as during the full-time working years, etc... .
For all of us, the Stanford study said:
The following assumptions need to be made to calculate an accurate retirement savings target:
•Rate of return on savings
•Salary growth rate
•Life expectancy at retirement
•Whether retiree continues working part time for a period of years after retirement from full-time work
•Household structure: single, married, presence of dependent children or parents
•Amount of expected Social Security benefits
•Amount of existing savings in retirement and non-retirement accounts
•Existence of traditional pension benefits
•Whether the retiree will tap home equity to help fund their retirement
•Expected living expenses at retirement, the largest of which will most likely be housing costs and medical costs
•Income tax rates at retirement
Reasonable differences in these assumptions can produce significantly different conclusions about adequate retirement savings targets. And the farther away that future retirement is, the more likely it is that the assumptions will diverge from reality over time.
Whether one is in their 20's, 30's, 40's, 50's, or 60's - we don't have the exact answers to all of those bullet points along the way. Yes, some of them get clearer along the way as we hone in our focus on them and age, but we have to be content on knowing that we will not ever know the answer to every single one of them.
Regardless, one has to plan whether they rely on suggested charts, graphs, multiples, what the financial community says, etc... even if the one size fits all
style may be misleading for some of the outliers.