Rules like this are woefully incomplete. Complications arise in individual circumstances, vagaries of the market beyond anyone's control and any number of other things.
For what it is worth, the article says that a 45 year old should have 3.6 times his salary saved, a 55 year old should have 5.4 times and when you retire you should have 7.7 times your annual salary.
If you still work what are your biggest expenditures? If you are retired what are your biggest expenditures? What are the likeliest changes to expenses between working and retiring? Our biggest expenses are estimated tax payments and savings. If I ever stop working and start living off of savings then I would think tax payments would go down and savings would mean taking less out of the portfolio one quarter.
If your biggest expense is your mortgage do you plan to have that paid off when you are retired? Many people say yes but some say no. Do you have car payments and credit card debt? Do you plan to eliminate that debt when you retire? If you answer that question with a yes, then you must ask yourself whether you really are capable of eliminating that debt (ouch).
Most people probably assume healthcare expenses will go up in retirement and in general at a rate faster than inflation. That is a good assumption but I don't think there is a realistic way to figure out how much healthcare expenses will go up and it is difficult for several reasons to know what, if anything, you will need.
Another ouch is about disciplined spending habits. Anecdotally, living beyond ones means is a big problem and many people living beyond their means are either in denial about it or don't understand how the numbers work. I'm telling you this afflicts a lot of people.
This might be a good spot to bring up one of my favorites, the one-offs. Some people never have to deal with anything major while others may be very unlucky. Envision a scenario where a year starts out with an expensive trip of a lifetime (we all need to have fun) followed by needing a new roof, then a deadbeat adult child (sorry but they're out there) hits you up, then the car needs a new Johnson rod (Seinfeld reference) all coming in a year that the portfolio turns out to drop by 20%. That combo may not be a deathblow but it would surely cause some sleepless nights. Now how much planning can you do for that?
This is not a knock on financial plans at all. A good plan will give a couple of assumptions for portfolio growth and they allow for telling you when you are getting too far off track--very important stuff. But over-reliance such that the forest gets missed while looking at tree and betting your financial future on overly simplistic rules of thumb is a rotten idea.
No matter how much planning, saving and investing you do you will have what you will have and it will either be enough or it will not. If not then something has to give. Period. The roughness of this road can be mitigated by saving a lot, living below your means (this concept is totally ignored in the article) and doing something that produces enough of an income when your are older such that some of the burden is taken off of your portfolio.
In the past I've posted a few ideas about working or otherwise generating income as part of a post-career life and a couple of new ideas came to me yesterday. Bud Selig turned 75 yesterday and obviously still works the the commissioner of Major League Baseball. Being the commissioner of a professional sports league pays millions. Selig has had that job since he was 64 (in an official capacity). This would be one place to look for work and I'm sure most sports fans would enjoy being the commissioner of a professional sports league.
The other idea I had is inspired from the baseball card above of former Red Sox backup catcher Bob Montgomery. Bob is 65 and while not the Sox' regular announcer does do some other broadcasting work. Being an analyst or play by play announcer can be quite lucrative, admittedly these jobs pay less than being the commissioner but low six figures announcing games for part of the year could be a huge helper for relieving the burden off of your portfolio.
Ahem.
14 comments:
Read the "The Millionaire Next Door" same basic stuff. Even has the formula about how much you should be worth at a certain age.
If everybody took your advice (living below their means) then when will we return to growth? Our whole economy has been built on people buying stuff they don't need. Pray that they don't start wising up and their savings doesn't get up to 20%. Strangely, in this downturn the biggest selling items are still the most needless (big screen tvs, iphones and other similar crap). I guess that is a sign that they aren't wising up.
I read this article yesterday. This is one of the higher multiples I've heard in the last few years. Even at the peak of the market I wasn't close to what they say you should have and I've been saving a high percentage for a loong time. Then again, I'm sure there are a lot of people who could say that right now.
Anon at 6:24 -- Re: living below means/slower growth. That's the "New Normal" in action and that's the reality for a good many people.
The Business Week story is simply a jumping off point. If it gets some people thinking a little harder on this, mission accomplished.
... A little absurd that they pinpoint financial planning to decimal points. 7.7 times? How about 7.6 or 7.8? Beyond that, the devil is in the details of how you get from 'here' to 'there.' ... 4 percent annual pay raises? Good luck with that unless you are an investment banker. ... 6 percent annual return? Easier said than done, esp. now.
BillM
"No matter how much planning, saving and investing you do you will have what you will have and it will either be enough or it will not."
I disagree for many of us reading this blog, saving appropriately, etc.
My wife is in her late 50's and has wanted to retire for a while. I can set a number at 500k, 1m, 2m, 3m, or some where in between as enough which will vary the age for her retirement. I can then set another number (hopefully higher) for my retirement.
I think we have a lot of control of how much and when if we plan appropriately instead of spending foolishly and being stuck with an undesirable or less than desirable end result.
One other area I disagree with you on is the withdrawl rate. While 4% may be adequate historically the future is not the past and IMO 3% or less is all that should be taken for at least the next 5 to 10 years.
Agree with Anon 9:13. 4% is too agressive of a withdrawal rate.
anon 10:09:
why?
I hope the mainstream media pick up more retirement themes, both Yahoo's & yours Roger, as I have an old fogey canniption (Spelling?) when I talk with those younger with nearly 1/2 of take-home pay in a mortgage & child care and another $400-$800 in car payment(s), even if they've already put 8-10% in a 401k. What happened to norms: keep housing below 1/3, pay off credit cards, etc. I missed a huge cultural shift somewhere, somehow, & I can't think excessive spending has occurred just because of access to credit. I tie this in to retirement planning with the view that if folks can't plan for today, how the heck can they plan for tomorrow?
P.S.: Talk about the unexpected for this year--Duke Power just filed for a 13% rate increase in NC, 9% in SC!
(Retired) Anna in NC
Living the good life in coastal Carolina, I observe that most folks do not retire. They morph into a different and, from my experience, more enjoyable career as well as lifestyle. It is not unusual at all to have both spouses working and volunteering, with life's hobbies fitted somewhere in the schedule if there is time.
I would not be happy if I was not working. Nor would my spouse.
Frankly, I view non-productive people as slackers regardless of age, unless a medical condition interferes.
An interesting view amongst many acquaintances is that if the Progressive Agenda is implemented, they will still, work but on a cash or barter basis (done more often than I suspected), while younger taxpayers (you folks) subsidize our necessities. And if necessary, travel offshore for appropriate medical treatment, which is already being peddled to us.
While I'd avoid a $400 car payment, "nearly half of take-home in mortgage and child care" isn't really out of line. It actually fits in to your "1/3 for housing" guideline.
Had we used daycare, it would have cost more than our mortgage.
SD,
RE: Impact of Childcare Expense
WOW
(Clearly I'm not up-to-date.)
Anna
Responding to Anon 11:19, because the expected real return of bonds is around 2% and stock returns do not follow a linear path. The sequence of poor returns versus decent returns in a portfolio is critical to long term survival. I agree with Bogle who advocates that a person's age should equal the percentage they have in bonds, up to 75%. I think it also makes sense for retirees in their early 70s to consider an immediate annuity and build a ladder of sorts with some portion of thier portfolio over a period of several years. As a conservative investor, I suppose I would rather be living modestly than be living broke.
Roger- interesting take on moving averages...
http://dshort.com/articles/SP500-monthly-moving-averages.html
Roger,
I agree with your musings on the shortcomings of traditional retirement planning. The problem is the basic premise: work hard and save for for 40 years so you can spend the next 30 years doing absolutely nothing while spending down the savings. It's nonsense. It is neither a viable solution nor one most people will find fulfilling.
Increasing longevity and inflation have made traditional retirement planning out of reach for most people. The basic math behind 30 years of retirement combined with expected inflation necessitates a nearly perpetual income stream - something most people have trouble achieving.
The whole "save and spend" traditional retirement came from a day when retirement lifespans were shorter than 20 years and inflation was stable. All that has changed, and so must your retirement planning.
The basic solution is to shift from an asset analysis to a cash flow analysis. This connects back to earlier comments about bonds, annuities, but it also introduces non-traditional solutions like income real estate, income stocks and owning businesses.
The idea is to create income streams that grow with inflation, are perpetual, and enjoyable to service. This last point is key and connects to the idea in your article about the baseball jobs.
The ideal retirement lifestyle for most is not to do nothing, but instead to do less of what you don't like and more of what you do like. You will likely have 20 or more healthy, energetic years in retirement so find something you really like doing, and maybe even make it pay a little to take the pressure off your savings.
For those interested in more detail than can fit in a blog comment I wrote the ebook How Much Money Do I Need To Retire?
The key is to recognize how the reality of retirement has shifted for most of us and to shift your retirement planning accordingly. Phased work, second careers, converting personal interests into income is much more desirable than doing nothing for 30 years for most people.
The impact on your savings requirements is dramatic for even small amounts of income. The 4% rule (or Rule of 25) shows that for every $1,000/month earned income in retirement you reduce your savings needs by roughly $300,000. Small amounts of income can make a huge difference in your retirement savings. The math is the same for reducing spending needs. Every $1,000 reduction in monthly spending drops savings requirement by roughly $300,000. The key is to get creative with your income and spending and that can dramatically shift your savings requirements. That is a lot more fun than figuring out how to save another 300K or 600K.
Anyway, I think you post is dead-on in terms of highlighting the shortcomings of traditional retirement planning. The solutions require a shift in perspective. Traditional asset allocations, investment strategies, and savings requirements simply don't make sense any longer. Other solutions exist.
Todd
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