The objective here is to replace 85% of the final income which as Jaffe notes is up from the "rule of thumb" of replacing 75% of the final income. There were some details missing and no link to the research by Fidelity. There was no mention of a withdrawal rate or whether the 85% includes Social Security benefits. If not then the withdrawal rate would have to be astronomically high.
To use round numbers, let's say the final salary is $100,000 so the target savings balance would be $800,000 with an income objective of $85,000. If they are not including social security then obviously the withdrawal rate would be more than 10%. If it includes social security then the total benefit for a couple might be about $3000-$3300 per month in today's dollars so the portfolio would need to come up with $3783-$4083 per month which works out to a withdrawal rate of 5.3%-5.7% which is a big bogey. If the money is in an IRA of some sort then there is the additional problem of taxes on the withdrawals.
There may be more to it though, again no link was provided.
Long time readers will know that I believe in taking no more than 4% out annually. If that means ratcheting down the lifestyle then so be it. People want what they want but if that does not fit with reality then something has to give.
Another cornerstone here has been that focus should be paid to the spending part of the equation. People who live below their means don't need to focus on a percentage of their income they need to focus on their spending needs and whether those needs might go up or down after they retire and then they either have enough or they don't. It is not unreasonable that moderately well to do couple could have a $60,000 lifestyle, $1 million saved, $10,000 in income from sort of monetized hobby, $36,000 in combined social security benefit and so only need $14,000 from the portfolio.
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I would also not give up on the notion of being able to reduce spending in retirement. No financial plan can account for every possible life circumstance but with a little planning it is feasible to have the mortgage paid off upon retirement (or maybe sooner). I found a stray reference that the average mortgage payment is 20% of income. Who knows if that is accurate but if it is, that along with not saving 10% of income anymore would allow for a 30% reduction in expenses before even needing to consider any lifestyle changes.
While we can appreciate the positive aspect of what Fidelity is trying to do with this sort of research (the negative is that it is just an AUM grab) it seems that most people don't start to think about retirement until their 40s or 50s and we know that very few people that age have three, four or five times their annual income socked away. Great for those who do but for those who don't; something will have to give. They will have to live a more modest lifestyle than they envision and do something that creates an income for a little longer than they envision.
Related bit of humor; I was talking to one of the other firefighters yesterday, who is of retirement age but chooses to work, about department business. As the conversation wound down he asked what I had done today (meaning Sunday) and I said "hiked, watched football and got some work done, how about you?" Without missing a beat he said "I practiced retirement; I took a nap."
6 comments:
I respect Jaffe, but don't believe their numbers. Why?
Retired at 55; 59 now. Wife retired this year at 57. Have 10 times our final income in 401k, plus another 4 times in taxable accounts. (We have done very well in our investing.) Wife's pension is 17% of our final income, more than half of which goes for health insurance. We live very comfortably on 40% of our final income, which is less than a 2% withdrawal rate. We should be in fine shape. But we are hardly confident it is sustainable, even though SS will reduce that to 1% in a few years.
Here's my view: what you have in retirement accounts can never be enough to give you complete confidence. Current income from work trumps all kinds of savings. You can do all the calculations you want but they really won't mean much when your retirement account starts shrinking. I guess sometimes financial ignorance is bliss.
Rich
It may be cliche but everyone is individual and I'm inclined to doubt there is a homogenizing mechanism that kicks in to make everyone the same when they retire.
I don't live quite as 'interesting' a life as (fictional) Travis McGee but, like him, I have taken my retirement in installments for some time now: I enjoy my work too much to give it up but also enjoy my leisure time and am fortunate that I can work by contract w/ a large portfolio for backup and can say yes or no as I please.
I'd like to say I planned all this in advance but, in 20/20 hindsight, I'd have to say a lot of dumb luck was involved too.
"at age 35 people should have one year's salary set aside, at age 45 it should be three times and at age 55 people should be up to five years salary set aside."
Hey, I was just thinking about those age/amount ratios this weekend. thanks for the update. I think I've heard the "you need 8x" several times over the last 15 to 20 years.
So if you've got 3x at age 45, and you want to have 8x at age 65 you've got 20 years to get there. The rule of 72 tells you that if you assume, for instance, a 6% return you can double your 3x in 12 years - and that does NOT include what you've added to the accounts.
A calculator I often use on the web tells me that if I currently have $300k at age 45 and I want $800k at age 65, I need to average something like a 5% return (and that's leaving out any additions I make). This is a lower return than I thought I'd need 10 years ago. What does that teach you? Save like crazy.
I agree with Anon 7:14am that you can never have enough. I'd be curious, if he retired 4 years ago, how his story went around the financial crisis. Had he reduced his equity exposure before the crisis hit? Could be a good learning experience.
We have what I call a "gentle retirement". That is, doing what we want, maintain numerous income streams (active and passive)and intellectually engage in local and university activities. Every day is a day with neat things to do.
Our nest egg has yet to be touched and is expanding, our pensions and present ventures actually provide us with more income than we need. And we are not misers.
The key was saving generously early and often, earning a pension, education and focusing on the above-mentioned multiple income streams. Diversification of one's income is what I would encourage for everybody. It is just as important as a diversified security portfolio.
Having children who are in successful careers helps the mix.No freeloaders. And my mother, who lives with us and turns 103 next week, keeps the family in line.
Most satisying for us is that we inherited no wealth. We did it ourselves.
The Fidelity article is a decent start. It's up to folks who don't want to live in a relative's attic to execute.
Stephen: (From Anon 7:14)
No, I didn't reduce exposure, I actually increased it. I had just finished David Swensen's book and was on a "markets are efficient" kick. I don't feel that way now.
I retired in Jan 2009, right before the bottom. My portfolio had probably lost 30-40% by the end of 2008, despite having tons of bonds. Even with these losses I still felt it was adequate to fund a reasonable lifestyle, unless SS goes to zero. A lot of my gains from 2003-2007 were in gold stocks, some of which I sold in 2008 to buy banks :) I also bought various stocks all the way through 2008 until I pretty much ran out of money. I took big risks, and if the market hadn't recovered I would be hurting now. We did (and still do) have a lot of cash and a house worth 4x income which we plan to downsize, and my wife's small pension, so there is a Plan B. The numbers say we are in great shape even if the market tanks, but that's not how we feel.
My point was having 300 investing books, dozens of Excel spreadsheets, and many hours of calculations and models doesn't guarantee a secure retirement, regardless of what the numbers say. There's always something lurking around the corner to surprise you. Call us slightly nervous. But I am much happier than when I was working.
Rich
I have Fidelity accounts and I believe their final figures assume you will buy an annuity.
Sam
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