Boston Gal's Open Wallet

I got similar calculations as well for my retirement. I know I probably won't be able to save that much per year but I'm going to try to save as much as I can while I can. I mainly save in pre-tax account, then the rest in a roth ira account. Hopefully, as income level increases in the future, I can make more contributions in the future!

But don't lose hope.. you can do it. You have alot of current net worth as well...something I should have built up earlier during life!

 

I know the amounts sound huge, but I think you are well on your way to accumulating that kind of wealth. If you get an 8% return on your retirement investments and don't make any more contributions, you will have over a million in retirement assets. Since you continue to make contributions, you are probably closer than you think.

 

Take a look at the power of compounding returns. While it does require constant savings, it is not as hard as you think.

 

Seem daunting all right. If you've got a substantial net worth and your worried about it then what about people like me who have a third of your worth. Sometimes I think I'm screwed.

Looks like I need to redo some numbers and then resign myself to living in the hills like a hermit.

 

From looking at your net worth, say you have $100k saved now, from your 401k/IRA stuff and some of your other savings. If my calculations are correct, if you earn 7% annual return and figure inflation at 3.5%, then you only need to add $21,000 a year to your savings to be able to meet your cash flow needs from your savings alone. If you factor in say $1000 a month from social security, then you'd only need to save about $7,500 a year.
My math could be way off, so YMMV-- please try the calculations yourself!

 

The way its always been laid out to me is to have a target that you'd need for retirement (in your case 3.3mil). Once you had enough working for you (not saved but actually making money for you) you could stop needing to save for retirment.

With compounding, if get 8% like Will said you're money will double every 9 years. If you could get 10% it doubles every 7 years. So in those 36 years you'd get 5 doublings at 10% meaning 1 dollar today would be worth $30 by the time you're 70.

And also keep in mind, you're income will be increasing (hopefully) througout this time too.

 

Hey Boston Gal,

Look at all the comments you are getting! Congrats!

I have no doubt in my mind that you will make it. You are very clear and disiplined.

I would just tell you to consider managing your Home Equity along the way. You live in the land of lots of appreciation. If you pull your equity out, maybe every 5 years and re-invest in more real estate and/or the market, you will be amazed how quickly you get there.

I only suggest this because I can see that you are a disciplined person. I am not worried that you will blow your equity.

By managing both my savings and my home equity over the years, I am VERY near my retirement number at 49 years old! YIPPEEEE

The cool thing is that now I work because I choose too.

David Porter

 

I would be curious to know how you got the number of $4000/monthly (in today's dollars) to cover future cashflow needs.

It may be that you've thought of all this, and if so I apologize- but have you carefully looked at what your costs will be? Both your properties will be paid for, so no mortgages to worry about. You probably won't be driving to work every day, so your transportation costs may go down. There are certainly areas where your expenses will go up (health care, probably) but overall I think your expenses will go down considerably. In addition, you do have the rental property that's going to generate income every month, including into retirement, if you keep it. And that's going to go up with inflation...

Just something to think about. $4000 a month seems awfully high to me, but that's speaking as a person who doesn't make that much! Good luck!

 

Hi Jane

$4000 does seem high for a single person - is that just living expenses or are you including things like your current mortgage payments. I spend around $2000 a month including $600 in rent (fluctuating a lot up and down). My Mom who is retired spends far less. I really can't understand how she spends so little. She receives a pension from each of the British and German governments and a small defined benefit pension from my father's employer (he died 4 years ago). And this is all she spends. So she doesn't touch her net worth at all and it keeps growing....

So don't forget social security and figure you might spend less when retired.

In my case inheriting almost half my Mom's money might turn out to be the biggest factor though I am trying to build up my net worth to a similar level anyway.

I followed the link from the NetWorth IQ site, where I go by Moominoid too.

 

Hi Moominoid,

Thanks for visiting! According to your NetWorthIQ profile you are accumulating a nice retirement fund. Good job! As for the $4,000 needed per month after retirement - I came up with that figure assuming my expenses will go up even while my debt level (mortgages) gets paid off. Watching both my parents in retirement I see that as you age you spend more money on medications, higher utilities (as you age you keep your house warmer in the winter and AC colder in the summer) since you are home all the time, lawn care services, snow plowing services, get added because you no longer can do it all yourself. Then their is the eating out, entertainment, and travel expenses. I am not saying this will hold true for everyone, but I would rather find out I had budgeted and saved too much when I retire rather than too little.

 

Interesting. My Mom lives in an apartment, takes taxis and public transport etc. She needs AC in the summer (though often she switches it off). She gets public health care. She lives in Israel...

I calculated that even if I stopped working in 5 years (after only 10 years of US contributions) I would get $800 a month from social security. If I kept working till 60 is was more like $2000.

Having more money is always better than less. I guess what I am saying is don't worry too much about having too little money - you are doing very well already.

Financial planning types tend to ignore social security (and inheritances) in their "how much do you need to save" discussions. Of course they want to generate a bigger number to flow through their fee-taking gate...

 

Something in that figure of 3.5 million just feels wrong to me. The simple fact that 99% of the population probably can not get anywhere near the neighbourhood of that number but will still retire and live happily, though perhaps with limited financial possibilities, kind of shows that this number is lacking realism.
Maybe I'm underestimating the effects of inflation, but this just seems too much !
By the way, how old are you ? I have to admit I did not study your website too close, but this is one of the first things I would like to know, to be able to put your current net worth in the right perspective.

Good luck in your quest !

 

Hey Boston Gal:

One other thing to think about: just because you're 70 1/2 doesn't mean that you have to stop working. I think it'll be the time to start doing what you love! Maybe you could take a part time job doing what you love!

Good luck!

 

Saving alone is not going to get you there. Building up passive income via real estate, dividends, and business income will though.

That's a lot of money to have, I figured I'm going to need more than that even. I'll have to check out that article.

Very interesting!

 

The 25 times is a good rule of thumb and based on a Monte Carlo Simulation analysis of making principle last for X years that if you plan on taking out 4% each year (1/25th) then you have a high probability your money will last.

For a better solution you need to consider and crunch more numbers. A good starting point is the "Retirement Shortfall Calculator" off this page http://www.finance.cch.com/tools/calcs.asp (and others).

I took the detailed numbers that provided and made my own spread sheet so that I could better consider taxes and other factors. Like my IRA/401k grows tax deferred, and that I do not want to start taking that money until 70.5. The calculator also estimates Social Security which could provide a nice contribution, hopefully it will be there.

The other consideration is how much you need and you said $4000. The rule of thumb is 70% to 90% of current income. You know how much surplus you have now, and if you are living the way you want so that should help you with a target number.

While winning the Lotto will help a few get there, I think "Slow but Steady" wins the race every time. Racking up years of good savings and decent 8% to 9% returns pays off.

 

If you decide to estimate your income needs as a percentage of pre-retirement income, keep in mind that you're already living on less than 100% if you're contributing to 401(k)s, IRAs, etc.

 

I wrote to you March 13. One flaw in your current comparison is your requirement for $3.37 million is in future dollars 37 years from now, your balance of $372,000 is in today's dollars.

You need your comparison in the same year dollars.

So one way is to take your today dollars $4000/mo times your 25 factor or 4000*12=$36,000*25=$1.2MM. That means you have 31% of your goal made and not the 10% it appears. Next year your $4000 should go up 3.5% and the target is $1.24 Millon. I think this is a reasonable way to look at it, but I would use a higher number then 25 with such a distant goal. This simply tells if your current nest egg has made the goal and not how your saving and investment plan will work out.

Growing your current $372,000 out into the future using a 6% rate for 37 years would get you $3.2MM. So again you seem in good shape, if you can make that rate after tax. A 5% rate grows to $2.2MM and you end up well short. Those estimates do not include any additions to savings, but it's nice to know your nest egg has made it.

A better way, as I noted before, is to make a spead sheet cash flow analysis of your savings/investment/retiremen plan and take all of your cash in/out into the future year by year. You must consider the money in 3 possible pools by tax status.
Regular savings - after tax invest, annual income taxed, withdraw taxfree
IRA/401k - before tax invest, annual income taxdefered, withdraw taxable
Roth IRA - after tax invest, annual income taxfree, withdraw taxfree

With this XLS "plan" you can adjust different factors and know what savings rate it will take to meet your goal given some assumptions about investment returns, inflation, etc.

In the retirement phase you need to decide when to cash out each type, I figure save the stuff that grows tax defered until 70.5, if you can.

And again you need to consider taxibility. If you need $11,000/mo and it's coming partly from an IRA it's going to be taxable and you'll have to take out more then $11k.

Use the "Retirement Shortfall Calculator" as a good starting format. It also includes an estimate of Social Security that probably replaces 15-25% of your needs.

I made my number recently :)
I figure I'll work 3 more years, then I'm not sure. I'll be 50.

 

I just noticed you have your home equity figured into your networth.

That's probably not a good idea to consider it an investment. When you retire you might cash out some equity and move to a smaller place or less expensive area. You also are not going to sell your cars to retire.

So your retirement savings that you compare against your target need of $4000/mo should only include investments and maybe 25% of your home equity.

 

actually its pretty easy to retire in style.

real estate more or less keeps pace with the cost of living, you can say its inflation based. I currently own 1.7 million dollars worth of real estate with approximately 10k worth of rent coming in every month.

Right now the rents just barely cover the mortgages. however in 30 years, the mortgage payments will be the same but the rents will have probably gone up 10 times. That 100k will probably have the same buying power as 10k does today, which means after maintenance, vacancies & taxes I should net atleast 7k/month in todays dollars. Enough to live in style, if not luxury.

 

Do you really think you will live till 95? You want to save 25 years worth of retirement cash to be used starting at 70...that seems way too long. After 85...how much money do you think you'll need? Medical expenses will be all you probably have and hopefully by then there will be a better health system.

 

Hi Ophelia,

I don't want to "hope" for a better medical system. Having seen many elderly relatives at the end of their lives I can say that the last ten years can actually be the most expensive. In home care, home health aids, nursing homes - if you want your last years to be comfortable you have to pay.

I am trying to be very realistic and conservative in my calculations. I do not have children so when I reach my last years I have only myself and my money to rely on (I don't expect my nieces and nephews to have to worry about me - they will have their own parents to take care of).

 

Long term health care is a concern for the elderly and long term care insurance can help defray those cost, thus reducing the amount of out of pocket expense needed. Just another tool in planning for the expenses of the future.

 

Just a note about your goal. I think it is way high. If you had 3 mil, earning interest at 5%, it would be generating 150K per year. So if you were taking out 150K per year, or a little less, you would never run out of money, it wouldn't matter how long you lived. But if you were to earn no interest and just take the principal out each year, you would still have enough for 20 years. Maybe I'm missing something here : ) Anyway, if you save successfully enough to ensure yourself 3 mil as a single person, surely you will be able to retire early, a fine goal in and of itself.

 

Hi Anonymous,

I think the thing you are missing is inflation. My retirement is decades away - so my retirement number needs to reflect my future dollar needs factoring in inflation.

Just ask your parents how much a loaf of bread used to cost or how much a tank of gas used to cost during their early working years vr. what it costs them now that they are retired...

So yes, my retirement number is a big number, but I still feel my calculation is on target. If I have over estimated, all the better for younger family members or charities which will benefit. I would far rather over estimate my needs than under estimate them.

 

I did similar calculation too. I think, you're quite safe. To reach 4million in 30 years would likely be doable. Let's say you double your money every ten years (ROI of 7.2%) and count 4 million backward. This means 20 years later you would need 2 million. This means 10 years from now you would need 1 million dollar in portfolio, and now you have already 25% of it. With rigorous savings until ten years for now, sure enough you'd be able to reach 1 million.

 

BG,

Are you ignoring any Social Security income that you will get in retirement?

Even if you assume you will get just one half of what you are currently promised reduces what you need to save.

 

I pretty much assume social security will not exist for me and for anyone younger than me, which I think is a realistic assumption.

 

I have to agree with some of the others who felt $3million + was way too high a target.

My target income/expense needs are also about $4k a month and i figure $1.2 million should be just about right for me, also single.

 

I miss the networthiq chart to see your progress over time. The current chart leaves me wanting.
- small_time (on networthiq.com)

 

Good stuff! $500,000 net worth at 35 years old is great!