Planning for Retirement

[dr_codex]

Bookmarking, since we just moved and are looking long and hard at all of our finances, retirement, and estate planning.

[pedanticromantic]

Has anyone ever heard of a faculty member successfully buying out some of their teaching from their own salary?
I make good money, and hate teaching. I'd gladly pay more than adjunct rates for someone to take half my teaching off me.... anyone heard of such a thing?
I  don't mean dropping down to half time, which I'm also not sure a full-time faculty member can do here until they are in semi-retirement status, but that is also a possibility.

[ciao_yall]

Has anyone ever heard of a faculty member successfully buying out some of their teaching from their own salary?
I make good money, and hate teaching. I'd gladly pay more than adjunct rates for someone to take half my teaching off me.... anyone heard of such a thing?
I  don't mean dropping down to half time, which I'm also not sure a full-time faculty member can do here until they are in semi-retirement status, but that is also a possibility.

Will your research bring incredible prestige to the institution? If not, unlikely. Teaching makes $$$ in a college. And they tout their full-time faculty teachers as a marker of quality for recruitment.

Can you get a research grant to buy yourself out?

When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

[polly_mer]

When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

I wasn't tired of teaching at that point, but the extra service commitments to replace courses that didn't make did pave the way for moving into administration for me as well.

[pedanticromantic]

When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

I wasn't tired of teaching at that point, but the extra service commitments to replace courses that didn't make did pave the way for moving into administration for me as well.

Not sure what's worse--teaching or service! Probably teaching is worse for me, so that may be an option.

[AJ_Katz]

It's either the post-tenure blues or the mid-life doldrums, but lately I've felt lost in terms of "what do I want out of life?".  Up to now, the goal was to have career stability (tenure), a comfortable house in a neighborhood we like, and be comfortable in daily life.  All of those things are now checked off the list and I feel the years flying by faster than ever.  We don't have kids and we don't really have hobbies either, so what's next?

In my quest to answer this question, I discovered a website describing the Six Stages of Financial Freedom https://www.getrichslowly.org/stages-of-financial-freedom/.  It's been very helpful for me to re-frame my expectations.  I thought we were in good shape financially, but it turns out that there's a lot more that we can achieve and that we're really not there yet.

Currently, we are only in Stage 1 on the scale and have been very close to Stage 2 for a long time, but just don't have the "emergency" funds set aside.  Stage 2 is described as "You achieve stability once you've repaid your consumer debt, established some emergency savings, and continue to earn a personal profit. You may still possess some 'good debt' — college loans, a mortgage — but you've eliminated other obligations and built a buffer of savings to protect you from unfortunate events." 

Over the weekend, I calculated our net worth, our monthly expenses, and income.  It turns out that we need to accumulate $10-15k in savings to have a 3-6 month emergency fund, we currently have only about $4k saved.  In retirement accounts, we a combined $190k in 401a,401k, and 403b, but my calculations are that we will need about $1.25M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.  Currently, I have a contribution of 13.5% into my 401a, but I'll need to invest an estimated $1,200 monthly in my 403b to be able to reach the "cross-over" point in about 20 years and until today, was contributing $0 to that account.

Today submitted paperwork to meet the $1,200 monthly contribution to my 403b and I'm working on a plan to reduce our monthly expenses.  I also want to keep our emergency fund in some type of CD or other asset that can be liquidated in case of an emergency. 

My bank offers 1-year CDs at a rate of 2.4% --- does anyone know of banks offering a CD with higher rates?  I've only just started to look into this.

[mamselle]

You might want to check into building a CD "ladder" so that you have liquidity rolling in as various CDs mature.

I have no experience in this, either, but that's one piece of advice I keep running across.

M.

[pigou]

CD ladders are among the worst financial advice out there -- readily exploited by financial institutions, of course, because it means cheap access to capital for them. I strongly encourage staying away from any of that nonsense. The second worst financial advice is the very notion of an "emergency fund," beyond a few hundred dollars. Yes, it's sensible if you're living paycheck to paycheck, don't have access to a credit card, and a $50 payment means you're now paying overdraft fees... but that's not the group of people who actually apply the idea.

What should you do instead? Have your money in a regular, taxable, brokerage account (*assuming you have maxed out a Roth 401(k): it shares most of the features of a brokerage account, except that your gains are all tax-exempt and you can only withdraw the amount you contributed with no tax penalty, i.e. not the gains).

You can get money from a taxable brokerage account into a checking account within 4 days. Could it be that you have to sell when stocks trade at lower than their height? Sure... but so what? Your reference point is not how much profit you could have made if you had timed your sell optimally ex-post (impossible anyway), but what you would have made with another investment. People are, over the course of their working lives, literally leaving hundreds of thousands (and millions) on the table for the small annoyance of not having gotten the most profit possible?! It just boggles the mind.

[clean]

I have an emergency fund. Of my cash hoard, I have $15000 designated as my 'emergency fund'.  Why?  I dont try to tempt fate to ask questions like, "what is the worst that could happen?" as I dont want to tempt fate to come up with far worse than I can imagine. 

Do I have easy access to credit?  Yes, I will admit that I possess 4 or 5 credit cards.  All have credit limits of at least $15000.  However, that does not mean that the credit card companies can not instantly reduce those numbers.  Why would they do that?  Perhaps because someone had an emergency that caused their credit score to drop and the card company got nervous.  Have credit card companies done that in the past?  Hell Yes!  In fact, in the era of 'universal default' if you got in trouble with one credit card, the others could lower your limits and increase your interest rates!  Could it happen again.  What is there to prevent a credit card company from modifying your interest rate, or credit limit?

So of my cash holdings (which are more than a year's take home pay - not a recommendation, but where I find myself now), $15,000 is designated as an 'emergency fund'. That amount is almost sufficient to cover both my homeowner's insurance deductible and my out of pocket medical deductible.  IF there were something else that would be designated as an 'emergency', I m probably ok.  The bottom line, though, is that your ability to borrow may be an illusion in an emergency.  The ability to liquidate a portfolio could provide cash, but part of the definition of "Liquidity" is "The ability to go to cash Quickly, WITHOUT losing value".  Id rather pay the 'insurance premium' of the loss of return for the security (insurance) that the money will be there at full value, instantly. 

CD ladders?  I have set them up in the past, but it has been nearly a decade since the last one 'matured'.  that will coincide with the 'historic lows' of interest rates.  Why build a ladder when I still expect that rates will rise?  (and someday, dammit, Im going to be right - rates will increase!).  I dont find anything inherently evil about CD ladders, but as I expected interest rates to rise, why lock in money at low rates for long periods of time?  That does not mean that I would not use them again if we return to a time of 'more normal' (whatever that means anymore) interest rates. 

A problem with using retirement funds (Roth IRAs) for your emergency fund are that you may not be able to put the money back in.  It is a one shot deal.  Then you have to deal with the tax reporting issues that it involves when the time comes.  Will you have the mental energy after the emergency to deal with the tax documents to support that your withdrawal was the contribution and not the earnings?  Why unplug retirement savings for decades because of a short term crisis?

Advice about investing usually involves having paid off consumer debt first, and then having $10,000 in a market tracking mutual fund (or an Exchange Traded Fund that tracks the market like the SPY or QQQ).

AJ Katz, i am glad that you are taking action to secure the option to stop working.  I am sure that the $1200 a month is a stretch at the start. However, you can contribute $19000 in a 403b account if you are under 50.  (You can contribute more after 50).  I am concerned with the estimate of your 'need'.  Your note was not very detailed in how you came up with the number. You mentioned

M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.

essentially, it looks like you are calculating a value where your retirement portfolio will be sufficient to live on.  However, I wonder about the 5%.  If that is indeed an "interest rate" that is currently a very high number.  IF that is a 'withdrawal rate' note that the old theory of a safe withdrawal rate was closer to 4% and that highly quoted study was done when savings rates were much higher.  At this point, I am simply suggesting that your number may be too low.  It could be too low because you have not accounted for inflation over the next 20 years, overestimated the withdrawal or interest rate, or some combination of both.  On the positive side, you may not have calculated your Social Security benefits that may be coming your way that would slightly offset some of the amount you need to fund your retirement. 

The bottom line I think is that you have begun to consider what sort of life you want and estimate what it will cost to support it!  So few have even started to think about such things!  You are ahead of the curve in that respect! 

[pigou]

I have an emergency fund. Of my cash hoard, I have $15000 designated as my 'emergency fund'.  Why?  I dont try to tempt fate to ask questions like, "what is the worst that could happen?" as I dont want to tempt fate to come up with far worse than I can imagine.

$15,000 on a savings account since the year 2000 is approximately $15,000 today. $15,000 in the S&P 500 since 2000 is now $30,000.

Ultimately, all of these decisions come down to personal risk tolerance and tradeoffs. But we should be clear about the (opportunity) costs of these decisions. If an insurance company walked up to you and offered you $30,000 in the future, if you ever lost your job, your credit card limits got slashed, and you had an emergency -- and charged you $15,000 for the privilege... you probably wouldn't sign up.

Do I have easy access to credit?  Yes, I will admit that I possess 4 or 5 credit cards.  All have credit limits of at least $15000.  However, that does not mean that the credit card companies can not instantly reduce those numbers.  Why would they do that?  Perhaps because someone had an emergency that caused their credit score to drop and the card company got nervous.  Have credit card companies done that in the past?  Hell Yes!  In fact, in the era of 'universal default' if you got in trouble with one credit card, the others could lower your limits and increase your interest rates!  Could it happen again.  What is there to prevent a credit card company from modifying your interest rate, or credit limit?

I think we've had the debate before, so we may just fundamentally disagree. :) But I still think the "risk" you're insuring against is not merely that your credit card company will lower your limit, but that it will lower the limit faster than you can liquidate your assets. There's just no way a credit card company responds instantly to a change in your income... not least because they don't have access to your income and that it takes them at least one billing cycle (30 days) to effect any change! And it takes approximately 4 days to get money held in an S&P 500 into a checking account from which you can pay bills.

The ability to liquidate a portfolio could provide cash, but part of the definition of "Liquidity" is "The ability to go to cash Quickly, WITHOUT losing value".  Id rather pay the 'insurance premium' of the loss of return for the security (insurance) that the money will be there at full value, instantly.

That's not part of any standard definition of liquidity. Liquidity is getting access to cash within short periods of a time. Stocks are liquid assets. A house is not.

Medical bills are not even short-term expenses. It takes a hospital between 30 days and 365 days to send you a bill and, once you have it, you get at least 30 days to pay it. The 4 days it takes you to get stocks into a checking account just aren't going to be an issue.

A problem with using retirement funds (Roth IRAs) for your emergency fund are that you may not be able to put the money back in.  It is a one shot deal.  Then you have to deal with the tax reporting issues that it involves when the time comes.

You can withdraw from a Roth IRA with no penalty and no tax reporting. And yes, you can't put the money back in... but how's that different from not having put the money into the account in the first place, because it's stuck in a checking account? If you max out your IRA already, then you'd take the money out of a taxable brokerage account instead and avoid this issue.

Will you have the mental energy after the emergency to deal with the tax documents to support that your withdrawal was the contribution and not the earnings?

Your brokerage takes care of this. But also: on even $15k in savings since 2000, you've forgone $15,000 in asset growth. I get that paperwork is annoying, but you can hire a wonderful tax lawyer for much less than $15,000.

[clean]

That's not part of any standard definition of liquidity.

www.investopedia.com/terms/l/liquidity.asp
Liquidity refers to the speed with which an asset or security can be bought or sold in the market, without affecting its price—the ease of converting it to ready money, or cash.

Sorry, but the study if Risk and Return IS my discipline and the definition I gave is correct. 

$15,000 on a savings account since the year 2000 is approximately $15,000 today. $15,000 in the S&P 500 since 2000 is now $30,000.

and in 2008, invested in the market, it was worth $7500

You can withdraw from a Roth IRA with no penalty and no tax reporting.

IRS Form 1040 Line 4.  You must disclose the distributions of an IRA.  Then you report the taxable amount.  In an audit, I m sure that the IRS will want proof provided of the amount that was contributed to confirm that the amount distributed is less than that. There are also restrictions that the account must be at least 5 years old.  So not as easy and all encompassing a source of funds in an emergency.


I think that we agree that a source of funding should be available to address an emergency.  I am more risk averse, so I would rather have the cash available to address a problem and not depend on volatile security prices or having to access credit (which I would have to pay back at some point, at potentially lower future income).

The bottom line, for me, is that I sleep better knowing I have an emergency fund (in savings).

[AJ_Katz]

AJ Katz, i am glad that you are taking action to secure the option to stop working.  I am sure that the $1200 a month is a stretch at the start. However, you can contribute $19000 in a 403b account if you are under 50.  (You can contribute more after 50).  I am concerned with the estimate of your 'need'.  Your note was not very detailed in how you came up with the number. You mentioned

M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.

essentially, it looks like you are calculating a value where your retirement portfolio will be sufficient to live on.  However, I wonder about the 5%.  If that is indeed an "interest rate" that is currently a very high number.  IF that is a 'withdrawal rate' note that the old theory of a safe withdrawal rate was closer to 4% and that highly quoted study was done when savings rates were much higher.  At this point, I am simply suggesting that your number may be too low.  It could be too low because you have not accounted for inflation over the next 20 years, overestimated the withdrawal or interest rate, or some combination of both.  On the positive side, you may not have calculated your Social Security benefits that may be coming your way that would slightly offset some of the amount you need to fund your retirement.   

Thank you for noticing this!  I used the "25x rule" (linked here) to estimate the amount we would need based on our annual expenses, but now that you mention inflation, it seems that is not clear whether or not that is part of the calculation and so I am now suspicious that it is not included.  I would appreciate direction to relevant resources to calculate our needs.  I estimated our annual expenses were about $50k in the last year, and used that as the basis of my calculation.  That calculation does not include that our house will be paid off in 19 years and would free up $15k/yr.  I also did not include social security as a source of income in the future if we can retire before being eiligible to collect SS. I'd like to retire in 25 years, but I'd certainly retire sooner if the funds were there.

You think a 5% rate of return is high?  I thought it was on the low end for estimating rates of return.  I'm trying to be as conservative as possible with my estimates and set up my 403b to be a higher risk index fund.  One thing I did not take into account in my estimate of needing to contribute $1200/mo is that it also includes the amount already being contributed to my 401a, which is currently $1,090 monthly (including the match contribution). But if the 25X rule is not including inflation then I need to recalculate. 

[monarda]

AJ_Katz,
For what it's worth, I think we're also shooting for 1.25M, but like you we figuring it in an assortment of different ways.
Folks on financial forums like MMM (Mr Moneymustache) often say you shouldn't include your primary residence equity in that number, because you have to live somewhere- but with or without that amount, we're in the home stretch.

I'm not into cash emergency funds. I've got over a dozen credit cards, with lines between 5K and 20K each.  So, I'm with pigou on that issue. We use those credit cards for any big expenses and all of our daily living expenses. And I almost always go for the 0% promotional rate credit card offers that come in the mail. That way, I have a year to pay off any major expense that might come up. We are carrying $40K in 0% interest CC balance now from a major remodeling project, and all of our other living expenses. Haven't paid a dime of interest (the offers I get don't have the balance transfer fees, either). We have a HELOC that can pay that all off tomorrow, but we so far haven't needed to touch that.  This approach might be risky to some, but a single spreadsheet and setting all the cards to autopay for the minimum balance  has served us very well for the past three years, allowing me to contribute the max to my 403b and 457b while doing this large remodel project.

In 5 days, I'll be 59.5 years old, so my IRAs will be available, but I don't plan to touch those either.

[monarda]

I looked at the stages on the 'get rich slowly' site that AJ_Katz mentioned above. I think we're between stage 4 and 5.

However, I disagree with the premise of their stage 3, that there needs to be no mortgages. We have three mortgages, one for our primary residence and two for the rental properties that we intend to keep for 10-15 more years. We should be at stage 5 or 6 within 3 years.

[clean]

The "25 Times rule" would be a 4% rate.  That is at the high end of what would be a safe withdrawal rate in today's market. 

Things to consider for retirement:
This is a website that can provide an estimate of your "retirement Inspired quotient" - an estimate for your retirement goal.  It includes inflation estimates, but I think that the return estimates are a bit high so it underestimates your actual contribution needs (but that is just my opinion as I reviewed the spreadsheet assumptions that were used).
https://www.chrishogan360.com/riq/. 

You are doing the right first steps to consider what your current expenses are.  Then essentially, this is a future value projection. If you think that inflation is going to be 2% (you pick a number) over the next 25 years,  then the estimate of your expenses will be 50000 * (1.02)^25 = 82030  (assuming a 2% inflation rate, you would need 82K in 25 years to buy the same things as 50K today).  If you use your 4% rule (25 times rule), 82030*25= 2050757.50 (at full decimal precision)

However, that would set you up to withdraw 82K every year, forever (at 4%).... If you had a portfolio of $2 million, and it earned 4%, it would earn 80K a year, forever.  So that is a good starting point.  It does not include future inflation (so you would need more), but you wont need the money forever!  So technically, you could live on less than the 2+million figure (ignoring future inflation).  (I did a quick financial calculator for the 82K in expenses for 30 years assuming a roughly 3% real rate of return (assuming you would earn 3% plus inflation) and you would need about 1,610,000

So I think that a target between 1.6 and 2.1 Million would be a better starting point.  (maybe target $1.75 M  as a first pass estimate)

Here is an article that will help (I assign it to my finance classes to give them a starting point to think about retirement - Two Million is the New One Million)

https://www.washingtonpost.com/news/get-there/wp/2016/04/25/2-million-is-the-new-1-million/?utm_term=.9989ab039a2a

Something else to think about

Taxes!!
If you are saving in accounts that get a match, then they are going to be taxable when you withdraw the money. IF you need 82K for expenses, then remember that you need to pay taxes on that money before you can spend the 82K!  So you will need even more, or you must start to convert to the Roth accounts as early as you can.  (At a minimum, the amount that you are contributing should be in a Roth account).

Do you think that your tax rate will Increase or Decrease?  Most think that their taxes will decline when they retire. Im not in that camp!  I think that the federal budget deficiet will catch up with us and tax rates will increase.  Further, social security is already taxed and Required Minimum Distributions from traditional (non Roth) retirement accounts are taxed as well.  So while you may have some control over your taxes today, once retired, you will have far fewer choices on tax planning.

Other considerations
What are your going to DO in retirement?  What will those 'hobbies' cost?  Is that in your 50K estimate?
What do you think about Health care costs?  Will you need home health care later?  (might your medical care cost more?) (What other costs might you have in the future that you do not currently have?)


ANYWAY....
It looks like a first pass estimate is that you need at least $1.6 Million to cover your basic needs for 30 years of retirement.  IF you live longer, you need more. IF you need to pay taxes on the money withdrawn to pay for your needs, you need more. If your living expenses (hobbies) were not in your first estimate, then you need more. You did not include Social Security in your calculations (probably wise), but assuming that you get any positive, after tax flow from that program, you need Less!

The good news is that you have some money already saved, and you have 25 years (at least) to save more.    You can work longer if necessary.

For comparison, Im 55. My future wife is 45, so my planning horizon is another 45 years. I m planning to be 'able' to retire in about 5 years, and I have considered taxes and social security, and I am estimating that i will need about  $2.3 Million to cover us until she is 90.  (If she lives past 90, she had better save whatever inheritance she gets from her parents, or be prepared to work at Walmart, or move in with her sisters!! because by then, my estimates are that the money is gone!)

Again, I want to congratulate you for looking at this NOW while you still have a chance to make changes that will positively influence your potential retirement!!  My own thoughts are to save as much as you can now. It has 2 effects.  It lowers your current consumption (keeps you living within your means), and it provides more available for future needs!