Planning for Retirement

[monarda]

Thanks, clean, for walking through that.
Your analysis will be useful to affirm or tweak my numbers.

Folks should remember to adjust their annual expenses, factoring in whether their house is paid off or not.
Also, I wonder how to budget for medical costs. I'm not sure how to approach that in this (hopefully) changing political climate. Not counting home expenses (currently paid for by rental income), we live on a lot less than 50K, but with a medical allowance, who knows.

[clean]

I dont know how to estimate health care spending.  My own situation is that I SHOULD have health insurance paid by my employer (for me, not my bride) in retirement.  I can buy it for her, but at what cost, I dont know.
However, the state could always change their promise to pay my health insurance and Id be screwed! 
The politics is in play here too.  The Affordable Care Act (Obama Care) has been gutted and Im not sure what to expect?  Medicare for all?  What does that even mean?

Health care costs are a leading reason for people to file for bankruptcy. 

It is a black box to me. I m assuming as that is my best guess, that I will be covered by some combination of medicare and my employer's plan in retirement, but it will be one of my largest retirement expenses, especially as my future bride is 10 years younger than I, so even when I qualify for Medicare, I need to cover her for another decade.  (Until we Both qualify for Medicare, my employer will charge the higher rate for insurance!  I expect it will cost up to $15000 a year for health care in retirement until she qualifies for medicare.  I hope Im overestimating, but fear Im not!  It  could be a major reason I continue to work past my 'hope to retire' date).

[pigou]

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. 

Mine, too. :)

That part of the definition is there because every asset is perfectly liquid at some price. I can sell a house in 30 seconds if I put it up for $20 when it's valued at $200,000. Unless you're liquidating a *lot* of shares, you're a price taker and your sale doesn't affect the price of the asset. The volatility of an asset is not part of its liquidity, but it's a concern that matters independently anytime you invest money. In fact, your link uses (commonly traded) stocks as an example of a liquid asset.

My point is largely that it makes little sense to have $100,000 in stocks and a dedicated $15,000 in cash. You could get the same risk exposure by doing something like $80,000 stocks and $20,000 bonds with a higher risk-adjusted rate of return. It's like someone investing in stocks and buying the extended warranty on their TV: either one on its own is sensible, but the two decisions made by the same person is just outright a mistake. And we can argue it away by introducing some psychological costs (also my field of research), but that just provides some reasoning for why people are making the mistake -- it's still a mistake from a financial decision perspective.

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.

This does not apply to a Roth IRA. You only have to report the distribution *subject to an income tax* and the rule is that contributions are withdrawn first. So if you invest $1,000, it grows to $1,200, and you withdraw $800, it's assumed to come from your contributions. There's similarly no 5-year minimum to withdraw contributions. For a Roth IRA, you only report withdrawal in excess of contributions, which your brokerage will report for you -- and it's not relevant for this particular example. If you get to the point of reporting earnings due to an emergency withdrawal, it's a hassle resulting only from the fact that you have more money than you otherwise would have had. In the above example, you could withdraw $1,200 (the remaining $200 only if the account has been open for 5 years) and you'd have to report $200 in taxable gains. But in every world, that's no worse than having access to only $1,000 to begin with.

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

Ultimately, that's just a matter of personal preferences and we don't have to have the same views on this. ;)

I just think that people should be aware of the opportunity cost that comes with them. If they run out of money at old age and/or can't afford the things they need/want, decisions like these contribute. That is, for most people, there's a serious risk of not having enough money when they need it. The stress that comes from that doesn't strike me as less than the stress of investing in stocks, but that part is also entirely a personal preference.

[pigou]

When you estimate income in retirement, it's much easier to think of everything in real (i.e. inflation-adjusted) terms. You can forecast 7% rate of return and adjust the amount you need for 2% inflation per year, or you can just forecast a 5% rate of return and keep your expenses the same: the result is the same. That's why rules of thumb for returns in retirement are lower than you might expect: they rely on inflation-adjustments. They often also assume that you shift from stocks into less risky investments as you near retirement, which I think is a costly mistake, but I assume clean will disagree. :) (I can't imagine that actually comes out of a model: the optimal rule should be constant risk allocation over your lifetime, much like it's utility maximizing to smooth your consumption over your lifetime.)

All my retirement savings are in Roth 401(k)s and Roth IRAs, so my tax rate on withdrawing in retirement will be zero. This also means social security payments won't bump me over the threshold where they get taxed, so I'm not paying taxes on those either. No minimum distribution requirement, so I don't have to sell and get taxed on money I don't need. Plus, no need to forecast future changes in income or capital gains tax rates (there is a risk of an increase in sales taxes).

I do estimate about a 5% withdrawal rate, so for $200k/year I'd want about $4m. But I also don't own a house/condo and plan to continue renting... which is easily $50k-$70k/year for a nice apartment in a high COL city.

[clean]

All my retirement savings are in Roth 401(k)s and Roth IRAs

Im older, I guess. I had been earning before the Roths were available to me. They didnt exist, and then my employer didnt jump on them.  So I have been contributing the max to the Roth 403, but the money that Im required to contribute and the matches go in pretax.  The amount in my retirement accounts is now so out of balance, that I think it would take another lifetime before the Roth balance would overtake the traditional balance.  Im considering some IRA transfers to at least offset the required retirement contributions plus the state match.  I suppose that it is a good problem to have! 

As a "curse" my coworker would tell his classes "I hope you pay a Million Dollars in Taxes!"  (imagine what you would have to earn to pay a million in taxes!) 
SO im in a similar boat.  I will owe a lot of taxes!

[AJ_Katz]

Thank you, clean, for providing the formula.  I've found it very helpful!  I've created a spreadsheet to estimate what we need, how much we'll have from our current investment, the shortfall, and then how much we would need to contribute to make up for that shortfall.  I am not including SS benefits in my estimate.  Please review my estimate to see if you think I missed something:

Annual expenses in today's dollars:  $33,258 (I've subtracted monthly student loans and mortgage paid off in 10 and 20 yrs)
Additional money for retirement traveling: +$12,000
= Expenses in retirement in today's dollars:  $45,258
Calculating for retirement in 25 years at a 3.3% inflation rate, our annual expenses translate to be:  $101,906.58
(For reference, that value changes to $120,650.42 @ a 4% inflation rate)

Using the 25X rule, we would need $2,547,671.36 to retire in 25 years
Including my partner's 401k, we have a total of roughly $190,000 in retirement accounts
If we get a 5% rate of return, I calculated it will increase to a value of $643,407.44 in 25 years
That means we will have a shortfall of $1,904,263.92 compared to the amount estimated with the 25x rule

Using your formula in reverse, I calculated that we need to invest $7,219.83 monthly to meet the shortfall
Converting that back into today's dollars, it is equal to $2,1332.04
My current 401a contribution with employer's match is $1090 per month
Therefore, I calculate that an additional $1,042.04 is needed to meet our shortfall

Firstly, does this appear correct?  Second, what are good conservative estimates for inflation and rates of return on a diverse investment portfolio?  What I found online is that the 30-year rolling average inflation is 3.3%.  I could not find a good estimate of rates of return though.  Apparently Dave Ramsey claims it is 12%, others say 8% is a good estimate, and even others suggest that 5% is conservative.  For the purposes of my 25-year estimate, what ranges for inflation and returns should I include as conservative estimates?  I've presently created a spreadsheet that shows several scenarios.  In my worst case scenario of 4% inflation and 5% return, we are short by about $1,570 per month.  In the best case scenario of a 3.3% inflation rate and 8% rate of return, we are over-paying into our retirement by about $400.

I know these numbers are just guidelines.  We're talking estimating what might happen in 25 years, which is ridiculous if you consider that our best and most complex algorithms can't even predict the weather 2-weeks from now.  Still!  It's a helpful exercise for me to understand factors that influence our potential future income.  I really appreciate the feedback.

[clean]

Using a financial calculator, you have 190000 today. You plan to invest for 25 years, you plan to earn 5% and want to accumulate $2,547,671.36  and calculate the payment
N= 25   I=5  PV =-190000   FV = 2547671 and calculate the payment = - 39899 per year contributed to the retirement account.  (3325 per 12 months or 4433.25 on a 9 month contract.  Some of that is being contributed by you and your employer now --you indicated 1090 a month, but you dont say if that is for 9 or 12 months) 

If your contributions earn 7%, you will need to contribute only 23976 in total for 25 years.

At 12% (which I think is too high to use)  you do not  need to contribute any more, but again, that is likely too high a number to use. 


Here is another site to play with
https://financeformulas.net/Future-Value-of-Growing-Annuity.html#calcHeader

It is for a 'growing annuity'.  It may be too complex a formula or too many variables to play with, but essentially, you start with one payment, and then increase that payment by some rate every year.  The benefit is that you start with a lower payment, but you must increase the payment by a constant rate every year.

I played with the online tool using your numbers... You indicate that you are short 1904000 or so.  In the calculator I assumed that you would earn a 6% return, and grow the payment by 2 percent a year.  (Essentially, I assumed that you earned 4% above inflation).  By playing with the initial payment, if you start contributing roughly 29000 a year and increase your contribution by 2 % every year, then you will accumulate the 1904000 you are short.  I assumed that your 190K would grow the other $643K as you indicated. 

So if 39899 is too much to contribute a year, you can contribute almost 11K less a year to start if you can raise that number 2% a year.  Of course that assumes that you earn 6% on your assets. 

Anyway, that gives you plenty of things to think about. 

[pigou]

All my retirement savings are in Roth 401(k)s and Roth IRAs

Im older, I guess. I had been earning before the Roths were available to me. They didnt exist, and then my employer didnt jump on them.

And wiser, I'm sure. :)

Employers were really slow on the Roth 401(k)s and many still don't offer them. I just helped a friend of mine set up some retirement planning stuff and when she reached out to her benefits manager, the guy was ecstatic that someone asked about Roth 401(k)s. So many exclamation points and smiley faces... she was less enthused, forwarded it to me, and asked if there's anything in there she needed to know. (There, alas, was not. But she brought the guy cookies the next day anyway. Benefits managers are totally underappreciated.)

The amount in my retirement accounts is now so out of balance, that I think it would take another lifetime before the Roth balance would overtake the traditional balance.  Im considering some IRA transfers to at least offset the required retirement contributions plus the state match.  I suppose that it is a good problem to have! 

As a "curse" my coworker would tell his classes "I hope you pay a Million Dollars in Taxes!"  (imagine what you would have to earn to pay a million in taxes!) 
SO im in a similar boat.  I will owe a lot of taxes!

Given your expertise on retirement planning, you probably don't need any advice... but have you talked to a tax attorney? There are some weird quirks in the tax code that, for example, let you contribute to a tax-advantaged account and, a few days later, withdraw the money at a lower tax rate with no penalty. I'm not versed on the details, but I think it's just before you turn 64.5... I only remember from a seminar that there are discontinuities in the returns and a tax lawyer would know where they are. (Economists, of course, assume that people are automagically aware of those opportunities and then are puzzled when they don't take advantage of them. But cute: you can use the same model of how viruses spread to model which people take advantage of those quirks. Someone learns about it, then goes to tell their friends.)

AJ_Katz: for your retirement calculation, working in real terms will dramatically simplify your life. You have $190k in today's dollars and your projected expenses are $45k in today's dollars. If you want to go with the 25x heuristic, you need $1.125m in today's dollars in 25 years.

If you get a nominal rate of return of 7% and expect 2% inflation, you have a real rate of return of 5%. Now you use the real rate for your projections, and you'll find that saving $10,000 per year gets you to $1.145m in 25 years. That means you need to save $10,000 in real terms per year. So you save $10,000 in the year 2019, $10,200 in the year 2020, and so on.

[polly_mer]

I will mention that I have a non-Roth-401(k) through my employer and a Roth IRA through a financial advising company.  One is not limited to just the retirement options that the employer offers.

[spork]

I will mention that I have a non-Roth-401(k) through my employer and a Roth IRA through a financial advising company.  One is not limited to just the retirement options that the employer offers.

Yes. I have a 403(b) managed by TIAA-CREF through my employer and a Roth IRA account that I set up many years ago. I am maxing my contributions to the 403(b) (I'm over 50 years old) but have not contributed anything to the Roth IRA for a long time, unfortunately. I seem to have hit a consumption-savings plateau. While I would like to save more, the mortgage, property taxes, car expenses, wife expenses, etc. make it difficult to reduce spending by appreciable amounts. I'm banking (literally and figuratively) on getting promoted to full professor within two years and putting much of the raise toward retirement.

[retired_prof]

Clean asked about health care expenses upthread so I thought I'd share my experience.

I retired in late 2016 at 55.  My spouse retired in mid-2017 at 54.  For health insurance we relied on her COBRA through the end of 2018.  The premium was about $1400/month for the two of us.  This year we switched to the ACA (Obamacare).  Effectively this is our only option.  Had I continued working until age 60 I could have continued on my employer's policy (state system) until age 65,  but I did not want to work another five years. 

I think our premium is $1,800-$2,000 per month.  I say "think" because when I was investigating the ACA landscape in late 2018 I discovered that we qualify for a subsidy.  Net of the subsidy our premium is $316 per month.  For a family of two people the cut-off for receiving a subsidy is about $66,000 in annual income.  I am not sure if this is a national figure or whether it varies by region.  If our earnings exceed the limit then we will owe the full amount of the premium retroactively. 

We are lucky enough to be able to control our income because it all comes from investments and retirement accounts.  In 2017/2018 I had been rebalancing our portfolio to reduce equities from around 80% towards 60% when I learned about the subsidy.  I accelerated the process to realize the gains in 2018 and not 2019.  We now have enough cash in regular (non-retirement) accounts to last at least two years.  Since almost all of our taxable savings are in index funds we should have virtually no capital gains until we decide to start liquidating again.  I expect to receive the subsidy next year as well.  The subsidies are based purely on income.  Assets do not affect it. 

I will add that I found the ACA incredibly difficult to navigate.  We needed an insurance agent to help with the on-line registration.  Even with only one provider, Blue Cross, there were about 25 different plans to choose from.  Comparing the plans is difficult because few of the benefits appear to be standardized;  many differed only slightly.  I think we narrowed it down to about 5-7 choices and then basically picked one at random.

Aside from the premiums, we have paid a lot this year.  I have had two medical procedures this year for a chronic condition and I have exceeded the plan's $5,000 individual out-of-pocket limitation.  Last year (2018) I think we may have spent $3000 on health care over and above insurance premiums.  2017 was uneventful. 

For planning purposes we had budgeted $2000/month for health care.  $2200 to 2500 is probably a more accurate estimate assuming no subsidy.

Neither of us has any regrets over choosing to retire early.

[clean]

https://www.msn.com/en-us/money/retirement/why-the-4-percent-rule-for-retirement-wont-work-anymore/ar-AAHVI3j?li=BBnbfcN#page=2


That is an article that I saw today about the 4% rule and some issues with it.

Thanks Retired_Prof for the information on health care. 

I think that we are in a similar situation. I have to work until 60 to get health care in retirement.  However, as I wrote earlier, if I want a single policy, I should be covered (unless the state changes its policies, and they can at any point!).  IF I want coverage for me and my future bride, then the premium is going to be the based on our duel medicare situation. Once we are both on Medicare, we get a sweet(er) rate.  When only one qualifies for medicare, then the premium is set as if neither is on medicare, so the highest premium is charged.  When we get closer to making the final retirement decision, I will have to compare what it will cost to use my employer's policy for both of us, or price an individual policy for her alone as my employer should continue to cover me.

I dont expect that we will qualify for any subsidies.  Again, as we get closer to the decision date, I will run some more numbers, but currently my Roth/Traditional balances are leaning too much toward traditional.  I had planned to do a lot of conversions from traditional toward Roth in the first years of retirement, far more than the $66000 you mentioned to qualify for the subsidy.  However, that is sort of a 'tax' as well, so Ill have to include that into the analysis when the time comes. 


For those still reading, and for what it is worth, I talked to my father about retiring 'early'.  He retired at 62, my mom at 60.  He noted that their health care costs were their biggest expenses until they qualified for Medicare.  Something to consider, and something that is very much being debated in the political circles.  I guess that the bottom line is that it is not likely to be something that one can easily forecast for more than a few years into the future!

[clean]

I went to see the HR person today.  She wasnt in, but I was able to get the price sheet. If I understand the document,  It looks like as a retiree, my insurance would be free (as I suspected.). For both of us, it would be a bit less than $350 a month (for those currently covered today).  When we are both covered by Medicare, the premiums drop to about $200.  Those prices are not nearly as bad as what I had suspected. 
A coworker was telling me that it would be closer to $1200 a month.  (though that is about what the forms say is the university's cost). 
I still need to ask the HR person the details, but at this point, it looks like I can currently plan on $400 a month for insurance, once I am eligible for retirement health care... in five more years!

IF others have guidance on the cost, it would be welcome!!

[lightning]

Thanks Polly for starting a very useful thread. Bookmarking.
A related question regarding where to retire. One of my long-time academic colleagues, who is many years older than me, vacations in Mexico whenever school is not in session, and now she plans on retiring there (she likes warm weather and she says everything is cheaper). Does anyone with first-hand info about retiring abroad (I live in USA) have any tips to share? My retirement is projected to afford me the same lifestyle I enjoy now, if I stay in my same location, but my opinion of this place is meh. Having lived abroad, in several different countries, for many years, it's not a stretch for me to live in a foreign country, again.

[ciao_yall]

Thanks Polly for starting a very useful thread. Bookmarking.
A related question regarding where to retire. One of my long-time academic colleagues, who is many years older than me, vacations in Mexico whenever school is not in session, and now she plans on retiring there (she likes warm weather and she says everything is cheaper). Does anyone with first-hand info about retiring abroad (I live in USA) have any tips to share? My retirement is projected to afford me the same lifestyle I enjoy now, if I stay in my same location, but my opinion of this place is meh. Having lived abroad, in several different countries, for many years, it's not a stretch for me to live in a foreign country, again.

My husband's cousin and her husband retired to Spain. Just on his and her SS they were accepted on a retirement visa for the rest of their lives.

They could be on the national health but decided to buy private insurance for a small amount.

Anyway, they live a million dollar lifestyle for a fraction of the cost outside of Malaga. They have a 5 acre farm, a horse, golf nearby... no regrets!