Random Roger made some interesting observations in a recent post called “You Lost Me At Hello.” Here are some highlights:
Yesterday Yahoo Finance ran this article from BusinessWeek about a “rule” for assessing where your savings compares to where it should ideally be. Meaning if you are 50 years old you should have X. X is not a number but a multiple of your salary. The basis for the formula cited “starts with one of the basic tenets of retirement planning—that people need at least 70% of their pre-retirement income during post-working years.” Insert scratched record audio file.
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.
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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?
These are all very interesting considerations and no one can perfectly plan every little detail of his future life ahead. While I talk to my share of retired people in my day to day business affairs, I get only incomplete responses when probing about the challenges of retirement.
If you are retired, please share with us (in an anonymous comment if you wish) the surprises and short comings you have encountered as you moved into this phase of your life. What has been disappointing or what exceeded your expectations? Did you need as much money as you thought you would? Are some of your expenses now considerably less than during your working years? Did you scale down in terms of living quarters or automobiles?
And last not least, which will help all readers most, what would you do different if you could do it all over again?
Comments 5
Retirement for me began this past April and the key surprise was a reduced 401K and the associated need to delay any distributions. I have supplemented this loss of income by occasional consulting with the employer I just retired from and that has clarified my anticipated need for pulling income out of the 401K. As long as I get the back-up part-time work we will fare ok but if that work dries up I will notice a cash flow shortfall. I am trying to follow the key timing signals from Ulli and hopefully that will strengthen longer term performance and the 401K might begin to yield what it needs too.
I moved from full time working for someone else to full time farming or puttering at it. Some travel and little play. Car expenses went up at least 50 percent. Taxes do not go down and after ayear 70 percent was not cutting it and we had to dip into the 401K to make car payments. I refused to crawl under or on cars in retirement so we bought new ones after 75,000 miles. Finally the bear market came and now having only 50 percent left due to bad investment advise we have become frugal. Still having fun but doing it cheaper. To date I should return to work but the bright side is if the new medical plan is implemented my life expexantcy will be a lot shorter than 95 like my uncle.
I retired in Jan 07 with approx 60% of my base salary. I lost about 80% of my IRA in Sept 08 while I was on a trip to Alaska. I am still financially comfortable but fear inflation down the road. Thank you Ulli for helping us minnows in these waters.
Pat
I'm 76 and have been retired for 16 years. When I retired my pay was about 35% of what I earned in my last year on the job. However, I had some savings ($100,000+) and two substantial IRAs ($400,00+ in the two).
We lived very close to home and frugally for five years, but a real estate investment made in 1994with some of our savings paid off in 1997 and we took a part of that money to take a trip to Africa. And it was money well spent.
In 1999 I saw small cap growth funds and IT funds moving very strongly. I got fully invested and my IRAs (which to this point I had not touched) ran well past the million $ mark before the top in early 2000.
I gave some back in late 2000 but held onto most of the gains. In 2000 I used some of the gains to pay off our house.
My pension plus our Social Security is enough to live on comfortably. We've been taking required distributions from the IRAs for six years now. Mostly the money goes for travel and to help our daughter who has her own business and borrows from us rather than a bank from time to time.
We lost about 20% in the IRAs in
this last drop, but have recovered about half of that since the March low. Our portfolios are 30% in equities and 70% income (50% CDs and 50% bonds/preferreds.) Having a defined benefit pension and living within the limits of that income has allowed us to be comfortable and grow our investments after retiring. We get to travel (going to China in October), help our child, and know we have a cushion against big medical or home maintenance expenses. We also bought Long Term Care insurance many years ago. So, we do not worry if one of us has to go into a nursing home. We're both quite healthy now, but who knows what can happen in the next ten years.
I feel that I've been lucky, but I have also planned ahead for a lot of this. I educated myself about investing forty years ago and planned to be able to enjoy some security and some pleasure in my old age.
The most important thing I would NOT change (if redoing retirement) is to first pay off all debts. This way you eliminate all the really big bills—such as the house, cars, and credit cards.
This drops monthly income needs drastically.
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