Planning my retirement budget

by Nick on August 20, 2012

Who’s ready to retire?  (Don’t you love how I ask that on a Monday morning… yeah, I know, a lot of people are ready to retire on Monday morning, haha!).  Well I have good news and bad news.  The good news: there’s absolutely no way it’s too late for you.  I don’t care if you’re 24 or 64.  You can retire someday, somewhere, as long as you aren’t sitting around waiting for someone else to take care of you.  If you don’t believe me, just think about how “set” you can be if you take charge – starting – now!  The bad news:  you’re still reading – shouldn’t you be planning?!?!  Haha – it’s cool – you can wait until after you finish the post…

If you need some help, Yahoo! has a few suggestions for you – seven to be exact.  Today I wanted to focus retirement budget planning over here though.

As with any good long-term plan, you need to anticipate how much things will cost and then figure out how much you need to save to get you there.  When you’re young it’s tough to estimate how much you’ll need to spend decades later.  As you get close, the picture becomes clearer.  So how do you do this estimate if you’re young?  I didn’t really.

Basically, what I did was:

  • First, I took what we spend per year now, figuring some things will be more expensive (health care if I don’t use Medicaid) and some costs will drop off completely (mortgage);
  • Second, I assumed a 4% inflation rate until retirement age (which is high, historically).  I figured that is rough, but logical math for how much I would need at retirement;
  • Third, I puked on my shoes;
  • Fourth, I cleaned my shoes; and
  • Sixth, I divided that number by .04 to calculate the amount I will need to withdraw 4% per year and never eat into the principal.
I know this isn’t perfect, but it’s relatively conservative.  I figure I wouldn’t be as “all in” with the stock market at 60 or 65 (maybe I will though…), so 4% isn’t too low and it isn’t too high (most folks suggest between 3% and 6% these days, it seems).  My inflation rate may be a bit high.  And who knows what healthcare will look like thirty years from now (I’m almost 34).  But this at least gave me a plan tied to my life and some reasonable assumptions.

 

Then I planned how to get there.  
  • First, I figured out how much my retirement accounts would be at 60;
  • Second, I set up an auto-invest into a mutual fund for the difference.

I assumed a 9% return, which is less than the Dow Jones Industrial Average annual rate for the last 20 years.  So while there’ s no guarantee moving forward, I figure just sticking it in a DJIA index fund and reinvesting the dividend had a decent chance at 9%.  (I’m also not one of those “the sky is falling” folks so I think 9% is pretty attainable over the long term…).

Simple.  I now have three accounts I’ve tapped as retirement.  The first is a 401(k).  I invested pretax and will be taxed at retirement.  The second is a Roth with after-tax money but no tax at retirement.  The third is this mutual fund in a taxable account.  It sets me up to have tax choices in retirement (and before) and with plenty of money to live the life I’m living now.  Some people call this tax planning.    I call it “they need to raise the Roth limits.”  Either way, it’s all good.

Not sure if it’s perfect, but it’s a plan.  And it’s based on logic (sort of… haha).  Of course, there are other extreme thoughts on retirement out there, like my buddy Jake’s thoughts on retirement plans and 401k early withdrawal over at his blog.  Jake has some pretty cool sketch videos going on over there, too, and will be setting one up for me in the near future.  Interesting stuff, so check it out.

Have you started planning your retirement budget and how you’re going to get there?  What assumptions did you use?  And what did I miss?!?!  

Until next time, put your credit card down and slowly step away from the mall!

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{ 16 comments… read them below or add one }

Modest Money August 20, 2012 at 9:46 am

That sounds like a logical way to plan your retirement budget. I admit I’ve given very little thought to how much I’ll need. For now I’m just trying to invest however much I can. As I get further a long I’ll have to eventually have to crunch some numbers to get a better idea what my long term goal should be. It’s just tough when your income fluctuates a lot with little long term stability.

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Nick August 20, 2012 at 10:02 am

There’s a general guideline to put 10-15% of your income in investments and that should set you up pretty well if you’re debt free at retirement – as long as you start relatively early. Making a commitment to do something is certainly on the right track. I heard recently that over 50% of people are doing nothing to save for retirement.

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Michelle August 20, 2012 at 9:47 am

Part of our plan is to downsize our house. We have 4 bedrooms and 2 stories now. I’m thinking a ranch sounds better when we’re rickety. 🙂

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Nick August 20, 2012 at 10:01 am

Ha! I like it. Funny you mentioned that, I was just thinking about the same thing for my parents who are in a raised ranch… if only there were a simple way to lower a raised ranch…

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Veronica @ Pelican on Money August 20, 2012 at 3:22 pm

Are you expecting the ROI to go up after the recent drops? Or are you already getting 9% somewhere?

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Nick August 21, 2012 at 9:04 am

Well the answer to both is yes. I’m no expert by any means, but I think our better days are ahead of us. I know a lot of market experts bad things ahead and we surely have a mess to clean up. But we’ve had messes before (tech bubble in 2000-2002, recession of the 1990s, market crash and bank crises in the 1980s, rapid inflation of the 70s, etc) and have survived those. I believe we’ll survive this and do very well. I think consumers are nervous and aren’t spending as much as they would like to and once they feel comfortable again (which I believe is inevitable) corporate earnings will go up and the stock prices will follow.

But (I plan to do a post on this, early next week, so I won’t go into too much detail…like the teaser?) the stock market has already recovered from the drop. In fact, since the end of 2008 (which included a drop at the beginning of 2009 and then a March 2009 low) the S&P 500’s annual return has been over 14%. 2008 was certainly a “kick in the gut,” wiping out what had been slightly less than a 13% annual return from 2003 to 2007 (2008 was down over 37%!).

But the funds I put this retirement money have each returned over 9% over the last 10 years, which includes 2008 and some of the tech bubble fallout. (One is right above 9% and one is right above 11%).

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TB at BlueCollarWorkman August 20, 2012 at 4:09 pm

Well, we sort of have, but even reading this post, I find that once percentages start getting put in there and calculations about rates of stock stuff… my mind gets fuzzy. Really fuzzy, really fast. Maybe you could make one of those sheets like for taxes? Where they tell you waht to do and you fill in a number in the blank. And then they tell you to divide that by some other number, and they give you a blank spot to put that number, etc. Those are easier for me to understand!

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Nick August 21, 2012 at 9:05 am

I year you! If I were savvy enough I’d put together a calculator, but I think I’ve seen some out there on the web. I’ll see if I can find one… I love finding new calculators… sad, isn’t it….

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Holly@ClubThrifty August 21, 2012 at 11:27 am

I am so worried about the healthcare aspect of early retirement. How can I plan ahead for healthcare costs without having any idea what that picture will look like in 20 years when I plan to retire? It’s crazy and mind numbing but I guess I can only make my best guess and plan accordingly!

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Nick August 21, 2012 at 2:24 pm

Yeah, that’s another really tough one because not only are costs changing but the entire structure of health care seems to be changing. Let’s see if I can put some context to it, which might ease some of your concerns (which I have, too).

I’ll be 34 next month, so it’s really tough for me to project what it would look like with any accuracy either. But way I see it healthcare costs cannot grow exponentially forever (see real estate, college tuition and tech stocks, which seemed to grow at triple or more the rate of inflation and eventually slowed down).

Also, for most of my working life I’ll have a family plan. At work now, my plan costs me about $1,100 per month (my work covers 1/3 or so, so the total cost is about $1,600). Once I hit retirement even assuming I’m completely on my own (i.e., no medicare or whatever) I will only need a single plan (or hopefully a couple plan!), which today would drop the monthly cost by about 40% (for a couple) or 60% (for a single plan). So my cost will go down at least 40% once the kids are on their own and maybe 60% if (or once) one of us passes away.

So if the assumption of a 9% return and a 4% withdrawal rate holds, and my assumption that health care cost inflation will slow down somewhat, then I should be fine – my cost will increase with inflation and at some point reduce by 40% or so and my investments will outpace inflation and give me enough net of inflation (5%) to cover the monthly costs. (Not sure if this paragraph is clear… but the point is I’m saving for it now and costs will go up, but net of inflation and the kiddos on their own the cost will probably be less in retirement).

The other thing that you can control is diet and exercise. A really healthy 75 year old probably has a lot less costs than an overweight smoker in his 40s.

All that to say don’t worry too much about it, stay healthy and keep on saving and investing!

Too long a comment…?

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MoneySmartGuides August 21, 2012 at 6:08 pm

This sounds like a good plan to me Nick. When I looked at my numbers, I puked on my shoes, cleaned them, checked my math, and puked again. 4% is high for inflation since it averages about 3% annually. But, I like to be conservative in planning long term as well and think 4% is a good estimate. I use a long term investment return of 8%, but 9% is not unreasonable.

I also agree that they need to raise the limits of IRAs! But Uncle Sam needs his tax proceeds now!

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Nick August 23, 2012 at 1:09 pm

Thank Don. Yeah, I figured I was pretty conservative on inflation and reasonable with the 9% (essentially a net difference of 5% between the two).

It’s pretty nuts seeing the post-inflation numbers 30 years from now, isn’t it?!?! I keep telling myself thinks like “it is as if you have $1,000,000 today and want to live off of $40,000 per year.”

If they raised the limits on the ROTH to even $10,000 my guess is you’d have a lot of people put some extra cash in there for savings – Maybe Uncle Sam’s willing to give up some $$ later for an influx of cash now…

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Jacob @ iheartbudgets August 23, 2012 at 1:04 pm

Having both a 401k and Roth IRA helps you hedge against taxes for sure. I am doing something similar, although I don’t have much to invest right now. I hope to MAX my Roth next year, and then look at a brokerage account.

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Nick August 23, 2012 at 1:12 pm

Nice, Jacob. One way that a bunch of people increase retirement savings without “feeling” it is to sneak in an extra 1% of your salary every six months you’ll get to some substantial savings. So if you’re saving 5% now, raise it to 6%. Then in January (yeah, I know it’s not 6 months but it gets you on a calendar), raise it to 7%. Then July 1 8%, etc. (It’s really easy to do with a 401k where you can set the percentage easily).

With raises and everything it really jacks it up and, soon enough you’re maxing everything out without even noticing it. Sounds like you’re doing great though and pretty self-disciplined.

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Well Heeled Blog September 2, 2012 at 4:14 pm

I’ve never done any kind of retirement calculation… But I have been putting in 10%-30% of my income every year since I graduated college, and I hope that if I continue to do so every year that I work I’ll be OK when I retire. Now I’m in school, which is going to put a real dent into retirement savings for at least a couple of years…

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Nick September 4, 2012 at 10:07 am

I’d suspect that if you’re putting away 10-30% into something that can earn you a decent return you’ll be ok. And hopefully the school will pump up your earnings, so the 10-30% will be a much higher amount and catch up really quick. I just like playing with numbers a lot, so that’s why I do the whole projection.

A lot of folks who are much smarter than me simplify it further and suggest that all you need to do is start early and invest a good percentage (10-30% generally falls into that range) regularly into an index fund.

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