Comments on: Common Questions – How Much Do I Need to Save for Retirement? http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 20 Nov 2009 19:56:44 -0800 http://wordpress.org/?v=abc hourly 1 By: Dylan http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-293059 Dylan Tue, 22 Apr 2008 15:01:50 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-293059 Mike, I was using 1% as an example. Yes, some will be higher and and some will be lower, and that is exactly why you need to account for the expense in your withdrawal rate. Should someone paying 3% annually for their investments be expected to sustain the same after fee withdrawal as someone with the same size portfolio but only paying 20 bps? Why should your annual investment expenses be any different from your housing expenses? Most of the accepted studies on sustainable withdrawal rates are based on overall asset class statistics and do not consider expenses, investment or otherwise. If you're inclined think the added expenses will be made up by better performance and therefore washes out, it's probably time to reread those books. This is the mutual fund and asset management industries' dirty little secret. 2% may not seem like a large expense until you consider that it is half of the available 4% for a sustainable distribution. Mike,

I was using 1% as an example. Yes, some will be higher and and some will be lower, and that is exactly why you need to account for the expense in your withdrawal rate. Should someone paying 3% annually for their investments be expected to sustain the same after fee withdrawal as someone with the same size portfolio but only paying 20 bps? Why should your annual investment expenses be any different from your housing expenses?

Most of the accepted studies on sustainable withdrawal rates are based on overall asset class statistics and do not consider expenses, investment or otherwise. If you’re inclined think the added expenses will be made up by better performance and therefore washes out, it’s probably time to reread those books.

This is the mutual fund and asset management industries’ dirty little secret. 2% may not seem like a large expense until you consider that it is half of the available 4% for a sustainable distribution.

]]> By: Four Pillars http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-292700 Four Pillars Tue, 22 Apr 2008 12:23:47 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-292700 Dylan, I don't quite agree with you that expenses have to come out of the 4% - for one thing, not everyone's expenses will be 1% - some will be higher and others will be much lower. You raise a very interesting point however - I'm going to have to research and think about this. I don't recall this being mentioned in any books I've read (Four Pillars, Random Walk etc) but then again, they advise to use low cost index funds. Mike Dylan, I don’t quite agree with you that expenses have to come out of the 4% – for one thing, not everyone’s expenses will be 1% – some will be higher and others will be much lower.

You raise a very interesting point however – I’m going to have to research and think about this. I don’t recall this being mentioned in any books I’ve read (Four Pillars, Random Walk etc) but then again, they advise to use low cost index funds.

Mike

]]> By: Kitty http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291872 Kitty Mon, 21 Apr 2008 23:40:32 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291872 "As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me." Living a "healthy" lifestyle doesn't guarantee good health, especially when you get older. "Healthy" people may have lower risk of some conditions, but not that much lower, but lower risk doesn't mean no risk. "Healthy" people can get heart desease, cancer, auto-immune conditions, arthritis, etc. just like everyone else. Just because you are healthy in your 30s, doesn't mean you'll be healthy when you are 70. Most people are healthy in their 30s. Most people have one or another problem in their 70s - some small problems some big ones. So you cannot predict that your healthcare costs would be minimal in retirement. Having good genes - most relatives who live into the 90s without needing any healthcare - increases your chance of lower health care costs (by a whole lot more than being a yogi or healthy at 30). But it still doesn't guarantee you wouldn't be the only one in your family to need healthcare. “As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me.”

Living a “healthy” lifestyle doesn’t guarantee good health, especially when you get older. “Healthy” people may have lower risk of some conditions, but not that much lower, but lower risk doesn’t mean no risk. “Healthy” people can get heart desease, cancer, auto-immune conditions, arthritis, etc. just like everyone else. Just because you are healthy in your 30s, doesn’t mean you’ll be healthy when you are 70. Most people are healthy in their 30s. Most people have one or another problem in their 70s – some small problems some big ones. So you cannot predict that your healthcare costs would be minimal in retirement. Having good genes – most relatives who live into the 90s without needing any healthcare – increases your chance of lower health care costs (by a whole lot more than being a yogi or healthy at 30). But it still doesn’t guarantee you wouldn’t be the only one in your family to need healthcare.

]]> By: Lord http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291863 Lord Mon, 21 Apr 2008 22:41:41 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291863 As to Social Security, if nothing is done, the midcost estimate is that it can pay out 75% in perpetuity after trust fund exhaustion. Due to wage indexation this will amount to more than current benefits. Sounds like a plan, do nothing. Medical care is a far different story. As to Social Security, if nothing is done, the midcost estimate is that it can pay out 75% in perpetuity after trust fund exhaustion. Due to wage indexation this will amount to more than current benefits. Sounds like a plan, do nothing.
Medical care is a far different story.

]]> By: Lord http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291857 Lord Mon, 21 Apr 2008 22:28:24 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291857 I always recommend using real returns and present values. Knowing you will need a gazillion when you retire isn't informative because you don't know what everything else will be worth. Knowing you need $1M in today's dollars allows you to compare it with the value of other assets and costs today. You might say, oh that's 5 houses or 10 years annual income. I always recommend using real returns and present values. Knowing you will need a gazillion when you retire isn’t informative because you don’t know what everything else will be worth. Knowing you need $1M in today’s dollars allows you to compare it with the value of other assets and costs today. You might say, oh that’s 5 houses or 10 years annual income.

]]> By: EA http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291766 EA Mon, 21 Apr 2008 18:51:02 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291766 I think part of why this calculation scares people is that there are many unknowns, and no one wants to end up eating catfood in the dark. But people are making it seem like a bigger deal than it should be...if retirement is close than you have a good idea of what inflation is like in the next few years. If retirement is far away, just run a calculation like this every few years and re-adjust. When you're driving, you point your car down the road towards your destination, but you are constantly moving the wheel a tiny bit to stay in your lane. So do the calculations now, start saving, and check every few years to see if you need to be saving more. I think part of why this calculation scares people is that there are many unknowns, and no one wants to end up eating catfood in the dark. But people are making it seem like a bigger deal than it should be…if retirement is close than you have a good idea of what inflation is like in the next few years. If retirement is far away, just run a calculation like this every few years and re-adjust. When you’re driving, you point your car down the road towards your destination, but you are constantly moving the wheel a tiny bit to stay in your lane. So do the calculations now, start saving, and check every few years to see if you need to be saving more.

]]> By: Dylan http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291734 Dylan Mon, 21 Apr 2008 17:53:39 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291734 Mike, If you don't account for your fees in the 4%, than you are depleting your portfolio by a greater amount. They are an annual expense just like food, utilities, and healthcare. Let's say your total investing expenses are 1% and your other expenses (taxes, lifestyle, etc.) are 4%, the you will be spending 5%, which is significantly less sustainable. Mike,

If you don’t account for your fees in the 4%, than you are depleting your portfolio by a greater amount. They are an annual expense just like food, utilities, and healthcare. Let’s say your total investing expenses are 1% and your other expenses (taxes, lifestyle, etc.) are 4%, the you will be spending 5%, which is significantly less sustainable.

]]> By: Don http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291724 Don Mon, 21 Apr 2008 17:26:43 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291724 Fidelity has a great retirement check, very detailed. http://personal.fidelity.com/misc/buffers/portfolio-review.shtml.cvsr?refhp=pr Fidelity has a great retirement check, very detailed.

http://personal.fidelity.com/misc/buffers/portfolio-review.shtml.cvsr?refhp=pr

]]> By: Wilson http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291628 Wilson Mon, 21 Apr 2008 14:27:11 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291628 As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me. I found I need only up to $1,000,000 in 2007 dollars at the retirement age of 65 and die at 95. The problem is, if I invest most of my disposable income, I would probably have at least $6,000,000 at retirement, which is approximately what the Fidelity website suggested based on my yesteryear's income. Finally I decided last year that I had to reduce my 401k contribution to a minimum level to capture the employer's match. And I'd keep the rest for aggressive investment and moderate consumption, planning for a much earlier retirement. As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me.
I found I need only up to $1,000,000 in 2007 dollars at the retirement age of 65 and die at 95.
The problem is, if I invest most of my disposable income, I would probably have at least $6,000,000 at retirement, which is approximately what the Fidelity website suggested based on my yesteryear’s income.
Finally I decided last year that I had to reduce my 401k contribution to a minimum level to capture the employer’s match. And I’d keep the rest for aggressive investment and moderate consumption, planning for a much earlier retirement.

]]> By: Four Pillars http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/comment-page-1/#comment-291609 Four Pillars Mon, 21 Apr 2008 14:03:24 +0000 http://allfinancialmatters.com/2008/04/20/common-questions-how-much-do-i-need-to-save-for-retirement/#comment-291609 JLP - there is nothing wrong with having a high income as a retirement goal except that the trade-off is that you will have to work a lot longer and scrimp like crazy. Setting your retirement goals is the first step in planning, step 2 is doing the math/plan. Step three is revising the goals/math repeatedly until they fit! Mike JLP – there is nothing wrong with having a high income as a retirement goal except that the trade-off is that you will have to work a lot longer and scrimp like crazy.

Setting your retirement goals is the first step in planning, step 2 is doing the math/plan. Step three is revising the goals/math repeatedly until they fit!

Mike

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