Merrill Edge Simulation: believable?

[chocolat]

Do I really need to have $1.8 million at retirement age?

I tried - for fun - to calculate my retirement savings with the Merrill Edge simulator. Given a salary of $40K and desired retirement age of 60. The results of the simulation were that I needed to have $1.8 million saved at retirement. That sounds like a awful lot to me... Enough to live until 105 at 40K a year, assuming that I wouldn't get any return on my savings or any SS money.

I wonder how many people have that much saved when they hit retirement age.

[buster]

Don't forget about inflation. Assuming 3% a year inflation, the purchasing power of each dollar will be worth half in approximately 23 years.

If you're not earning at least the rate of inflation, you likely will have very little to live off of if you live to be in your 90s. Your health expenses will also likely skyrocket.

[cronewitch]

Inflation is a real money killer over. If you took all your money and divided your remaining life by that and took it out to spend you would be what they call fixed income.

Look at what things used to cost and what they cost now take just 25 years ago or 1986. I bought a house in 1985 for $422 a month including taxes and insurance.
Now I have a different house but my taxes and insurance is more than my entire mortgage was in 1986. My last year in that house my total mortgage including taxes and insurance was $103. The car I had was paid off but the payment had only been 127 a month for a new car bought in 1980 with nothing down. Buying a car on payments now might be 3 time that. I could live on about 24K a year then and save money for retirement and pay off the mortgage early.

If I had that same house with the same mortgage making 24K I couldn't live on that. Gas was around $1 gallon, tomatos were about 39lb, homes seldom had computers and nobody had cell phones that I knew now they are almost seen as needs. So between things going up in price we have new wants.

Now gas is about $4 and tomatoes were on sale today for 1.39lb. I am 63 now what will they cost when I am 88 in 25 years? Property taxes and insurance is 5K a year now what will they be then? A fast food meal cost more now than a casual dinning meal used to cost. We could go to dinner at a place we wanted to go for under $20 including tip for dinner for two now it is well over $30 for a simple meal.

A nickle candy bar in 1970 cost more than 10 times as much inflation happens.

We can withdraw about 4% of our retirement money if it grows at the inflation rate plus 4%. So a million invested making 7% with 3% inflation means you can withdraw 40K life but putting a million in the bank earning nothing you couldn't make it last 40years because each year you would want more to live.

[chocolat]

Thanks for the replies!

I agree that inflation is really bad and sometimes I wonder if it is worth saving in the first place. Like you said cronewitch, gas is four times more expensive now than 25 years ago. How our life is going to be if it follows the same curve and hits $16 in 25 years?

[Deleted]

May 1, 2011 0:52:01 GMT -5 chocolat said:

Thanks for the replies!

I agree that inflation is really bad and sometimes I wonder if it is worth saving in the first place. Like you said cronewitch, gas is four times more expensive now than 25 years ago. How our life is going to be if it follows the same curve and hits $16 in 25 years?

Actually that should encourage you to save, not wonder if saving is worth it in the first place.

Unless you want to depend on social security and be limited on what you can or cannot do, I say keep on saving!

[chocolat]

Wouldn't it be better to invest in real estate?

[cronewitch]

I have seen gas go from about 25 cents a gallon when I was a kid. It was about 32cents when I was under 25 then around 1976 it hit $1 for the first time. So that was 4 times as much as when I was young and now 4 times what it was then. So when it goes up 4 times as much again I need to be ready.

The secret is to invest in something that goes up with inflation. Real estate is fine but you can't afford to diversify so you are limited to one location or type of real estate unless you do a REIT even then it isn't much diversification. Mutual funds are better since you get a wide variety of investments from all over the world.

I happen to own a lot of MCD stock, I remember the 15 cent hamburger, now it is a dollar, soon it will be 1.29 when the dollar menu becomes a value menu. In the early 70s two of us could go to MCD and get a burger, shake, fries and apple pie and get 21 cents change out of $2. Of course earning $5 an hour was a great job I was making about $2 an hour so dinner for 2 was an hour's pay for two. Investing it MCD means that part of my budget will keep up with inflation. I am invested in other countries like emerging markets because they may grow faster than us. I don't know what will grow or shrink in the economy in the future so I spread out my investments.

One of my great aunts invested in the telephone company because the dividends would pay her phone bill. That is one way to do it, invest in auto companies to pay for your future cars, oil companies to pay for future fuel, medical supply companies, hospitals, etc to pay for future medical care but it would be too hard to plan it. I started to my first investment was in the local electric utility and I thought of it as my future electric bill payment.

Saving is just the first step investing is very important most can't ever save enough to live off it without it growing.

[Deleted]

Real estate should be one piece of your overall portfolio. While it can be a great hedge against inflation, the down side is that it's considered "risky" because of the cost of entry (e.g. down payment, getting a loan et cetera), illiquid (can't generally sell it in a day), and has maintenance costs.

Yes, you'll need about $1.8M to retire. We've gone through a retirement income modeling process (we're retiring next year) and assuming the income on $1.3M at 3% is a paltry $39,000 a year. You can see how even modest inflation at 3% will eat up that purchasing power over 20 years.

[lurkyloo]

Don't forget health care and LTC insurance! The figure they throw around is $200,000 or so needed for total health care costs--I believe that's above and beyond what Medicare covers, but also for a couple. And of course, that's going up much faster than inflation.

I'm also pretty daunted by the amount needed for a modest retirement. But don't forget that the idea is generally that you invest it and it then grows on its own, so that 1.8M isn't all just what you save out of your paycheck. I started my 401k 4.5 years ago and have gradually built up to maxing it out; even with that it's currently earning more YTD than my biweekly contributions plus match. That's pretty gratifying.

[stats45]

Though I think that many people could reach these goals if they started investing early and invested intelligently, most people's savings is going to be combined with Social Security to provide any type of decent retirement.

What type of Social Security benefit do you expect and when do you expect to take your benefit? If you have averaged that salary over 35 years, your yearly Social Security benefit is going to be around $18k. Even a completely unexpected policy change (like a 25% cut in benefits) would still make it over a quarter of your needed retirement income.

[phil5185]

I agree that inflation is really bad and sometimes I wonder if it is worth saving in the first place.

Well, not "really bad" - the opposite, deflation, and a collapse of the US Monetary system was a lot worse. A 2% or 3% inflation rate is desirable to give us a cushion against going 'negative'.

The Simulator uses 2.5%/yr as the default inflation rate. So, in 37 yrs, you will need $99,750/yr to have the same purchasing power as $40,000 today. I ran your numbers thru the simulator using $500/m contribution and the aggressive mix (8.87%/yr return), I get about the same answer, looks pretty accurate.

[chocolat]

Thanks for the good ideas. I particularly like the idea of investing in inflation connected stock.
I really don't trust the markets, which is why I would prefer to save on my own or invest in real estate. But I can see per Phil's calculation that it would be crazy not to invest.

I am not an american citizen, so I don't know if I will end up retire here (and maybe get some SS) or in my home country and get a more substantial retirement income. This is why I don't have any investments right now, nor a 401k. Instead, I am saving a good portion of my income.

I am in my mid twenties and I expect to retire in 35 years. Most of the people in my industry are very young, so if I want to work after 60 (or maybe even after 50), I'll have to be my own boss or change careers.

[tskeeter]

chocolat, you don't have to live in the US to get SS benefits. If you qualify for SS benefits, the benefit payments can be sent to you regardless of the country you live in. Lots of retirees are currently enjoying their SS checks while living in Central America, Asia, and Europe.

[Plain Old Petunia]

May 1, 2011 13:18:21 GMT -5 stats45 said:

Even a completely unexpected policy change (like a 25% cut in benefits) would still make it over a quarter of your needed retirement income.

I'm not certain you could call that "completely unexpected"; it's printed right on the annual benefits statements.