How much cushion do you need to retire?

[cronewitch]

Assuming single and will never work another day after retirement for any reason.

I have a budget that calls for 500K to get 20K of income that and SS will provide me with my basic retirement budget of 38K. I could trim that to 36K if I had to or even less.

I plan to live 40 years after retirement and want to leave enough that the last two or three years I don't even have to think of running out of money.

I am bucket of money for contingency fund so if I need something like a new roof or other major lump sum I don't need to spend my retirement money.

Maybe another bucket of money for wild spending sprees.

Maybe another bucket of money to let grow to cover old age so I can hire help in my later years and pay for medicine or assisted living or nursing home.

I am 30K over saved for retirement now to cover basic budget so how much should I save for the cushion? What if I don't make more than 4% plus inflation? Is any amount really enough so I could quit working and go out to play?

[Plain Old Petunia]

Does your annual budget of 38k include money for home maintenance? If you had a big ticket home maintenance item (such as a new roof), how would you handle that?

Is 38k going to be bare bones or is there some room for splurging? I know you are very frugal, but sometimes you might like a little splurge.

And of course, what about health care? Are you close to 65? Have you priced supplemental health care plans, or do you plan to have Medicare only?

I know you like to fish, boat, and camp. What else would you like to do? Is it expensive?

I know you bought a brand new car somewhat recently, and assume you intend it to last you a good while? It probably will, but will it last your lifetime? Probably need a replacement at least once more.

[Plain Old Petunia]

Oh, perhaps if I read more closely I might notice things such as you just said you have a contingency fund for things such as a new roof. Scratch that comment.

[Deleted]

I think about this a lot. I have a 98-year-old aunt that lived alone until maybe she was in her mid 90s.

What she has/had going for her was a store that delivered. It was a drug store, but, of course, they sold other stuff. It wasn't cheap, but it was convenient.

You also need someone who will buy or deliver groceries, etc. I am planning on advertising on CraigsList for someone to buy beer for me. Trust me, my daughter will cut me off from any pleasures "for my own good." Lol. She is a do-gooder, and Thoreau said you should run when someone is trying to do you good.

I have learned from the 98-year-old aunt that if you can take care of your own needs (even if inadequately in terms of home maintenance and personal hygiene), most of your family won't "bother" you. To criticize is often akin to taking responsibility. That is why my aunt has lived so long alone.

I am actually impressed with her. She sometimes apologizes for being retired much longer than she ever worked.

[lurkyloo]

Hm. I'm figuring we'll need about 4 million (160K/year) to retire; by the time we get there that'd be equivalent to 80K/year in today's dollars. We're not counting on SS or inheritances. When we get closer I'll probably refine the estimate to fit closer with whatever reality turns out to be...but right now 4 million is a really mind-boggling number and if I think about it too much I get discouraged and go think about something less distressing.

[DVM gone riding]

lurkyloo try running some fake numbers might make you feel better.
I figured I needed about 2-3 mil for my retirement (I am 30 almost right now) and when I put in what I am currently doing or planning on doing in the near future, 8% avg return, and 2% income increase I got to that number. Which is assuming that is all I do and I think those growth numbers are low. But it made me feel a lot better about retirement in the future.

[lurkyloo]

Oh, I've run the numbers several times and I'm actually reasonably confident we'll get there based on the typical scenario--or even a worse than typical scenario. It's the part you can't control very well, like decades of stagflation, that worry me. Basically unless you're totally in real estate, nearly everyone's retirement strategy is that the stock market will grow at a rate several points higher than inflation. But we're just basing that on history, and faith. Just because some calculator tells me that 16K that I put in this year will be worth 170K in 2041, doesn't mean the calculator is right.

[cronewitch]

I have seen inflation and seen retired people have to stretch to keep up with prices. I don't want to be really poor in retirement and 38K is what my current lifestyle will take after adjustments like not saving for retirement or paying SS tax. It is pretty detailed and has things like line items for repairs and replacements that should be plenty but you never know.

Being fairly frugal I don't see me going hog wild and spending down my savings like some do the first 5 years then find themselves unable to work and broke. Mom used to be really frugal but now will waste money and I would like to also. Tomorrow I am going to surprise her with ice cream that cost about $7 a quart. Next week I am taking the entire family out for Chinese food my treat, I didn't need to save up to do that. That is how I want retirement not every little thing to be a struggle.

My car has about 16K miles on it so should last another 10-15 years so one more after this one when I am around 75 then when it wears out I am done driving. We have public transportation that is fantastic for elderly and handicapped people. Access buses will pick you up and take you were you want to go even if you use a wheel chair. You need to schedule it ahead of time a couple of days so if you want to go to the store then an hour later go home you would schedule both trips. The fee is reasonable about what bus fare is but door to door, it doesn't run on Sunday. If I was outside this area I would arrange to hire a housewife or college student or younger retired person to drive me places twice a month or more. One grocery delivers and mom says one of her friends orders a lot on line so she doesn't need to shop. We order mom clothes from JC Pennys on line and if they don't fit you send them back so you never need to shop, we had them shipped to where she was last summer because she couldn't get to stores and lost a lot of weight so needed new clothes. Mom gave up driving but has us kids to take her places, I don't have kids so will pay other people.

The question wasn't how much it takes to retire or how much to live but how much cushion. I want to work two more years and have the basic budget amount so all I can earn in two years will be my cushion unless I decide to keep working to be extra extra sure I have enough. I don't want to be called McDuck and work until I am really old because you never have enough but I don't want to quit when an extra 50-100K would make retirement so much more happy.

So if you needed 4 million would you stop then or try for half a million more to take the edge off. I am almost 63 now so am thinking work until 65 but 65.5 would be an extra 30K towards retirement and every year is another 1,200 in SS so less need for the nest egg. Working until 72 would put me so far out that I wouldn't be able to ever spend my life savings more than doubling my net worth over working to 62 but that doesn't seem reasonable.

I think a 100-200K on the side that could be used as needed would be nice amount to take away worry.

Grandma lived alone until she was 96, no car walked everywhere until she was over 90. At 89 the town put in a bench for her half way from her house to down town. It had her name on it and the mayor dedicated it, the newspaper covered the dedication, a business in town paid for the bench. Did I mention it was a very small town? She lived 4 blocks from the center of town so would walk to town and drink in the bar. The bar cut her off after one drink so she didn't fall and hurt herself. The bar tender would ask someone to drive her home and if nobody was available would take a short break to drive her home and walk her to her door.

Her house was old and falling apart but at least she was able to stay alone pretty long but she broke a leg in a fall in the kitchen just before she turned 97 and never walked again.

[formerexpat]

but right now 4 million is a really mind-boggling number and if I think about it too much I get discouraged and go think about something less distressing.

But like $160k is like $80k in today's dollars, $4m is like $2m in today's dollars. Not as mind boggling when you think about it like that.

Surprisingly, $4m is only $20k per year at 80/20% stock/bonds over a 30 year period with 10% / 7% return for stocks and bonds, respectively [both a bit light on historical returns]. [/size]

[lurkyloo]

I think subsistence level (assuming a paid-off mortgage) would probably be around 30K/year today's dollars, so 80K already allows for some cushion. But no, I wouldn't stop after 4 million (and certainly not after estimated-to-grow-to-4 million) because I'm not built that way--I'd always want a little extra, then a little more, then a lot. Room for error, life curveballs, and real estate and stock markets going haywire. How much extra? Maybe 20-25%; 800K-1 mil minimum. It's hard to say 30 years in advance; my crystal ball doesn't go that far. But even with 5 million set aside, assuming I still had the option of gainful employment and enjoyed my job, I'd probably choose to continue working and socking away money, maybe just ease off on the rate a little.

EDIT: That is to say, I don't think I'd retire at 50 or 55 given 5M in the bank. If I were 80, I'd probably go ahead and retire even with 3.9M

[Deleted]

I'm 58 and right now DH and I are darn close to $2 million. I'm still working. I tend to over-think these things but here are some of my concerns:

1. The cost of some vital things will outpace inflation. The amount of medical intervention will increase as it has over the last few decades. Even if Medicare survives (fingers crossed), more costs are likely to be passed on to us. I think food will get scarcer and thus more expensive as world population increases the demand- same for energy. As technology improves, some things that were considered OK will be unacceptable or even unavailable. What person who retired in the 1970s would have expected cars to cost so much and be loaded with AC and multiple catalytic converters? Can you even buy a 2-door car with a back seat anymore? When I'm 80 and the equivalent of a smartphone is everywhere, I want a choice as to whether or not I have one. I don't want it to be out of the question because I can't afford it.

2. If I retired now I'd have to find health insurance someplace. DH could get Medicare but he's got some chronic medical issues and I really like having him on private insurance. Some docs limit the number of Medicare patients they take.

3. As I think about it, I may choose to rent so I don't have to keep up a property, but that's a steady cash drain and it will go up with inflation.

4. As you get older, you need more services. As cronewitch noted, at some point the decent thing is to stop driving. DH and I know that our travel is already getting more expensive- Coach transatlantic is just too much for his long, lanky 72-year old body. We need to stay in hotels that are close into town so that he can put up his feet in the later afternoon while I go out and explore a little more. We tend to get more taxis to the airport so we don't have to lug our bags on and off subway trains full of commuters. At some point we may have to resort to cruises. I shudder at the loss of freedom and the expense.

5. cronewitch, you asked what happens if you don't make 4% on your money. The conventional wisdom was that you should withdraw 4% the first year, then that amount adjusted for inflation the next, etc. Of course, after the market crashed the gurus were saying maybe it should be 2 or 3%. Thanks for the warning, guys. But the idea is that even if you make less than 4% some years, you have money that will grow when the market recovers.

If I keep working till age 65, we'll have about $4 million under some reasonable assumptions. That's what I'm shooting for. It's probably more than we need, but people in my family live to their 90s and I dont' want to run out.

[Savoir Faire-Demogague in NJ]

Assuming single and will never work another day after retirement for any reason.

The demographic that is most at risk in any economic downturn and also for retirement is the single demographic.

[Deleted]

I'd say a 10%-20% cushion over what you think you're going to be spending. So in your case Crone, perhaps $100k?

It's really an interesting puzzle. As we go through the preparation to retire in about 18 months, we're learning a lot. Ideally we wanted to just live off the income of our investments and let the principle grow to at least keep up with inflation. But with dividends and interest rates so low we're not going to be able to rely on just the earnings. Although the stocks and mutual funds did really well last year; we earned a total rate of return of around 15% but when I calculated the earnings from our stocks they were only 2.9%. We're close; our budget (and our current spending pattern) has us within a few dollars of earnings of 3% we're really going to need to project a 4% withdrawal rate.

We have plenty and I'm not going to wear a hair shirt in retirement-we don't have children and the bulk of our estate is going to charity but the prospect of making this money last for 50 years is daunting. As Athena says, the world is bound to look a whole lot different!

[Gardening Grandma]

crone,
You are talking about a lump sum cushion. What about looking at it from another angle? In terms of annual income. You want an annual income of $38K. You've already built in a $2K cushion when you said "36 if I had to".

If you wanted a 5% cushion, your target would be about $40K. Then you could calculated the lump sum required for a $40K income. That'd be a 5% cushion from $38K and a 10% cushion from $36K.

Does that make any sense?

[olderburgher]

DW and I deliver food for Meals-on-Wheels in a poorer section of city with mainly the elderly receiving same. Once you see what we see you know you do not want to live at a subsistence level but above it so be forewarned.

[Deleted]

Athena,

I can't not comment on your post. You're going to double your net worth in 7 years? I'll have what you're having!

Seriously, what are you doing?

[Deleted]

Feb 12, 2011 10:31:36 GMT -5 @bonnap said:

Athena,

I can't not comment on your post. You're going to double your net worth in 7 years? I'll have what you're having!

Seriously, what are you doing?

We save over $100K per year including the company contributions to my 401(k). I'm assuming the amount we save will increase by 3% annually and we'll make 6% annually on the investments. That 6% still looks reasonable; we're now just under that for 1/1/2003 to date.

[Deleted]

Interesting. We're saving as much as you but based on what's happened over the last 2 1/2 years, I've never applied a projection based on our existing net worth.

I've done the quick and dirty math on your numbers and I get about 1.6 without compounding. I see how you get your numbers.

I'd be thrilled if I could get 3% on our whole portfolio but until real estate starts to recover I'm only going project based on our our stocks and mutual funds. Fortunately we're in budget. And we're within 1% of out net worth of where we were in June 2008 but I wrote down $600k of real estate value over that time. Sometimes it feels like we're saving to stay in place!

[stats45]

I agree with many of the posters so far about their retirement goals. This is how I've been taught to use the numbers as well.

I don't, however, get as nervous as some people do because I base my 'worst case scenario' off of what is the median preparedness in retirement. The median household has a paid-off house (or near paid-off), Social Security, and usually either a small pension or defined contribution plan. They have between $30,000 and $40,000 a year in income in their first decade of retirement and around $10k less after. The average total net worth of a household at 65 is around $190k, and most of that is housing wealth. This drops a bit in the next ten years of life as retirement accounts are used for expenses.

I make goals like the people here, but I also realize that it is impractical to think that people who are at the median level of wealth and income are raiding the cabinets for 'cat food'. I'm all for reducing risk, but I don't think it is healthy to be so stressed that you lose sight of where you truly stand compared to most households. Stress will ruin that expected lifespan!

[Plain Old Petunia]

Crone, the real danger to your plan is bad markets during the early years of your retirement. You will start with a reasonable cushion, which helps. And you are willing to take a bit less if necessary, which also helps.

[cronewitch]

I also will have some other income from my roommate early on then expect to inherit a little from my mom in 15-20 years after I retire and my mortgage will be paid off 30 years into retirement so if I stayed in this house 92. I will move at about 66 so about 96 the mortgage will be done. Having a mortgage fixes part of my expenses so I have less inflation than some people. Another cushion is I could sell or reverse mortgage the house in old age. At that point I would down size to a rental so not need home repair funds, cars would be sold, car insurance canceled and I would live much less expensively.

[Deleted]

This discussion has me thinking about the buy/rent tradeoff. We're halfway through a 15-year mortgage so, happily, that could be paid off if I retire at 65. Downsizing is a definite possibility, but buy or rent? As cronewitch noted, a mortgage payment won't rise with inflation but rent will. OTOH, rent is "all-inclusive"- maintenance costs, property taxes, etc. If the furnace or the A/C breaks down, not your problem. Something to think about in a few years.

[cronewitch]

I have known homeowners who were retired and it was always a great deal compared to rent.

Take my ex's grandparents they were apartment managers until he retired then got a house when she turned 65 and took a 15 year mortgage. They paid $62 a month for a two bedroom one bath house. When she was 80 it was paid off, she saved for a roof, aluminum siding and new carpet so was able to keep it nice. When she was widowed she lost his SS and pension so had to live on her SS. Then she had no more mortgage so only had food and utilities she died at about 93 so got almost 30 years for 15 years of payments that were about what rent was. Half way though we had a one bedroom one bath apartment for 160 a month so they got much more for less than half the cost and paid only half the time so it was about 1/4 the cost.

My grandmother had a little house in town they had traded the farm to my aunt and uncle so no mortgage ever. She was about 65 when she moved in and 96 when she moved out. She didn't spend any money on upkeep, we painted it when she moved in and my cousin painted it when she gave him the house in her will. They replaced the carpet once never anything else, she had gas heat in the living room but didn't heat bedrooms.

She and my ex's grandparents retired in 1965 and lived without cars but didn't drive anyhow.

Mom and dad bought a house in 1974 sold in 2008 they paid it off in 1978 when they sold a rental. All the house cost them in 34 years was one roof, one furnace, one hot water tank and recarpet a few times. Property taxes were reduced for all three retired households since they were low income after widowed. Mom was paying 300 a year about 10% of my taxes. Rent in 1974 would have been 240 for a two bedroom apartment and they had a 3 bedroom house with a two car garage. Rent would have gone up to about a thousand before she sold. Now she is collecting on the mortgage until she is 122 at almost enough to pay her currrent rent. She pays $1,500 now but it covers food, utilities and housekeeping. She rents from my brother so doesn't have to worry about eviction if she ran out of money.

[DVM gone riding]

so whatever our "magic number" what % cushion do we want?? I would say 20% if I could get it.
that said if at 59.5 I have 4 mil I think I will "retire" but if at 65 I only have 2 mil then I might work part time longer-assuming I can-all numbers and ages in between I think I would most likely be fine.