Retirement planning

[telephus44]

I am curious as to how other people handle retirement planning, particularly in the assumptions you need to make about many years in the future.

My situation - I am 32, DH is 36. We have one son (4). We would like to have another child. We currently own a house. We would like to keep this house until retirement, and then build a cave house and rent out this house. I would like this to happen when I'm 55-60.

I guess where I stuck at, is there are a lot of variable for me to calculate. How much is my house going to be worth in 25 years? How long is it going to take to get my second child (not conceived yet) out of the house? I can calculate what my yearly expenses are now, but how do I begin to guess at what they will be 25 years from now?

We currently have about 75K across all investment accounts. We have a ROTH IRA, and each have a 401K. I currently max the ROTH IRA, and we are putting approx. 12K each year into the 401ks. We make a combined 120K. There is some matching in each of the 401K's, and we are taking full advantage of that.

I know that we need to save for retirement, but I guess I feel like my current plan is "save as much as possible and pray that it's enough, and if it isn't, then we can adjust the retirement plan when we get there." What I'd really like is a concrete number -you need to save 23K a year (or whatever amount) to make that happen - that I can aim for. However, everytime I try and calculate it, I just get bogged down by the fact that there are so many unknown variables. So I'm wondering how people my age handling this aspect of retirement planning?

[The J]

Instead of a concrete number, I go with a percentage. I save 20%. I think that's the minimum I would need to put away to retire in my mid 50s.

[resolution]

I occasionally use the retirement calculator on my deferred comp website. I don't count things like home equity because I figure I will still need a place to live.

[SVT]

You really can't know what those variables are. At such a young age, you just have to save as much as a percentage of your income as possible and figure out the details later.

You could also estimate how much money per year you think you would need in retirement income to live off of, then account for 3%/year inflation for x number of years till retirement then figure up how much money you'll need to be able to use the 4% SWR. I don't remember exactly how to figure all that up though. I'm 25 and don't care about that at this point. I'm just saving what I can for now.

[SVT]

Dec 30, 2010 13:36:31 GMT -5 telephus44 said:

I guess where I stuck at, is there are a lot of variable for me to calculate. How much is my house going to be worth in 25 years? How long is it going to take to get my second child (not conceived yet) out of the house? I can calculate what my yearly expenses are now, but how do I begin to guess at what they will be 25 years from now?

Use average inflation of 3.4%/year. The historical average is about that much.

[phil5185]

Your $75,000 plus $12,000/yr at 11%/yr for 25 yrs is $2,380,000. BTW, w/o your $75,000 current account, the $12k/yr alone adds $1,524,000 - ie, your $75k is $850k (that shows the power of starting early).

Your expenses in 25 yrs, projected at 3% inflation, is 2.1X your today's expenses. And your house, at 5%, is 3.4X current value. (altho our home and rental houses did more than 5% over the past 35 yrs).

Cave house? Have you been reading Ken Follett's 'Pillars' where Ellen lives in that neat cave in the forest?

[Regis]

I keep a spreadsheet with current liquid assets, income and expenses. What we expect to have next year equals what we currently have plus income minus expenses times whatever rate of return can reasonably be expected. The spreadsheet continues in this fashion until I reach 100. At some point, we can make our income 0 and theoretically not run out of money. That's the year we get to retire! Expenses increase with inflation - I use 3.6% per year.

Similarly, I keep another spreadsheet showing our income at 0 and calculate what money would be currently needed to end up with nothing when I turn 100. That's our "number" needed to retire.

[T Skeeter]

telephus, I wouldn't get too hung up on dialing in to the third decimal place how much you need to save each year so you can retire in the style you wish. The path to retirement is long, so you have quite a bit of time to make adjustments and refine any calculations you are making. The key element is to start saving early and to let time and compounding earnings help to get you to your target.

Here are some suggestions for assumptions. Assume you will retire at about 55 years old. If you can reach that target, it will give you lots of flexibility. For inflation, assume between 3% and 3.5%. For appreciation in the value of a house, assume 3% - 4%. Phil's assumption is a bit higher, but Phil is much more savvy than most of us, so he bought smarter than many people do. For earnings increases, I'd assume 3%. For tax rates, assume that your taxes will not go down after your retire. By the time many people retire, their house is paid off, so their effective tax rate frequently is about comparable to their pre-retirement tax rate even though their income is lower. If you include social security benefits in your retirement income, plan on a good portion of it being taxable (up to 85% is subject to income taxes today, depending on your income level). How long will you live? For starters, I'd use the IRS life expectancy tables, then add about 10 years, to account for improving health care over your life. Even that may be too low (my wife's Grandmother lived to 103, so I use at least 100 in my calculations). This should give you a starting point for a good sized spreadsheet. Or, you can use on of the retirement planners available on the internet.

[Deleted]

I agree with the points that you shouldn't get too detailed now and that equity in your home should not figure into your plan. A lot of people ended up postponing retirement over the last few years because they'd counted on some massive gain from selling their house and real estate values tanked.

I have a pretty simple Excel spreadsheet. My specific assumptions are that inflation is 4%, average return is 6%, the amount I can save grows by 3% per year, and when I retire I'll withdraw 4% of the balance in the first year. Note that you also need to discount that back to today; if inflation is 4% a year, an income of $100K 30 years from now is equivalent to an income of $30,831 today.

In my 30s I just used the "save all you can" method. There were good years and bad years; at one point I married, DH and I sold our houses and realized a total of $300K from the gains that we didn't need to buy our new house because we moved to a low COL area. That move has also massively increased what we could afford to save. DS needed a private HS education that cost $48K for 4 years and THEN we paid for college! You get the point- make some reasonable assumptions but understand that Stuff Happens, both good and bad.