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I read now on HD concern for the 4% withdrawal strategy, potential – inevitable – market declines, the lack of COLAs in pensions (mine included) and annuities, asset allocation, general concern about preserving life-long retirement income and more. All of which is clearly justified.
I have said many times and been criticized as often, that the key to a secure retirement is a strategy that provides more steady income than one thinks they need based on pre-retirement income and lifestyle. It’s a cushion, insurance if you will.
Regardless of what a calculator may show, starting retirement with 70-80% or even I’ve read 40% of pre- retirement income is risky business or at least if events turn sour, cause for sleepless nights. I also suggest that the more modest a persons income, the greater the risk. No matter how frugally or modestly people live, stuff happens before and after retirement.
Knowing I had a pension and Social Security and following the belief we were not going to spend less in retirement-that’s aggregate spending beyond necessities including some ongoing modest saving, helping family, travel, giving, etc., I built assets that would generate income when needed and deal with emergencies. The assets come from a 401k plan and non-qualified investments over my working life. However, I also did not spend bonuses and retained stock compensation that only started when I was age 62.
My strategy was and is simple, don’t plan for change in lifestyle, plan to continue your lifestyle and plan for as much of the “what if” as possible. In other words, live as far away from the edge, the adequate, the sufficient as possible. And, it’s all relative to doing so based on a persons pre-retirement income.
My retirement planning was solely focused on replacing my pre-retirement salary, nothing else was considered. Yes, a pension made the goal easier, but I cannot see myself doing anything different even with investments and a purchased annuity although no doubt our pre-retirement lifestyle would have been different. I also admit it would have been a struggle if my goals included early retirement.
There are different approaches for sure, but isn’t the common goal all the income you need for as long as you need it regardless of uncontrollable events?
We understand everyone’s situation is different. We knew we had two SS incomes and one full pension and two what I call half pensions coming. For those reasons we kept it simple by taking SS at fra . We didn’t and some need it so we invest it monthly and use the leftover income to build our cash accounts
Hello all, this is my first post and I have come to this blog through reference from the NYT article today. My condolences to the family of Mr. Clements and his friends and followers.
I am a CPA and have been in private practice for 3 plus decades. In my experience there may be other factors to consider within this important post.
There are large difference between the acquisition versus the maintenance of wealth. The maintenance cost of wealth is usually significantly lower than earnings required to fund the acquisitions.
In some circumstances, using the formula above may not be a realistic goal. I work primarily in health care, M&A and international taxation. Most physicians I serve average between $ 750k to a1M K per year. To sustain such earnings using a 4% cap rate exceeds 18M in net wealth. In 2025, the maximum Defined benefit asset value allowed at age 65 retirement age is between 3M and 3.5M. This doesn’t approach the type of funding needed to sustain this level of income.
Another implied assumption above is that people consistently earn similar amounts through the years. Being on the entrepreneurial side of life, this approach is the exception rather than the rule for my professional practice. Most of my clients do NOT consistently earn the same money year over year.
I am firmly in the camp of zero debt (on personal assets) as you approach retirement. Reduce, reduce and further reduce debt and monthly overhead as much as possible. Live conservatively and below your means throughout your life. Don’t try to keep up with your perception of what your peers are doing, earning or pretending to earn. 🙂
George
I retired from medical practice just over 7 years ago and lived in the manner you recommended in your final paragraph. My income did vary from year to year like many others. I’m out of the loop, but have read median physician income (all specialties combined) is in the 330,000 to 375,000 range. Those earning over 750,000 per year are in the top quartile. It appears that your physician clients are among the higher earners. I enjoyed your first post George.
Not sure what you mean by “In 2025, the maximum Defined benefit asset value allowed at age 65 retirement age is between 3M and 3.5M.”
In 2025, the maximum annual benefit for a defined benefit plan is $280,000.
How does asset value on a DB plan affect the individual? Back in 2008 my DB benefit was limited because income exceeded the IRS limits, but the difference is made up by a non-qualified plan which is common given the limit affects very few people.
Hello Mr. Quinn, I was referring to when a plan becomes fully funded and no further contributions are available to the plan beneficiary. There are various techniques to use after this happens but they are more limited in terms of contribution amounts and percentages. Non retirement funds are also needed in most cases as you suggest. A good post and thank you for the topic.
Now more confused. Are you talking about a contributory DB plan fully funded and thus cannot take extra contributions from participants.
i have to admit that in fifty years designing and managing DB plans I never heard of that as an issue.
But even if that happens how does that impact the benefits that will be provided as they are based on the benefit formula, not the assets in the plan – at least that’s how every DB plan I ever heard of works.
I’m guessing here, but the $3.5M value could be the equivalent Lump Sum amount that equates to a $280K per year benefit, The Society of Actuaries has an Annuity Factor Calculator that shows an annuity factor of about 13.5 for a single 65 year old male. The equivalent lump sum would then be 13.5 * $280,000 =$3,780,000. Than’s my guess.
Mr. Connor, DB plans are very limited and only utilized in very specific circumstances. This is because they are very expensive to the employer and must include all qualified employees. When you can use them however, they are the best tax deferral tool available and are well beyond the reach of creditor claims. Recall the OJ case, and the inability of his creditors to access his DB plan assets.
Mr. Caramanna, thanks for your post and response. I look forward to future posts using your professional training and experience. I am a beneficiary of a DB pension and I realize how fortunate I am.
I think you are right, but I don’t see it as directly relevant. As I said employers that offer DB plans at that level typically provide ways to make up the difference as the limit will affect a handful of people. And, of course, there is no limit on what can be accumulated in a DC plan.
“Most of my clients do NOT consistently earn the same money year over year.” That was my personal experience as a principal in a small C-Corp.
I agree entirely about zero personal debt. While debt can be used strategically, it should not be used as an excuse to assume debt and mortgage one’s future.
I really don’t care what my peers are doing or how they are spending, either. This website is one of the very few places I talk or write at all about personal finance and spending matters. I do so to further the discussion, not push anyone’s buttons.
There’s a lot of comments here about how to reduce expenses in retirement. I’ve always determined what is discretionary. That can be eliminated at any time. Vacations and entertainment are all optional. Then determine the amount being saved for retirement, income taxes and the cost of that home or condominium. I found that in retirement these were reduced and we downsized, lowering our annual housing and auto expenses, too. Medicare reduced the annual fees for health insurance. Any expenses related to the children’s education were eliminated years ago.
While working any expense reduction was transferred to savings. We maintained what we felt was a modest lifestyle.
Now that we are retired, we do travel more but that’s entirely discretionary, with the exception of travel related to elder care. In our case the out-of-pocket medical expenses have increased and with travel there are more dining expenses. Friends sometimes want to go to restaurants which are more costly than we would prefer but we go; it is a very small price for friendship and enjoyment. We are gifting more, too. Three friends received cakes last week, shipped across the U.S. I say this because we are spending, but with discretion.
Quinn has taken Jonathan’s playbook from WSJ–writing the same set of posts (columns) over and over but slightly different each time.
You mean because they cover the same general topic from different angles? I think you will find thats true of a lot of the writing on HD and elsewhere too. If the topic is retirement, there is only so much to write about, but with different perspectives.
But your perspective is always the same. As far as the downvotes, I hope folks realize that Jonathan had admitted what I’d stated about him.
Yes, my perspective on desirable retirement income, the value and goal of budgets, the need for a retirement income stream and the value of annuities does not change because I have yet to find a compelling reason to change.
I look at the pros and cons of these issues way beyond HD and even find some that agree.
However, I also understand that many people who disagree are satisfied with their approach whatever they do and that’s all that matters.
I also know nearly everyone retired does not replace 100% of pre-retirement income, that doesn’t make the goal undesirable.
if there is concern for my perspective not changing then it must mean different perspectives haven’t changed either which if fine with me.
Things would be pretty dull if everyone had the same perspective or if people changed their perspective just because the majority held other views.
This conversation has taken an interesting turn. If I had to choose between being happy with purpose, or being wealthy, I’d take happiness and purpose every time. So thanks to Celcelia, BBB, Kathy, Kristine, and others for making that point. Also thanks to Mark for today’s excellent post about his father-in-law’s very fulfilling retirement in Spain.
But I’ll also stick up for the alleged villain in this movie. Everything I’ve read from RDQ leads me to believe that he’s a loving husband, father, and grandfather, doing many things to help his family. As a human resources guy, he seems to have shown much empathy for the worker bees; a trait rare for those in his job. As a union thug, I sat on the other side of the table. One thing he and I would have had in common is that for many years we talked, lived, and breathed money and benefits, so it’s probably natural for us to want to harp on those things, ad nauseum at times.
HumbleDollar is a platform for all things retirement, I think there’s room for all these conversations. I find most of these posts thought provoking. I’ve been tuning in to HD for a couple years and have received solid and actionable advice and ideas from many of you on a myriad of topics. I thank you all.
Dan, my job trained me to ask questions, to keep probing to get the facts, and complete information.
So many times trying to resolve problems with some health insurance or pension, etc. I would discover what I was told by the employee was not true, accurate or complete. It was sometimes intentional but mostly not. Often, I would listen to recorded calls from our benefits center and find out what was said to the employee was not what the employee told me. I called doctor’s offices to verify information, again finding conflict.
I chalk it up to human nature. But in any case my tendency to keep digging, to look at different angles, to ask repeated questions is based on many years of trying to get to the root cause and facts, and yes truly to understand and confirm or not my views an things.
As I was preparing a lecture for one of my classes this morning, I came across a term I hadn’t heard before: sealioning. It describes the behavior of someone who repeatedly asks the same question under the pretense of honest inquiry but is never satisfied with the response. The posing of the question is not from a desire to learn, but rather as a springboard for sharing their view and arguing.
Anyway, for some reason I was thinking about that term just now.
Yikes, what’s next, a cup of hemlock?
Don’t drink the Kool aid Dick😇
Love this! How very odd that the idea of sealioning would pop into your head upon reading this post…
Maybe I’m missing something, but isn’t it more important to “replace” your pre-retirement spending than your pre-retirement income? Since my husband retired from a state agency in 2016 and began working in the private sector, our disposable income has been much higher, but we’ve never planned on having that level of income once we both have stopped working.
I’m thinking what you spend before retirement is determined by what you earn. So after retirement it should be the same. I recognize that some things like saving from earnings may go away, but also quite possible that other spending, including voluntary spending, will increase plus keeping up with inflation will be ever present.
Since we can’t predict all the spending that will appear over years in retirement, I just found it easier to focus on income. Spending may be quite different, but will spending in retirement actually be 20% or 30% or more less than when working?
I’m just glad I didn’t count on that or there would be a lot we do for family that just wouldn’t be possible.
“I’m thinking what you spend before retirement is determined by what you earn.” It’s limited by what you earn, not necessarily determined by it. Just ask the FIRE people.
“will spending in retirement actually be 20% or 30% or more less than when working?” It can be. I paid off my mortgage, I stopped saving for retirement and my tax bill went way down. I had been making extra principal payments on a 7 and 3/4% loan, and maxing my 401k plus additional taxable saving.
I have said all this before. There are none so deaf as those who don’t want to hear.
I knew how much I spent each year before retiring. My goal was to continue spending this same amount, once retired. This would come from the after-tax net from my social security and withdrawals from my retirement accounts. For a margin of safety, I divided the necessary gross retirement withdrawal by 0.03 (instead of the commonly used 0.04) to give me the needed “Number” I would need to retire.
For my own personal planning, I found this method to be more useful and specific to my own situation rather than calculating some percentage of gross income while employed.
Is the result that to accomplish your goal the gross amount of SS and withdrawals is more or less equal to your working gross income?
Approximately 60%
I’m impressed, but i admit i don’t understand the math.
I converted your down arrow to a “0”. The math is simple: We lived well below our means and invested the difference. Not hard to do when you earn a large income. I consider myself fortunate. I have more respect for those who earned much less, yet managed to achieve financial security doing the same thing.
You and I approached the same task from different perspectives. I do not see either approach as right or wrong.
About five years prior to retiring, while balancing my checkbook, I wondered “How much after-tax monthly income would I need if I quit working tomorrow to maintain our same lifestyle?” I imagine that had I earned a salary closer to the US median, and enjoyed a commensurately less expensive lifestyle, the amount would have come closer to 80% of my employment income.
I understand, but as you know, your situation is unique- high income, and apparently a high level of savings as well and circumstances that allowed for that savings level.
Living on 60% of former income is an accomplishment. We could not do that.
I think some of the misunderstanding of what i say is that when I talk about spending/expenses in retirement i include more than regular living expenses. For example, our goal was to continue to fund eleven 529 plans for grandchildren. Not a real expense, but no less important to us than paying property taxes.
While employed, my annual budget included not only actual spending for the year but also cash escrowed away for specific future needs, such as eventual new car purchases, home repairs and remodeling, and starting about 15 years ago, funding 529 plans for grandchildren.
When I retired 7 years ago, I continued exactly as before, increasing the 529 contributions as more grandkids arrived.
I realize that for many retirees, their annual cash flow provides for annual spending, but they must tap their retirement funds for extra cash when these eventual costs arise. Or borrow. I prefer my approach.
The only exception was earlier this month, when we moved for the first time in 37 years, selling our two story home and moving into a ranch style home in order to lower our fall risk. It is a nicer and more expensive home, so I sold some stock to raise cash to supplement the proceeds from the sale of our last home.
What makes you think your situation is not unique? Also, I am living happily on 40% of my former income, never mind 60%. Just because you don’t think you could do it doesn’t mean others can’t. You need to stop seeing your situation as typical.
BTW, funding eleven 529 plans is a discretionary expense.
You said it better than I could, but that’s roughly my thinking. We did a “monthly expenses” Excel sheet back in 2019 that we’ve updated periodically, just so we’d have a ballpark idea of what we were spending as we each decided when to retire. There’s another column estimating how those expenses might go up or down as time goes by. Obviously there are some unknowns, but we have a pretty good idea at this point.
I think your approach is sound. We all just make reasonable estimates when planning, and adjust over time as needed. I like the old saying “A flawed plan is better than no plan at all”. This is why my budget ledger, like my golf scorecard, is written in pencil!
Exactly!!
Over the last couple of weeks I have learned that happiness and personal fulfillment have nothing–or, at most, very little–to do with the amount of money one has.
True happiness and fulfillment is found by discovering one’s purpose. Some are lucky to find that purpose when they are quite young. Others are much older before it becomes apparent.
For me, being able to retire at 55 and pursue my passion for dog training was life-changing. For the first time in my life I feel like I’ve found my passion–my ‘calling’ if you will.
The happiness I get from a client running up to me at the grocery store to tell me about all the small successes they are having with their dog makes my heart full.
I charge very little for the dog training lessons I offer. Sometimes, if I know someone is particularly strapped for money, I don’t charge anything at all. I don’t do it for the money. I do it for the joy and personal satisfaction.
If I had tried to save enough money when I was working to replace 100% of my very modest final income, I would still be working. Early retirement was an easy choice for me.
Kristine, thank you. I love hearing about your love for dogs. I bet you are an amazing trainer. I’m not in a position right now, but I do hope to foster within the next few years. And I’m typically a cat person. 🙂
You’re welcome! I try to be the best trainer I can–I’m always learning from those who are better at it than I am.
Your comment about cats reminds me of a joke I heard awhile ago:
What’s the best method for teaching a cat to come when called?
Use a very specific can opener.
Kristine, on a sad afternoon it was nice to read your post. I’m really happy you have found happiness and purpose in retirement. Thanks for sharing your story.
Kristine – This is the second time today I read about having “purpose” and what it means in your life. It brought up a good discussion with my wife. Thanks!
I think it’s an important subject to discuss. It seems like for many years (decades?), the focus has been mostly on achieving success in life based on money, status, etc. I am only now beginning to realize that having a purpose to one’s life is likely the most important part of living one’s life to the fullest.
I couldn’t agree more!
It seems like discussions about true happiness, purpose and living life to the fullest seem to be happening more frequently. I think a generation of social media, ‘online chat rooms’ and electronic screens is causing people to rethink what it most important to them.
It does seem so; it’s great to see more people focusing on what’s important in life, and not just chasing a big paycheck.
I know I’ve plugged him before but Dan Haylett’s Humans v. Retirement podcast focuses almost exclusively on the purpose and meaning sides of the equation.
Definitely people need to retire TO something meaningful not just hope to reimagine themselves when free of the burden of work. I’ve been very consciously working on interests in this regard (I also would like to finally get a puppy to train and enjoy life with though don’t think it quite squares with travel ambitions yet).
Thanks for the recommendation! I’m looking forward to checking it out! I’m getting close to pulling the plug on employment and want to make sure I maintain my sense of purpose.
Well said.
Thanks!
And if I had done that I would have missed out on fifteen years of fascinating travel.
When I get my aspirational puppy, I’d love to come to AZ and have you help me train him!
I’d love to. I LOVE to work with puppies–they are such fun little bundles of joy!
I noticed on another thread that Mr. Quinn refinanced his mortgage twice to put his kids through college, only paying it off five years before he retired. That tells me two things:
If you see mortgages as living above one’s means because they are in debt, how can I argue? From 1970 until 2005 we were indeed in mortgage debt.
A few car loans too, but we paid all our bills on time and never had credit card debt- always, I think we lived within our means.
It seems by your definition that anyone with a mortgage isn’t living within their means. That sure includes a lot of working and retired people. About 86.5 million mortgages (some people have more than one) in fact. In the last census 59.7% of owned homes had a mortgage.
No budget, just knowing through common sense my income alone could not keep up with two or three college bills at once. I doubt anyone needs a budget to figure that out.
And, as I mentioned before I also started a small home based business to help so for several years I worked I 14-16 hours a day.
PS. The first college mortgage was a HELOC with a variable interest rate and when I saw where interest rates were headed, I stopped that and did a full remortgage which also allowed me to pay off the small remaining mortgage on our vacation home. So, in truth we went from two to three, and back to one mortgage which as I said, was paid off before we retired – and all within our means.
Today we are debt free living below our means without a budget. I determine that because there is money left at the end of each month even though we help our children and grandchildren during the month.
I hope this clears up our lifestyle.
Debt is debt whether it is a mortgage or not, especially when the mortgage is really student loan debt. One reason I was able to retire at 53 was by paying off the small remaining balance on my mortgage, on which I had been making extra principal payments.
Nobody is arguing that debt is debt. What is your point? Oh, I get it, by having mortgages a person is not living with their income? But they may well live within their means.
We bought one home with cash, our condo, but only after we sold our mortgage free home.
When I was 45 our oldest child started college so I sure wasn’t retiring at age 53 or 63.
I’m guessing there were other reasons besides no mortgage that allowed you to retire that early.
Poor Mr. Quinn suffers down arrows and some uncivil comments for offering sound advice that should not be controversial:
—plan for your lifestyle and expenses not change in retirement; and
—plan for unexpected emergency expenses that will inevitably occur in retirement.
Thanks for the reminder, Mr. Quinn!
Why should lifestyle and expenses not change in retirement? I certainly hope mine do (reduced commuting, longer more leisurely travel hopefully offpeak etc etc…)
I think you miss his underlying agenda which is to decry budgeting and assert the supremacy of his somewhat idiosyncratic view in the name of simplicity.
Some might call it over-provision or over-fattening the calf in the catch all cause of “security”.
In my experience, expenses in retirement have not decreased, despite the end of commuting and work-related expenses. Also, retirees I know seem to have maintained their pre-retirement lifestyles and presumably pre-retirement expenses. I am be overgeneralizing based on personal experience and a small sample size of other retirees. Even so, we assumed that our expenses would not decline in retirement, and they have not in the eight years since we retired. Good for you if you can reduce yours and maintain the lifestyle you want.
I am familiar with Mr. Quinn’s views from his numerous posts, including his disdain for budgets and his advocacy for secure income streams in retirement. I did not miss his agenda; I commended him for the simple points that, in my view, are valid. His other views may be idiosyncratic, and I did not endorse the entire Quinn personal finance dogma.
You know, you overlook one very simple fact: people are different. What was right for you wouldn’t necessarily be right for your next door neighbor, never mind someone forty years your junior living in Mississippi, or California. My current SS plus non-COLAed pension are indeed 40% of my inflation adjusted pre-retirement salary from twenty five years ago and you know what, my life style hasn’t changed (aside from my recent move to a CCRC). Meanwhile, my portfolio is three times larger than it was in 2000, and I am now going to spend from it. Yes, I’d be happier if my pension had a COLA, I think it’s ridiculous that it doesn’t, but I sleep well.
Perhaps you could bring your ideas into the world of today. Your old employer most likely isn’t offering the same pension plan. How would you have achieved your goal of 100% income replacement with a Defined Contribution Plan where your employer matched your own contribution of up to 6% of your salary? How much would you have had to save? How would you have lived the same life, putting kids through college? It is easy to speak of meeting some goal in the past. Tell us how to do it today without an employer provided pension.
You’re right, my old employer no longer offers a traditional pension because I changed it in 1995 by replacing it with a cash balance plan.
However, my pension has the value it does only because I worked there nearly 50 years. The average job tenure is 4-5 years and it hasn’t changed hardly at all in decades so the value of pensions never really existed except in certain highly unionized industries.
Most people never had a pension and many of those that did, never obtained any or much value as they their job tenure was not sufficient for vesting. Government employment is the exception.
As I have said many times, without a pension and the need to save more our life would be different. Obviously, I would have had to save more. Maybe I wouldn’t even have retired at 67 because it’s then I received the highest non cash compensation. Even with a pension I could not have done it retiring sooner than I did and certainly not in my early 60s or in my 50s.
Maybe I’m too conservative, too worried about the future, too worried about survivor income needs.
As I have said too many times, reaching 100% is a goal, a desirable goal that provides extra security. For most Americans of average income 40% or so of that goal is social security so the quest is a bit easier – and possible.
I can’t tell anyone how to do it. And if anyone thinks it’s unnecessary or unachievable that’s fine. I doubt anyone denies it is desirable.
What I can’t understand is why my saying it is a desirable goal for a less stress retirement upsets people. Does it make people feel less secure, I don’t know. I hope not.
Bottom line, ignore me if you disagree. I never said it was a necessity, ignore 80% or 70% what works for you is all that matters. Obviously, most retirees live on a lower income replacement, but I doubt many would turn down more.
The problem is that your formula is largely unworkable to all but the most highly paid in the modern environment and is actually a pretty lazy way of thinking about things.
To suggest that one’s income needs to be maintained when there is no longer a mortgage to be paid, retirement to be saved for, kids to put through college seems to be a gross overprovision. And one which if followed would condemn most without a gold plated pension to working far more years than may be healthy or desirable to them.
That you fail to see this and pupport to worry for yourself and others is highly disingeneous or alternately deluded.
We know it is your innate fear of enaging in maths that drives part of your worldview. Don’t limit others with your flaws.
Well said.
Exactly— and don’t forget to add in today’s housing costs.
Yawn – same old, same old from RDQ who trots out his own biases again like a greatest hits collection.
People don’t need “income” they need resources and there are various ways to deploy a mix of resources (including those which deliver fixed or inflation variable income) to best meet an individual’s needs.
Stuff happens, sure, and most people who build a plan with some redundancy and resilience cope without having built total replacement income.
If everyone followed the RDQ mantra very few would be able to retire – yet many people comfortably retire. How is this paradox to be explained?
Yup, many people are comfortably retired, no doubt, but many more are closer to the edge which is why there is such angst over property taxes, the SS COLA, the Medicare premiums and inflation, not to mention drug prices.
It’s why the AARP and other organizations push for higher SS benefits. Around 40% of retirees live on SS alone.
According to the supplemental poverty measure 14.2% of seniors live in poverty. Households age 65-74 have median retirement savings of about $200,000. That’s not much to supplement SS.
So, there is another world of reality out there beyond the financial savvy planners and investors reading HD.
Amen!
A budget for me is a “what if” tool. It’s less about the present and more about the future. It allows me to model what’s possible in the future and perhaps make different decisions now. I can see how it would be less helpful if your life is more static, but if you are looking at a 25-30 retirement and evaluating many different possibilities with different costs, it’s very helpful to have a model as a guide. It makes me feel better to know what my life could look like if I needed to pause portfolio withdrawals for a year or instead have significant portfolio growth or a windfall. It helps me maximize my time in retirement.
Of course, maintaining income (and lifestyle) in retirement is the primary reason for any savings, social security benefit or pension, or combination thereof.
As to avoiding worry, that’s an elective, too. Nearly every retirement source can have potential problems. Companies can underfund pensions and so can U.S. States. Bankruptcy can disrupt pensions. Market failures can impact stocks and bonds. For example, no one wants to be the one to tell the Illinois retirees (TRS, etc.) what will happen when the citizens can’t afford the taxes to pay for the bonds. No one can state with absolute certainty how the SS Trust fund will pay 100% for benefits once the fund has gone to $0.
Of greater concern to me is inflation. Even at a benign 3% it does erode the purchasing power of everything. Many pensions cannot keep up. Real returns on long bonds are only about 1% after accounting for inflation. One’s savings will be eroded by withdrawals and the purchasing power of those savings is diminished each year, unless replenished by “returns” and “gains”.
It is said that a $1 million retirement portfolio can provide $40,000 in the first year at 4% withdrawal. However, that “pot” will be reduced to $960,000. But let’s subtract 3% erosion because of inflation, and it might only have $931,200 in purchasing power remaining. So, that portfolio would have to have a gain of $68,800 by the following year to allow a 4% withdrawal to have the same purchasing power. This needs to occur each year.
In fact, after 25 years $4,000 withdrawn today will have $1,904 in purchasing power if inflation is 3% per year. Think of it this way. If I need $40,000 this year, I would need $54,245 in the 10th year to maintain my spending. In 25 years it would be $84,034.
We can withdraw 4% of the remaining $960,000 in the next year, but we’ll have only $38,400 to spend. But with 3% inflation it will have a purchasing power of $37,248. Retirees are forced to take out more of their savings each year to maintain the same level of spending and lifestyle, or they must reduce their spending. Alternately they can save more before retirement and withdraw more each year. I approach this with a simple calculation each year. Alternately, one can use the previous year’s expenditure and a guide for this year’s budget, expenditures and required withdrawals.
Should one be worried? If one retires early, then 4% might be too aggressive a starting rate. However, of one has no intention of gifting, then there should be no concern about depleting savings over a retirement period of 25-30 year with a retirement age of 65. Furthermore, many retirees have a home asset to sell and to fall back on.
I’m of the opinion that a 4% number for withdrawal from savings is of limited value. If I had $100,000 in my retirement savings I could possibly withdraw $4,000 in the first year and each year thereafter for 25-30 years. But I couldn’t live on that. Similarly, SS retirement benefits replace about 30-40% of earnings. One has to take action to generate the remaining 60-70% in retirement, or severely restrict spending.
The good news is, one doesn’t have to spend all of that 4%, or pension or SS benefit each year. One can also save more than the absolute minimum while working. Or work longer, beyond age 65.
The choice should be dictated by finances and health. Better to save when younger than to reach age 70 and declare out of necessity “I’m never going to retire.”
Which all argues for retirement with more than you “need.”
Some argue against budgeting, etc. I think there is a tendency to equate “wants” with “needs” and “requirements”. For some there will never be enough. How does one have any idea of what they will require this year or the next if they don’t have a budget and don’t track spending? If this year is an issue, then 5- or 10-years will be impossible. I think the answer too often is they don’t know, and they don’t have a plan.
I just think it’s not necessary and more of a crutch than a tool. How can a person spend more than they have to spend? A budget can’t exceed that amount in any case.
Tracking is after the fact. Aside from emergency needs, I have found that spending various little from year to year for routine living expenses except inflation.
if I made a budget I would include items for saving for emergencies and saving for wants, but it would still need to fit into net income.
“How can a person spend more than they have to spend?” It can begin early in life. According to the Department of Education, borrowers’ average student loan debt was $39,375 by the third quarter of 2025. More than one-half of students leave college with debt. These statistics don’t include credit card debt. One of the reasons I advocate tracking one’s net worth, even for students, is because too many operate on Cash Flow. If they decide that they can make the monthly payments, they think they are doing well. Boomers and the Silent Generation have $103.4 Trillion in assets. That’s 64% of the assets. Boomers about 24% of the US adult population. We are in a very different place than the millennials, Gens Z and X.
“How can a person spend more than they have to spend?”
How do you think people wind up in debt and/or bankrupt?
Of course, and a budget isn’t going to change such behavior or misfortune.
And you wonder why you get red arrows 😰
A budget might well change such behavior. Isn’t that one of the things Ramsey advocates?
What do you all think of this? I don’t know about the US annuity market, but at the moment in the UK, a 67 year old can convert one million in cash into a £45,000 yearly annuity with a 4% COLA, 100% survivor benefit, and 100% of the unused capital returned in the event of an early death. This amount would increase, possibly substantially, with health issues. It makes me wonder how the SWR is only 4% from a diversified portfolio. Surely a product as safe as an annuity should not be more competitive than the alternative.
Perhaps it’s the possibility of an extended bear market keeps the SWR lower. I think the insurance companies have the law of large numbers in their favor. The actuaries, like the cloth seller you posted about, have a very good idea how long I, and a million of my friends are going to live on average.
I don’t personally know a single person who retired and suddenly and deliberately began to live frugally.
I know a few that retired young, became the victims of inflation, and were forced to become frugal.
Prior to becoming permanent weekenders, we lived well on 60% of our income, saving the other 40%. That would not have been possible if we would have had a mortgage and car payments, so being debt free was a major plus for us.
No longer having to save, we have more disposable income than we had as working people. It helps me sleep at night.
Our mortgages were paid off over 5 years before i retired. The last time we had a car payment was somewhere around 1988.
I can’t imagine being able to save 40%. We were lucky to save 10%, but we paid for four children’s college with 1,2 or 3 in college for ten years in a row. That was our lifetime largest investment.
We didn’t achieve 40% until the last several years of working. We were also a two wage earner couple. I’ve written before about how cheap things are in Toledo, so we had some advantages that you did not. I had just two kids, and only helped with college tuition, largely due to going through a divorce and changing occupations during the time they were in school. Sadly, the kids did have some student loans to deal with.
Bravo to you for getting your gang college degrees without going into debt.
Oh I went into debt. Remortgaged our house twice. That’s why it wasn’t paid off until 5 years before I retired.
The last sentence sums it up brautifully
my mantra is can you afford a 50% stock loss and maintain lifestyle
No arguments from me. Although I’ve approached the problem from a different direction. Annuities and bond ladders and a very large cash cushion combined with a significant equity portfolio. My aim was to continue my normal cashflow stream into retirement.
I think both our philosophies essentially optimize for security and peace of mind rather than mathematical efficiency. To my mind, given the high stakes and irreversibility of retirement funding decisions, that seems like the rational approach.
Exactly. I can’t accept a spreadsheet or planning program being the thing to guide us as to how we feel about financial security.
I’ve played around with various tools just to see the answers I get. I never agreed when they said I could retire on this or that amount. Perhaps I am too careful or conservative, but the numbers I get do not make me comfortable at all.
Perhaps educate us as to which specific elements of the many excellent tools and models available make you uncomfortable? Or is the the general nature of making assumptions and precision regarding future estimates being impossible?
I’d point out your own method might not work had you faced hyperinflation immediately post retirement that had eroded the value of your pension from the get go. There’s always a reason to be fearful, neverthless we have to one day bite the bullet if we don’t wish to work into our graves.