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Quinn’s “big scary number” got me thinking about my approach taken on the path towards retirement. I would say being aware was my best tool.
Oh I did my share of spreadsheets and extrapolations, and while I had a goal of reaching a seven figure net worth, it had nothing to do with achieving a big scary number. Being aware of my spending and saving is what got me over the top. For me retirement planning meant knowing what would be coming in versus what would be going out. I’m not one to analyze every cent we spent, but I knew how much money flowed from the checking account each year. That annual spending became my target number for the income needed to survive.
Now comes the income planning. Again I was aware of my future Social Security income via the Administration’s excellent website. I was also aware of a rather insignificant amount defined benefit pension we would receive. My plan was to purchase an annuity to cover any expense beyond the SS and pension income. The way it actually worked out, by waiting to age 70 to start SS, our expenses are totally covered by the SS and pensions, with dollars to spare. No annuity purchase was necessary for us. The money we accumulated is just icing on the cake. I love icing.
Awareness was my secret weapon, what’s yours?
The 1987 crash made me aware that I had to stay the course. My 401k was cut in half in just a day and the value returned quickly. Same with the 2008 crisis. Consistent investing with a plan, a goal, and the fortitutde to stay the course allowed me to retire.
I did have a “big, scary number” in mind, but I retired at 53 without reaching it. I am now 77 and have exceeded it by a fair amount. I wrote an article last year on how it worked out. I am finally looking at spending some of it.
Kathy, to retire so young, and to have done all that you described in the article, and to end up with more money 24 years later is incredible. I think it’s a great example of being aware.
Thanks Dan. I credit low cost index funds and benign neglect. I was fortunate to have both a pension and retiree medical, otherwise I couldn’t have done it.
Dan, your post pretty much exactly described how I approached retirement planning. “For me retirement planning meant knowing what would be coming in versus what would be going out”. That’s a great summary of how I approached it as well. At a summary level I continue to track cash in/cash out every month to monitor if it’s unfolding as expected on a monthly basis. 6 years into retirement and it’s working as expected. So far so good.
“Back of the envelope” calculations based on some percent of annual income replacement to plan for retirement are useful as an introduction, but I preferred a more personalized method. For at least five years before retiring, I knew how much cash I burned each year, which included not only spending but stashing some away for future needs (home maintenance and repairs, new automobiles, etc.). Bill Bernstein wrote that two major determinants of long term portfolio survival during retirement are the burn rate and time horizon. Using the “4% rule”, but switching to 3% for a margin of safety, I divided the amount by 0.03 to reveal my “Number”. As for cash flow in retirement, besides SSA, I keep 10 or more years worth of future withdrawals in a mix of Treasuries and TIPs maturing in 0-5 years, with the balance in stocks.
Jack, I also take a 3% distribution, even though I don’t need it. The spend down calculators tell me I’m good for over 100 years, so I’ll begin to worry at age 172 if LTC expenses don’t interfere.
I agree with Bernstein.
Sounds like a sound plan to me. Did you retire at 70 or have other income pre SS to allow the delay?
I had my income tax practice for the last 17 or so years of working, so yes, that took me to age 70.
I was lucky to have the kind of work that enabled me to work until 70. Not everyone is able to have such a job.
Dan,
Situational Awareness is excellent advice for every aspect of your life.
Not just financial matters.