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Contents: Under Construction

This page is for people getting close to retirement.
See Financial Planning if you are just starting to save.

The bigest mistakes people make in retirement planning are:

  1. Assuming you will downsize and spend less.
    Many retirement planning books use 80% of your working income as what you'll need in retirement. Many people find they need just as much or more in retirement.
    You may want to have a house large enough for kids and grandkids to visit.
    You will have more time for travel, recreation and entertainment which will cost more.

    In consumer reports survey a third of retirees reported no change in their spending in the year they retired, 44 percent said their expenses were lower. Most saw a drop of between 10 and 20 percent.

    A recent study by the Urban Institute suggests that older married couples spend 84% of their pre-retirement income, while older singles spend 92% of their pre-retirement income after retirement.

  2. Underestimating your life expectancy.
    In another 10 years life expectancy is likely to increase.
    At 65 your chance of living past 90 are one in four.
    See Longevity
  3. Forgetting about inflation.
    Since 1925 inflation has averaged 3% a year. At that rate $75,000 in living expenses today will be $134,000 in 20 years.

How Much Do you need:
What you need to do is:
1. Do a budget to figure out what your retirement expenses will be. Housing, Food, Transportation, Entertainment, Travel, Medical...
See Cost of Living below.

2. Figure out what you will get from social security, a pension if you have one and other sources of income.

3. The difference is what you need to take out of your IRA.
The table below is an example of the spread sheet where you can see how long your IRA will last. Note: Some pensions do not have cost of living increases, so you will have to compensate.

At "Stop Freaking Out About Retirement" - Consumer Reports, Oct. 2014 they say,
"Our survey found that retirement satisfaction was significantly higher among households reporting between $400,000 and $1 million in savings than among those with less. But happiness didn't rise much more for those who had $1 to $2 million. And we found that people are often perfectly content with far less. In fact, retirees with less than $250,000 in savings who were highly engaged socially were more satisfied with their circumstances than retirees with $1 million or more in savings who were not. And numerous studies have found a connection between social engagement and better cognition in elderly people."

In Yes, You Can Still Retire Comfortably!, 2006 Ben Stein and Phil DeMuth say,
You'll need 12 to 16 times your final salary to maintain your standard of living (assumed to require 80% of your pre-retirement income.) If you plan to spend more after retiring (travel etc.) you'll need 15-20 times your salary.
They are assuming no social security or pension.
e.g. if your household income was $80,000 you'd need from $1 - $1.3 million.
The tables from their book are at www.stein-demuth.com.
If you get $35,000 from social security, then you need $600,000- $800,000 in savings.

Fidelity says you should have the following:
Source Age 30 35 40 45 50 55 60 65 67 70
Fidelity Saving factor x salary 1x 2x 3x 4x 6x 7x 8x 10x
Stein-DeMuth book Saving factor x salary 0.33x 0.7x 1.2x 2x 3.1x 4.7x 7.1x 9.9x13.1x
Fidelity:
i.e. if you are 50 and make $80,000/yr you should have $480,000 in savings and keep saving at the same rate to retire at age 67 with $800,000 in savings.
It assumes you will keep spending (housing, transportation, food, entertainment, ...) at the same rate after you retire and also will have Social Security income but no pension. It will take you through age 93.
Of course if you are a teacher or other government worker with a good pension package, you will need less.
It also assumes 45% income replacement (I guess they are saying Social Security (SS) will provide 55%. This is true for low income people, but with a median income of $46,000 over a 35 year working period SS would only provide 40%.)
If you want to retire at age 65 you will need 12x your salary or $960,000.
Their investment growth assumptions are based multiple market simulations based on historical market data and assuming an average equity (stocks, derivatives, ...) of more than 50%. They don't specify the period of time and growth rate they used in the simulations.

Stein-Demuth:
Assumes you retire at 70 with no pension or Social Security and live to 100.

Can you afford to retire? - MarketWatch quotes a report by Hewitt Associates which says you should have 11 times your salary which with 4.7 times your pay in Social Security will give you 15.7 times.

See also saving for retirement in savings.


How much you will need in the future depends on inflation.
Inflation 3% (See charts for average inflation)
Current Amount 15 years 25 years 40 years
$500,000 $778,984 $1,046,888 $1,631,018
$1,000,000 $1,557,967 $2,093,777 $3,262,037

Where will it come from?:
At The "MetLife Study of Gen X:" they say,
50% - pensions, 401(k)s and other retirement plans
30% Social Security
20% Other savings
* Gen X are generally people born from 1961-1980.


Saving for Retirement
Because of compounding the more you save early in your career, the better off you'll be.
See savings.

Net Worth Percentile
Age $125K $250K $500K $1M $1.5M $2M $3M $5M
40-44 63% 75% 86% 93% 95% 96% 97%
50-54 51% 65% 77% 90% 93% 95% 97%
60-64 45% 56% 73% 86% 90% 92% 95% 97%
65+ 45% 56% 74% 86% 90% 93% 95% 97%
Source:
Net Worth by Age Percentile Calculator (United States) - DQYDJ
Federal Reserve Survey of Consumer Finances (SCF) Data
Survey of Consumer Finances (SCF) FederalReserve.gov
Note: Families with holdings in the chart above include those with stocks or property.

See Income data on the budget page
The 2008 recession took a big chunk out of retirement funds.


Social Security:
Benefit for Workers with Maximum-Taxable Earnings | ssa.gov
As of 2015
Retire at 65 - $29,424
Retire at 70 - $42,012

1. The Social Security (SS) Cost-of-Living Adjustment (COLA) is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For the last 20 years it has been pretty close to the regular CPI.
See: Consumer Price Index For Urban Wage Earners And Clerical Workers (CPI-W) | Investopedia
and Savings for more on Social Sewcurity.



         Social Security Payments, COLA, Inflation, Consumer Price Index, CPI

Sources: www.ssa.gov/oact/cola/colaseries.html
www.ssa.gov/oact/STATS/cpiw.html
www.bls.gov/cpi/cpiursai1977-2014.xlsx

See Proposed Changes to Social Security's Cost-of-Living Adjustment: What Would They Mean for Beneficiaries? | AARP 2012
Social Security will run out in 2033 if something isn't done. See (see Social Security funding on the savings page)


Making your IRA last depends on inflation and portfolio growth.
                           S&P Average Annual Growth  
Period x/div* w/div Div Inflation COLA1
65 years - Jan. 1950 - Jan. 2015 7.5% 11% 3.1% 3.6%
20 years - Jan. 1995 - Jan. 2015 7.7% 10% 2.4% 2.25% 2.38%
* x/div - without dividends; w/div with dividends. See Investing
S&P 25 yr Av. Gain
This chart shows the average rate of return at the end of 25 years of investing a fixed amount each year. For example if you invested from 1988 to 2013 in a S&P Exchange Traded Fund (ETF) you would get the same amount as investing in something that would return 6% per year over that period.

Probability of a given minimum return based on the number of years above which exceed it.
Return <5% 5-7% 7-9% 9-11% 11-14% All
Periods 10 11 7 7 5 40
Probability
return ≥ *
≥3% ≥5% ≥7% ≥9% ≥11%
95% 75% 48% 30% 12%

S&P dividend yield has averaged 2.4% for the last 30 years and 1.8% over the last 15. They have been steadily declining as companies reinvest more of their profits.
Investors frequently benchmark their investments against the S&P index which does not include dividends. Broker fees typically eat up what dividends would add.

4% rule:
In 1994, Bill Bengen, a financial planner in California did some calculations and found that retirees who withdrew 4 percent of their initial retirement portfolio balance, and then adjusted that dollar amount for inflation each year thereafter, would have created a paycheck that lasted for 30 years.
His rule became the standard advice, but it was based on a 50/50 split between stocks and bonds. With today's low interest rates people are questioning it now.
However most advisors are getting away from that bond weighted model. See Stocks and Bonds below.

My basic thinking is if your portfolio is growing at 7% and inflation is 3% you can take out 4% and maintain your value. If it weren't for the Required Minimum Distribution (RMD) which kicks in at age 70½ and increases to 5.1% at at age 79 this would be true.
See New Math for Retirees and the 4% Withdrawal Rule - NYTimes.com
Other strategies in the article from Wade Pfau below.

A sample calculation.
We used a portfolio of $500,000 toward the low end of what the consumer reports survey said you need to be happy. It is somewhere in the middle of what my friends have. Some are getting by on $350,000 and others have several million. But I live in Somerset County, NJ with one of the highest average incomes in the country.

7% is slightly less than both the 60 year and 20 year growth of the S&P index. see charts.
You can download the spread sheet from the link below to plug in your own numbers.
If you have a Roth IRA you are not subject to the RMD and there are more sophisticated strategies for withdrawal rates.

Sample calculations. Get the Excel spread sheet so you plug in your own numbers.
Growth Rate 7.0% 3.0% 0% 3.0% 7.0%
Age Life Expect-
ancy
7
RMD Distribution1 Portfolio
Value
RMD
Amount
Other Income3 Expenses w/
Inflation2
Minimum
needed
from IRA 6
Distrib-
ution4
Excess 5 Invested Excess
period yrs % with COL fixed
65 $500,000 $30,000 $16,000 $65,000 $19,000 $19,000 $0
66 $514,670 $30,900 $16,000 $66,950 $20,050 $20,050
67 $529,243 $31,827 $16,000 $68,959 $21,132 $21,132
68 $543,680 $32,782 $16,000 $71,027 $22,245 $22,245
69 $557,935 $33,765 $16,000 $73,158 $23,393 $23,393
70 85 27.4 3.65% $571,960 $20,874 $34,778 $16,000 $75,353 $24,575 $24,575
71 85 26.5 3.77% $585,702 $22,102 $35,822 $16,000 $77,613 $25,792 $25,792 $0 $0
72 86 25.6 3.9% $599,104 $23,403 $36,896 $16,000 $79,942 $27,046 $27,046 $0 $0
73 86 24.7 4.0% $612,103 $24,781 $38,003 $16,000 $82,340 $28,337 $28,337 $0 $0
74 86 23.8 4.2% $624,629 $26,245 $39,143 $16,000 $84,810 $29,667 $29,667 $0 $0
75 87 22.9 4.4% $636,610 $27,800 $40,317 $16,000 $87,355 $31,037 $31,037 $0 $0
76 87 22.0 4.5% $647,963 $29,453 $41,527 $16,000 $89,975 $32,448 $32,448 $0 $0
77 88 21.2 4.7% $658,600 $31,066 $42,773 $16,000 $92,674 $33,902 $33,902 $0 $0
78 88 20.3 4.9% $668,428 $32,927 $44,056 $16,000 $95,455 $35,399 $35,399 $0 $0
79 88 19.5 5.1% $677,341 $34,735 $45,378 $16,000 $98,318 $36,941 $36,941 $0 $0
80 89 18.7 5.3% $685,228 $36,643 $46,739 $16,000 $101,268 $38,529 $38,529 $0 $0
81 89 17.9 5.6% $691,968 $38,657 $48,141 $16,000 $104,306 $40,165 $40,165 $0 $0
82 90 17.1 5.8% $697,430 $40,785 $49,585 $16,000 $107,435 $41,850 $41,850 $0 $0
83 90 16.3 6.1% $701,471 $43,035 $51,073 $16,000 $110,658 $43,585 $43,585 $0 $0
84 91 15.5 6.5% $703,938 $45,415 $52,605 $16,000 $113,978 $45,373 $45,415 $43 $43
85 92 14.8 6.8% $704,619 $47,609 $54,183 $16,000 $117,397 $47,214 $47,609 $395 $441
86 92 14.1 7.1% $703,000 $49,858 $55,809 $16,000 $120,919 $49,110 $49,858 $748 $1,220
87 93 13.4 7.5% $698,862 $52,154 $57,483 $16,000 $124,547 $51,064 $52,154 $1,090 $2,396
88 93 12.7 7.9% $691,978 $54,486 $59,208 $16,000 $128,283 $53,076 $54,486 $1,411 $3,974
89 94 12.0 8.3% $682,116 $56,843 $60,984 $16,000 $132,132 $55,148 $56,843 $1,695 $5,947
90 95 11.4 8.8% $669,042 $58,688 $62,813 $16,000 $136,096 $57,282 $58,688 $1,406 $7,769
93 9.6 10.4% $653,079 $68,029 $64,698 $16,000 $140,178 $59,481 $68,029 $8,548 $16,862
94 9.1 11.0% $626,003 $68,792 $66,639 $16,000 $144,384 $61,745 $68,792 $7,046 $25,088
95 98 8.6 11.6% $596,216 $69,327 $68,638 $16,000 $148,715 $64,077 $69,327 $5,250 $32,095
96 8.1 12.3% $563,771 $69,601 $70,697 $16,000 $153,177 $66,480 $69,601 $3,122 $37,463
97 7.6 13.2% $528,762 $69,574 $72,818 $16,000 $157,772 $68,954 $69,574 $620 $40,705
98 7.1 14.1% $491,331 $69,202 $75,002 $16,000 $162,505 $71,503 $71,503 $0 $43,554
99 6.7 14.9% $449,216 $67,047 $77,252 $16,000 $167,380 $74,128 $74,128 $0 $46,603
100 102 6.3 15.9% $401,344 $63,705 $79,570 $16,000 $172,402 $76,832 $76,832 $0 $49,865
101 5.9 16.9% $347,228 $58,852 $81,957 $16,000 $177,574 $79,617 $79,617 $0 $53,356
102 5.5 18.2% $286,345 $52,063 $84,416 $16,000 $182,901 $82,485 $82,485 $0 $57,091
103 5.2 19.2% $218,130 $41,948 $86,948 $16,000 $188,388 $85,440 $85,440 $0 $61,087
104 4.9 20.4% $141,978 $28,975 $89,557 $16,000 $194,040 $88,483 $88,483 $0 $65,363
105 4.5 22.2% $57,240 $12,720 $92,244 $16,000 $199,861 $91,617 $57,240 -$34,378 $35,561
106 4.2 23.8% $0 $0 $95,011 $16,000 $205,857 $94,846 $0 -$94,846 -$56,796
107 3.9 25.6% $0 $0 $97,861 $16,000 $212,032 $98,171 $0 -$98,171 -$158,943
108 3.7 27.0% $0 $0 $100,797 $16,000 $218,393 $101,596 $0 -$101,596 -$271,665
Excel spread sheet

1. Required Minimum Distribution (RMD)
The IRA Required Minimum Distribution Worksheet (irs.gov) gives a distribution period from the "Uniform Lifetime Table". You divide the value of your IRA on December 31 of the previous year by this number to get the RMD.
Note: The year you turn 70 1/2 you use the age of your birthday that year. For example, if your birthday is between January 1st and June 30th, the first year of distribution would be at age 70. If your birthday is between July 1st and December 31st, the first year of distribution would be at age 71.
You don't have to take you first RMD, the year you turn 70 1/2, out until April 1 of the next year. Note: Money in a Roth IRA is not subject to the RMD.
See Roth Conversion below for more information.

  The RMD is different for IRA owners whose spouse is the sole beneficiary of their IRA and is more than 10 years younger.

Click here for an excel spread sheet you can download to plug in your own numbers

2. Expenses: This example is for someone living in a major metropolitan area with higher than average expenses. $35,000 - $45,000 is a more normal national average for 2 adults and $48,000-$65,000 for 2 adults and a child..
It should include taxes. They are to variable to compute them in this model.
See Cost of Living below.

3. Other income - Income with a Cost of Living (COL) increase: e.g. Social Security, Other Investments.
  Assumed to grow at the inflation rate in this example.
  Income that is fixed (no increase over time): e.g. Many/most pensions and annuities.

4. Distribution = max of inflation adjusted expenses or RMD.

5. Excess - RMD is greater than the expenses needed to keep up with inflation.
This may be good as the need for assisted living or a nursing home kicks in expenses could increase.
See Cost of Living below

Of course the market does not grow consistently; There are bull and bear market periods.

6. The minimum need from the IRA is expenses minus other income.

7. Average life expectancy from actuarial tables. IRS uses a higher number for RMD. See Longevity

See:
Best Spreadsheets for Your Retirement Planning
spreadsheet to comput estimated tax - Google Search


Stock (equity securities) and Bond (Fixed-income securities) mix:
Conventional wisdom was that the percent of your portfolio held in bonds should be equal to your age. The reason is that as you get older you don't want to get stuck having to make withdrawals in a bear market (stock prices down).

Most investment advisors have gotten away from this increased fixed income strategy. Fisher Investments did a simple Monte Carlo simulation* to produce results for several scenarios. Here is one taking annual withdrawals of $50,000 (5%) from a $1,000,000 portfolio over 30 years. It does not take into account RMD and inflation. It appears the primary purpose was to debunk the old adage of more fixed income as you age .
$1,000,000 starting value over
30-year time horizon
5% Cash Flow
50% Stocks/50% Bonds 70% Stocks/30% Bonds 100% Stocks
Probability of ending balance > $0 79.7% 80.1% 80.5%
Probability of ending balance > $1,000,000 44.4% 54.4% 64.0%
Minimum years to portfolio depletion 17.1 14.3 12.2
Median terminal value $809,743 $1,268,505 $2,105,092
* Bootstrap re-sampling is a type of Monte Carlo simulation, a technique that allows for random sampling of historical stock, bond and cash returns while incorporating historical inflation. This statistical method is non-linear and allows for the assignment of probabilities to various outcomes. All values are expressed in today's dollars, as of 12/31/2013.
It makes numerous assumptions, including but not limited to, the use of S&P 500 Stock Index and/or US 10-year Government Bond Index historical returns

See What Is the Best Stock-to-Bond Ratio? - For Dummies


Other withdrawal stratagies:
"New Math for Retirees and the 4% Withdrawal Rule" - NYTimes.com lists some other stratagies.

Assumptions: A 65-year-old couple begins with a $1 million portfolio consisting of 50/50 stocks and bonds. The strategies below assume annual spending will never dip below $15,000 in inflation-adjusted terms over 30 years.

STRATEGY Constant
inflation-adjusted spending

Retirees begin by withdrawing a given percentage of their initial retirement portfolio. Each year thereafter, the withdrawal amount is increased to match the inflation rate.
Bengen's
floor-and-ceiling rule

In the first year, retirees withdraw a given percentage of their portfolio. After that, withdrawals could increase by up to 25% in bull markets, or decrease by not more than 10 percent in bear markets.
Guyton and Klinger's
decision rules

Withdrawals are increased each year to match inflation, except in years when the portfolio loses money. If the withdrawal rate ever rises to more than 120% of the initial rate, that year's withdrawal is cut by 10 percent. In good years, withdrawals may increase by 10 percent.
INITIAL SPENDING RATE 2.85%
Rate adjusts to keep withdrawals steady with inflation.
3.29%
Rate is allowed to fluctuate within certain upper and lower limits according to the strength of the market.
4.95%
Rate fluctuates to keep withdrawals steady with inflation and to reflect bull markets.
RANGE OF ANNUAL WITHDRAWALS* $28,500 $28,000 - $39,500 $15,800 - $61,000
MONEY LEFT
AFTER 30 YEARS
* Range of withdrawals illustrates best, average and worst case situations
Source: Wade Pfau, professor of retirement income at the American College of Financial Services.
By The New York Times
See Retirement Researcher, Wade Pfau, Ph.D., CFA

Required Minimum Distributions (RMDs):
Tax law requires individual retirement account holders to begin taking out at least minimum amounts, known as required minimum distributions, or RMDs, from their accounts once they reach age 70 1/2. Technically, that means the IRA money must start coming out in specific increments no later than April 1 following the year you reach that age.
The exact distribution amount changes from year to year. It is calculated by dividing an account's year-end value by the distribution period determined by the Internal Revenue Service.
It starts at 3.6% at age 71 and grows to 8.8% at age 90 and 15.9% at age 100.

Converting some to Roth:
Converting a traditional IRA to Roth is usually not considered to be cost effective for you, but can be beneficial for your dependents.
Wells Fargo has the following guidelines. A Roth conversion makes sense if:
  • Won't need the converted Roth funds for at least five years.
  • Expect to be in the same or a higher tax bracket during retirement.
  • Can pay the conversion taxes without using the IRA funds themselves.
  • May not need the funds for retirement and may want to transfer them to your heirs.
Thanks to changes in 2010, the $100,000 Modified Adjusted Gross Income (MAGI) and tax filing status limits on Roth conversions no longer apply.

See Estate planning opportunities with Roth IRA conversions | Vangard
Non-spouse beneficiaries of both traditional IRAs and Roth IRAs are required to take minimum distributions upon the death of the account owner.
If the estate of a traditional IRA owner is large enough to incur estate taxes, the IRA beneficiaries are likely to face "double-taxation" on that asset. First, the IRA is included in the taxable estate; second, the beneficiary is liable for income tax on any future withdrawals from the IRA, including required minimum distributions (RMDs). Example.
Roth IRA conversion $500,000
Marginal tax bracket 35%
Income tax due on conversion $175,000
Estate reduction $175,000
Estate tax rate 45%
Estate tax savings $78,750

Some people take out the maximum which will keep them from going to a higher tax bracket and convert it to a Roth each year.
See also:
Roth IRA Conversion Calculator | Schwab
Convert Traditional IRA to Roth IRA | Fidelity

See Estate Tax | IRS
The RMD Strategy for Retirement Income Withdrawals, Floyd Vest, Oct. 2014

State Estate and Inheritance Taxes in 2014 | Tax Foundation
Most have none.
Of those with tax most are 0.8 - 16%, MA, RI, NJ, DE, MD; CT is 7.2-12%
Rate for Each Beneficiary
First $25,000 No tax
Next $1,075,000 @ 11%
Next $300,000 @ 13%
Next $300,000 @ 14%
Over $1,700,000 @ 16%


Cost of Living:
Living Wage Calculator - Introduction to the Living Wage Calculator | MIT March, 2014, says,
"The living wage varies based on the cost of living and taxes where families live. Families of four (with two working adults, two children) in the North ($56,179) and West ($53,505) have higher median living wages before taxes than the South ($49,167), and Midwest ($48,496). Within region, the largest variation is between Southern states, where the living wage ranges from $45,655 in South Carolina to $69,820 in the District of Columbia."

Home Rent vs Own:
according to a report from Trulia.
For retirees, buying is cheaper than renting in all major metros.
However, if a retiree does not plan to pass the home on to heirs, it's nearly always cheaper to rent than to buy.

You could also look at home ownership as an investment. Home prices have increased at a rate of 5.5% from 1991-2015. That's less than the stock market which did 7% during that time, but it may be safer than stocks and an alternative to CDs or Bonds which still had low returns as of 2016.

The other consideration is do you want to have your own garden and are you willing to invest the time and money into maintenance on a home you own.
See:
Rent or Buy Calculator: Is it Better to Rent or Own a House?
Renting is Throwing Money Away ... Right? - Afford Anything


See Also: Budgeting and Cost of living by location in Household Spending.

Senior and Assisted Living costs


Software/Calculators:
Stein and Demuth recommend:
QUANTEXT Portfolio Planner
ESPlanner Inc.
The 3 Best Free Retirement Calculators - Can I Retire Yet?
  Vanguard - Retirement nest egg calculator
  Ultimate Retirement Calculator | FinancialMentor.com
  The Flexible Retirement Planner | A financial planning tool powered by Monte Carlo Simulation
Books:
"Yes, you can retire"..| Ben Stein and Phil Demuth | www.stein-demuth.com
The Boomer's Guide to a Great Retirement: You Can Do It!: Jonathan D. Pond | Online Tools

Links:
Required Minimum Distributions (RMDs) | IRS.gov
Retirement Planner: Plan For Your Retirement | SSA.gov
schwab.com/rmdcalculator
6 big mistakes you can make benchmarking to the S&P 500 - MarketWatch
99 Retirement Tips From Ken Fisher | Fisher Investments
Best places to live and retire
Retirement Calculator & Financial Retirement Planner - T. Rowe Price
Cost of Living Calculator: Compare the Cost of Living in Two Cities - CNNMoney
Top Seven Tax Deductions for Seniors and Retirees | Nolo.com
Longevity (How long will you live)
Retirement Researcher, Wade Pfau, Ph.D., CFA
Annuity Calculator - Bankrate.com

last updated 22 Oct 2016