Previous posts in this discussion:
PostWhen Can You Retire? How Much Money Do You Need? (Enrique Torner, USA, 02/09/21 10:25 am)
I would like to ask our dear financial expert Ric Mauricio:
How do you know when you can retire? Do you have any special calculator or "system" to help us make this important decision? I would really appreciate your input, and I bet other WAISers as well, given their wisdom and experience.
JE comments: Enrique, you and I are on the same page. I never tell my students I'm old, just that I have wisdom and experience.
So how big of a nest egg do you need to retire comfortably? Or at least modestly? Ric Mauricio would probably tell us not to retire ever, unless one stays very active, both physically and mentally.
So the answer is, as with interest rates, it depends. The basic financial rule says you can skim off 5% of your savings per year, so a million bucks in your 401K would translate to $50K per annum. This is enough for a comfortable middle-class retired life in most parts of the US (such as Minnesota and Michigan). Two things: you can't draw from your 401K until age 59 and 1/2, and also there's the nasty rub of health insurance: Medicare doesn't kick in until 65, and private insurance for the almost-65 demographic is obscenely expensive.
I'm spewing financial platitudes in the above paragraph, so I'll stop before you hear me saying: "past performance does not guarantee future yields." Rather, let's use Enrique Torner's question to discuss comparative retirement finances among the far-ranging WAISitudes. The big distinction is between the pension-focused nations and those that rely primarily on personal savings.
And Ric, I hope you'll add your 2 cents.
When Can You Retire? Ric Mauricio's Benchmarks
(John Eipper, USA
02/11/21 4:03 AM)
Ric Mauricio writes:
Xīn Nián Kuài Lè! 新年快乐! (Happy New Year!) The Year of the Ox. Start celebrating on February 12th.
I love the Chinese New Year. It's celebrated over a two-week period. Two weeks of dim sum. Yum.
Let me first respond to John E's query as to my Fiat accident. I was on my way to the College of San Mateo (north of Stanford on the Peninsula for those unfamiliar with the area) and took a shortcut on Crystal Springs Road, which winds under Highway 280. It was right below the underpass that I lost control of my Fiat 850 on the first rain of the season. Yes, the mixture of the new rain and auto fluids mixed to create a very slippery icy-like surface. I recall steering towards the skid attempting to regain control. Alas, the force was too strong and I hit the asphalt lip on the side of the road and it flipped me over down into the ravine.
When I first hit, my head hit the steering wheel, knocking me out for a few seconds. As I regained consciousness, I was upside down landing on the side of the ravine. I remember it being in slow motion. I watched as the passenger side (which was hitting the hillside of the ravine first) was crushing down. Thank goodness I did not have a passenger. Then my windshield shattered and the entire windshield structure exploded outwards. And the cowling and dashboard was being crushed downwards. Then it stopped. I was upside down and I released my shoulder harness/seatbelt, but could not pull out my feet which were on the gas and clutch pedals. The boots I was wearing were being held in place by the car. I was able to slip my feet out, crawled out of the car, and crawled up to the road. Fortunately, a friend of mine was passing by, stopped and asked me what happened. I told him to get me to the nearest hospital because my head hurt.
Injuries: Concussion and contusion of the brain and broken jaw. Condition: Very serious. Jaws were wired shut. But no surgery on my head was necessary, just observation and pain pills as my brain swelling was coming off the inside of my skull. I would hold out as long as possible on the pain pills, practicing my yoga to alleviate the pain. I told the doctor that I needed to get well, because I had a job lined up at the ski resort. That night I also had a business math test, so when I returned to school, it was time for the second midterm. I told the professor what had happened and asked if I could take both the first midterm and the second midterm that night. Yeah, I studied when I was in the hospital. I not only finished both midterms before others finished the one midterm, but got 100% on both of them. I guess you can say, the blow to the head knocked some "cents" into me. By the way, I do not recommend a rear-engine automobile (where the engine is behind the rear axle). A mid engine (where the engine is before or on top off the rear axle; think Ferrari or Porsche), is much more stable.
Now to Enrique's inquiry on retirement. As a CFP Emeritus, I am often asked this question (although not enough people ask). Most people think about retirement zero to 5 years before they retire. They'll come to me and say, "I have no savings, I retire in 5 years, now show me how good you are." This is why I started teaching my kids, and now my grandkids, to start early. Time is on your side.
Now to the calculations: First, estimate how much it would cost to retire comfortably. To do this, total your housing, food, medical expenses, auto expenses, utilities, and comfort items (entertainment, eating out, vacations) for the year. Now multiply that amount by 4% to account for inflation (historically it's been officially 2% although some calculate it to be 8%; as with most statistics, the truth is often in the middle) for each year from the present to your intended retirement age. Take that amount and divide by 8% (a target rate of return on investments; doable) and you will have the amount that you need to retire comfortably. What about Social Security benefits? I don't take those benefits into account. It provides a bonus amount that I can spend any way I want. Unfortunately, too many people count on government benefits to retire on. And shockingly, but not surprisingly, it falls far short of providing a comfortable living.
Need an example? Let's say your living expenses today are $48,000 per year. OK, wait, my living expenses here in the SF Bay Area are way more than that. There is a way around that. You can purchase a home and in 30 years, have it paid off, so no mortgage payment, just property taxes and maintenance. Or you can target an area you would like to retire to that is less expensive (like outside of the Bay Area, Nevada, Arizona (my best man bought a house there for $163,000), Texas, Florida, Mississippi, or yes, Michigan or even Costa Rica or Portugal) and estimate the cost from there. But let's start with our living expenses of $48,000. Let's say we have 10 years to retirement. At a 4% inflation rate, you will need $71,000 in 10 years. Now to produce $71,000, you will need to earn 4% before taxes (there are ways to avoid taxes at this level; one is to move to a no-tax state; a married couple with an AGI of less than $80,800, currently do not pay capital gains tax). You will need $1,775,000 to produce this income. Oh, but don't forget about future inflation. So double that amount with another 4% earnings and reinvest that 4% to protect against inflation. Ah, your $1,775,000 would need to produce an 8% return. That's below the S&P 500 historical average, so very doable. But let's say you can earn 12% per year on your investments (again, very doable). At this point you would only need $1.18M. Again, the lower your expenses, the less you will require in investments when you retire.
Here's another calculation: Let's say you are planning to retire today. Your comfortable living expenses are $48,000. You earn 12% on your investments. You really only need $800,000. That 6% will generate your essential income. 6% will be reinvested for future inflation.
Here's another scenario: You retire today at age 67 (full retirement age); your Social Security benefit and perhaps other pensions is $24,000 per year. Your comfortable living expenses are $48,000. You earn 12% on your investments. You need $400,000.
So you see, it is a function of your comfortable living expenses (my definition of comfortable living expenses is that you are enjoying life without skimping) and your investment's rate of return.
One more thought on retirement (my 2 cents worth): Retirement is a state of mind. Think of it. There are 52 weeks in a year. Let's say you vacation (travel?) 3 weeks out of the year. Funny how my European cohorts seem to always be "on holiday." That leaves you 49 weeks to do what? I actually experienced this in my first "retirement." One hour a week to mow the grass. One hour a week to clean the house. Fifty hours a week of sleep. Twenty-one hours a week of daily to-do's (meals, bathroom, shower, etc.). Two hours a week to wash and wax the cars. One hour for church. Five hours a week working out. Three hours a week on investments. That left me about 85 hours a week for? I used to play my Atari games or visit my local library, but really, how many hours can you do that? Aha. I learned early in life that what brought me the greatest joy was helping other people. So now my "retirement" was helping people with their automotive/tool needs at Sears. One thing I found was that "helping" other people resulted in a greater net income to me. I had exceeded my quota by 3 times every year and became the highest paid sales rep at Sears nationally (until they capped it; time to move on).
Then Sears bought Dean Witter. And I loved investing. So what better way to help people than to educate them on investing? I became a stockbroker. One of my clients really enjoyed having me as his broker, because he learned a lot about investing, vs. other brokers, whose main intent was to sell you something and earn their commission. My mindset was that this was not working; this was helping other people. Currently, as a Personal Trainer, a retired Enrolled Agent, and a CFP Emeritus, I am enjoying helping people become physically and financially fit. Ah, the joy. This is retirement.
So if you are a teacher and you enjoy teaching, you are, de facto, happily retired.
JE comments: Ric, we are grateful. From showing us the horrors of "oversteer" (rear-engined cars like to swap ends, back out front) to putting our retirement needs in perspective, you reassure us with your level-headed wisdom. Regarding retirement, you've put your finger on the essential requirement: have something to retire to, and not retire from.
- When Do Italians Retire? (Eugenio Battaglia, Italy 02/11/21 8:13 AM)
John E asked about retirement finances in different countries. Italy is a pension fund-focused nation and you retire as soon you legally can--meaning, when you are sick and tired of your place of work.
In my last place of employment, the principals were trying to screw their employees, the employees were trying to screw the principals, and both were trying to screw the State. This Bastion Contrario was mad at all three.
It was quite a difference from my earlier job with Amoco.
JE comments: Here's Wikipedia on comparative retirement ages. There aren't great differences from one country to the next, except that Asian nations (Japan, S Korea, China) tend to have the lowest: around 60, even though life expectancy is among the highest. It's also surprising that many nations still distinguish between men's and women's retirement ages, with women (who live longer) getting to retire sooner.
- When Do Italians Retire? (Eugenio Battaglia, Italy 02/11/21 8:13 AM)