2018: Contemplating retirement
October 29, 2018
Last November, I hopped into Fidelity’s retirement planning module (access restricted to account holders) and noodled around with some basic retirement assumptions (FIRE in 9 years, for example), and they didn’t have good news for us.
We assumed: PiC would retire in 8 years and I would in 10, that he would last to age 95 and I til age 98 (hah), that we would continue with our current level of household income during that time.
We scored a paltry 31. At that point in time, they estimated we might:
Have $3,242/mo
Need $10,308/mo
Leaving a Potential Gap of $7,066 /mo
(This is based on a hypothetically “Significantly Below Average Market” which is just how I want these estimates to be – very pessimistic.) Not good!
Their recommendations: Consider increasing your retirement savings. If you have a workplace plan, at the very least try to contribute enough so you will receive your employer’s full match.
I would LOVE to. But I don’t have a workplace plan and it stinks that the only way to put away money for retirement is through taxable accounts if your employer is a dud in the benefits department.
That is why I’ve been focused on both dividend investing and index investing.
Reduce spending: I sure hope we’re not spending $10,000 a month in retirement! I need to have paid off our mortgage and be done with childcare to ensure that.
More than half that cost right now is daycare and housing (mortgage, property tax, insurance) so at least 20% of it will be less in a few years.
Looks like your current asset mix appears to be closely aligned with your Target Asset Mix.
We based this on the percentage of stocks in your assigned accounts. You should review this at least once a year, or when markets move significantly.
Woot! I picked our index funds all by myself. Mostly. I had a bit of analysis help from fellow money bloggers.
Almost a full year later, having made some big changes to our investing and cash holdings and adjusting assumptions, our score has improved to 60. A good increase but it still qualifies as “Needs Attention”. Without taking any possible Social Security into consideration, the current projection is that we’ll have $6,022/mo income.
New assumptions: moved PiC’s retirement age up by two years and mine down by 2 years, set both of our life expectancies to 98 years. The excessively high life expectancy isn’t because I assume we’ll really live that long but rather that we’ll need to spend a fair amount on healthcare in our later years and this is my way of adjusting our needed income expectations. If there’s a better way to do that, I’d love to hear it!
This doesn’t spell the end of our early retirement hopes like I felt it did last year when I first poked around. It gives us some decent goals to aim for in a largely uncertain plan based on a lot of assumptions.
If we did manage to close that gap significantly or even entirely, there’s still the potential college costs to think of. Certainly some of it will be covered by the early start on our 529 but at this point, I’m more comfortable planning for a combination of using savings, cash flowing some portion of it and having JB commit to some of the costs zirself.
:: How do you fiddle with your retirement expectations? How much might your future costs change?
I think you’re being too pessimistic. The stock market might be “Significantly Below Average Market” in the short term, but we’re talking 50+ years here. You probably should make it a little more optimistic. Most, if not all FIRE bloggers wouldn’t be able to retire with that pessimistic assumption.
College is a question for us too. I’m hoping our kid will get some financial aid and/or scholarship. He can always get some loan if we don’t have enough college savings. I think you probably should put yourself first in this case.
Our future cost should be pretty stable. We live a moderate, but comfortable lifestyle now. I don’t think we’ll spend a lot more.
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You know what – I have no idea if we can actually adjust that setting from being “significantly below” to any other calibration! It just fit my mood at the time so I didn’t even think about it!
“But I don’t have a workplace plan and it stinks that the only way to put away money for retirement is through taxable accounts if your employer is a dud in the benefits department.” I’m a little puzzled by this statement. You & PiC can both choose between funding either a Roth or traditional IRA (Individual Retirement Account) through a credit union, bank, or other financial entity. A Roth IRA is taxed now & not later, but a traditional IRA would reduce your tax burden now during your high-income years and then be taxed (probably at a lower rate) when you pull it out for retirement later. However, both of those are only useful for the funds you’ll need after you reach 59.5 years old, so you’ll still need regular savings/brokerage accounts for your early retirement funds.
That was imprecise – we have access to the Traditional IRA but the deduction isn’t automatic, there are restrictions and we are not eligible to deduct our contributions so there’s no tax benefit there. We are also not eligible to contribute to a Roth IRA.
That means I’m eligible only to contribution $5500 a year to my retirement through retirement vehicles and we don’t get any tax benefit from it.
Do you guys do the backdoor ROTH? I think I read something last year that the IRS implicitly blessed it, so we did it for the first time in 2017.
No, at the moment my assumption is that we’re making more and paying more in taxes now than our expected income in retirement so I think we’d be paying more for a Backdoor.
My goal has always been semi-retirement or “Coast FI”, precisely because the prospect of figuring out a one-and-done number is so hard. It would require me to work longer than I am willing to in my current industry. Also how do you even guess health care costs thirty to forty years in advance? The mind boggles on even getting cost estimates for today.
I agree with Joe that you should not assume significantly below market average returns for the time horizon you are looking at. Once you hit a certain wealth threshold, you start to have a lot more flexibility (e.g. moving abroad in your sunset years for elder healthcare).
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I most definitely struggle with the Final FI number as well! That plays into my need to stay pessimistic, just in case. I don’t want to play out Mom’s role at the end of her life: sick and poor, dying of ill health and not enough money to fix anything.
It doesn’t help that I’m already irretrievably broken.
I’m wondering if you’ve considered and are factoring in the possibility of changing your current living situation after you’ve both retired?
The house I grew up in was a house in an area where the prices went up hugely over the time between when my parents bought it and my mother sold it. After selling, she moved back to the state where she grew up– a state with much lower taxes, and she picked a town with low housing costs. She worked a few more years after the move and then retired. During that time, she bought a house for cash that cost about 30% of what she sold her previous house for and also invested the remainder. Her willingness to sell that house and move to a much cheaper part of the country did huge things for her financial stability right now. She also has retirement investing and a bit of a pension, but the house sale put her in a very good spot for long term.
I’m on the fence about whether I’d do the same. I hope that by the time I’m ready to retire, I’ll have enough roots in this community that I won’t want to move so far away. But we’ve only been here about 5 months and I’m not in love with this actual house/property. My hope is that when I get to retirement, I’ll be perfectly happy to sell this place and move someplace cheaper in the same town–so that I can still spend time with the friends I’ve yet to make. (I would very, very much like to have friends who don’t live in other states.)
That’s a very good question. At the time of the first part of this post, no. I take a LONG time to put down roots and I feel like in 10-20 years, I wanted to be firmly rooted. We chose this particular home very carefully with the intent to age in place. It’s not perfect but we could never have afforded perfect here anyway.
But in recent weeks and months, we’re starting to talk about being open to considering a retirement elsewhere. I’m still very much unsure how I feel about it, like you I hope I’ll have real roots in the community by then! But it’s starting to be a consideration. Not a strong enough one to plan on it though. And of course climate change always makes me uneasy about planning on using our home as an asset many years from now.
I agree with Joe – if you assume poor returns over such a long time period, then why are you investing that way? It sucks that you are W-2 but have no retirement plan through work at all. I feel like that would lead me to committing to investing the after-tax equivalent of an annual 401(k) contribution in taxable as part of your personal retirement savings. That mortgage and daycare bill will be gone, but who knows about the healthcare variable.
I honestly don’t assume our expenses will change that much. Our mortgage will be bigger, but the rest of our costs won’t change that much and I don’t include it in my calculations. It’s too hard to guess, so I just use a rolling 12 month average. I’m forecasting our 2018 spending to be within 1% of our 2017 non-wedding spending, so our spending has been pretty stable for example.
Leigh recently posted…Q3 2018 Update: 58.5% FI progress
Investing what way?
I started aiming to invest my share of $18,500 separately in taxable accounts a couple years ago, we didn’t have the room in our budget to do the full amount but I’m working up to it.
I don’t know what rate of return you were assuming for stocks, but if you’re assuming they’ll only return say 2%, then I guess I would start to wonder why one is investing in them in the long-term versus another form of investment?
I’m glad you’re finding the room in your budget now, but I guess my question is if you didn’t have the room in your budget before, would you have made the room if you had a retirement account? Does that psychologically make it easier to make the room?
Leigh recently posted…Q3 2018 Update: 58.5% FI progress
I don’t know what rate the tool is assuming but I can’t seem to change its outlook anyway. I’m not sure why a pessimistic outlook would mean I wouldn’t continue to invest though.
A) I could be wrong. I hope to be – the point of being pessimistic isn’t thinking it’s entirely broken, it’s just planning for the worst.
B) I already have a rental property and I don’t love the work involved and ROR on that method.
C) Pessimistic or not, I diversify our holdings because that’s the prudent thing to do.
And yes. Even if I couldn’t have maxed the full $18500 before, I would have contributed enough to take the company match and then increased it as much as I could until I maxed out. I’ve always been investing in some way, I’m just annoyed that getting a tax-deferred 401K account is solely dependent on an employer.
I track separately the mortgage pay down and how close we are to FIRE, assuming that we have paid off the mortgage. It just feels like an easier way to grasp it, since I would not be comfortable retiring with a mortgage (who cares what the math says). But, we are not near retirement, and as much as I love my spreadsheets and future planning, I don’t see a point in coming up with firm numbers or timelines at this stage of the game.
We also nominally hope to retire in place – but are open to other ideas to lower expenses. Again, any changes are far enough off that ideas are vague and I don’t feel up for entertaining them too seriously. (Although we sometimes have the “what country could we feasibly flee to in the near future?” discussion, it isn’t retirement driven).
I’m with you on it seeming silly to come up with firm numbers or timelines. I mostly track our progress to FIRE each month to have a metric to watch it over time, rather than assuming we will actually retire with our exact current expenses or on some specific time schedule.
We have the “what country is safe to flee to and that we could afford” thoughts too and like you, totally disconnected from FI.
I don’t want to set a timeline either. That’s just not how I best function anyway. I just want to push hard for as much savings and investing I can do now and evaluate every few years.
Love this! I mess around with these calculations all the time. We’ll theoretically be FI-ish in ~10-15 years. We could (and likely will be) more aggressive, but because I love my work so much it’s hard for me to chase it with the same gusto I would if I was *escaping* something. And yeah – those retirement calculators expect you’re going to spend a TON more in retirement than what I think we actually will.
I haven’t worried about saving for the kiddos’ retirement – most likely we’ll be close enough to FI that we can just cash flow college, with some or all of the costs being covered by them via scholarships, etc. I would like to see them both graduate debt free. I don’t feel strongly (at all) about leaving them an inheritance, but I would like to give them a strong start in the world.
You’ll be in the best possible position: Having the freedom to make choices and provide for your kids’ start in the world!
This is something that we think about and talk about a lot these days. One of the FIRE concepts that I like is that if you get accustomed to living frugally, you set yourself up for financial freedom both in terms of the amount you can save and in terms of the lower nest-egg required to fund that frugal lifestyle in retirement. I suspect you’ll be very well set up for financial freedom in a decade or so – my bet is that you’ll be more ready than you now think you will be.
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I hope that you’re right and I’m very open to the possibility! I work best from a place of pessimism and enjoy discovering when I was wrong and we’re in better shape than I thought.
Just curious, I don’t know your story, but why put up with an employer who doesn’t have a decent benefits package? The current job market is pretty good, might it be worth looking around for better benefits and maybe even better pay? Just asking.
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A few reasons! My particular area of expertise typically requires a lot more travel, commuting, cutthroat politics – all things that generally suck for our quality of life.
I can’t list all the great stuff lest I out myself but this job has nearly no commute, zero politics, we don’t waste time on useless meetings, I have unprecedented autonomy, among other things.
More money and benefits would get us to that big number faster but it would *feel* like a million years. Previous jobs aged me and impacted my health severely.