When you guys eventually retire, you’ll be laughing all the way to the bank.
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And trying to figure out how to keep the gubmint’s hands off it!
That’s my plan
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Have you tried using a Monte Carlo calculation tool to estimate how much you can spend each year in retirement, and the associated degree of certainty of that calculated amount. I find this to be an extremely helpful tool. Monte Carlo analyses are based on many years of actual market performance history, so I think it’s a good method.
I’ll be 65 later this year, but at least for now I plan to keep working. Of course, my employer may have other plans. Regardless, I’m financially OK. I had the good luck of starting to work 1980, at a time when 401k plans had just become available. I immediately started contributing at the max allowable rate. I got accustomed to the living on the remainder, so I’ve kept it max’ed throughout my 40 yr career. I also had the good luck of discovering a talk radio show in the early 80’s, featuring Bob Brinker. Most such radio hosts have a bias due to working for a financial company (insurance, load fund company, etc.). Bob, on the other hand was independent and self-employed. He had a subscription newsletter. I just listened to him on the radio - never signed up for the newsletter. The gem of advice that he pounded on repeatedly was the value of investing in index funds, with the S&P500 being your core investment. He also implored the listeners to be their own financial planner, saying the only person you can fully trust to manage your money is yourself. I’ve done that and i think it’s good advice. At the time it was fairly unknown that index funds historically have outperformed actively managed funds. I adopted that investment strategy in the early 80’s and it has paid off. What’s important now is to keep living - hopefully I’ll be luck at that too.
Hi Don, yes and no. The two main tools I use are Fidelity’s Planning and Guidance Center and FIRECalc. Fidelity’s uses Monte Carlo methodology, but FIRECalc does not. I have estimated how much I can spend each year and the probability of that happening with both of them.
Fidelity’s “Tool uses a Monte Carlo simulation-based approach to estimate potential growth of your account balances through retirement and then converts those balances into potential monthly withdrawal amounts over the time frame specified, relying on certain market performance assumptions. The analysis is based on historical market data to estimate a range of potential outcomes for various hypothetical retirement income portfolios under different market conditions.”
I suspect you use Fidelity’s tool also.
FIRECalc is more of a historical “back tester”:
How it works - the philosophy:
FIRECalc makes a single fundamental assumption:
If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds.
If you accept that assumption, then just tell FIRECalc how much you have and how much you’ll be spending, and FIRECalc will tell you how often your strategy would have worked throughout history. Or what you need to change to make it all work.
I do find comfort knowing both tools are based on historical market performance. I know, past performance is no guarantee of future results, but if my plan can survive the worst 30-year period seen since 1871, I get a warm, fuzzy feeling about that. By the way, IIRC, that worst 30-year period was 1966-1995, mainly due to very high inflation, and secondarily due to sequence of return risk (SORR).
About 5-10 years ago, I was assigned a Financial Consultant as a perk of Fidelity’s Premium Services. No charge! We meet or have a phone meeting twice a year. Besides answering all my questions, we’ve worked together and really sharpened the pencil on my Fidelity retirement model. Anyone else use this service? How have they helped you?
Most of my money is at Vanguard, and they have a similar type of personal financial advisor concierge who’s assigned after one’s assets reach a certain point (don’t recall what that threshold is). Regardless, to answer your question I haven’t taken advantage of this service. Perhaps I should - I just haven’t taken the time, nor have I had a burning question that I needed help with. I definitely think this is probably useful for laying out a plan for turning investment money into income. Specifically, as mentioned above, one needs to be smart about that, otherwise you’ll waste a lot by having to give it to the govenment (so they can proceed to waste it for you!). BTW I looked up “tax torpedo” this weekend - never heard that before. Very interesting. I need to study up on tax avoidance in retirement.
I’ve found that playing with the Monte Carlo tools is very interesting. and informative. It’s especially helpful in optimizing your asset allocation (AA). For example, say you want to generate $100000 per yr from your investment assets. And say you have X amount of investment assets. Depending on how big X is, your probability of hitting that $100000 target may be a lot higher with 50/50 equity/bond AA as compared to a 90/10 AA. That was a bit counter intuitive for me at first, but it made perfect sense once i thought it through. As the value of X decreases, or as the amount that you want to generate increases, the equity fraction must be increased. The bottom line is that it informs you of when to safen (“lock-in”) by shifting more to bonds. This is of particular interest to me because I’m very heavily weighted in stocks (close to 100%). Some would say that’s very risky at my age, but I regard social security and pension as effectively equivalent to “bonds”, and I calculate my AA based on that. Shifting my investments to bonds to “lock-in” what I already have is a difficult decision for me. With the history of stock returns over the past 40 yrs, it’s so hard to shift to bonds and contentedly watch the market climb, assuming that it does. It’s tempting to reach for more annual income by staying skewed toward stocks.But after the stock market experience we witnessed last spring, I’m ready be safe and less piggish.
I haven’t used the Fidelity tool you mentioned, but i looked at it today, and I’m going to use it when I get some free time over the Christmas holiday. Thanks for the tip!
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The “tax torpedo” is especially cruel to the surviving spouse. The standard deduction gets cut in half, the tax brackets increase at half the values, but usually only the lowest SS is dropped. For me, that’s an income drop of less than 10%.
I need to estimate how much taxes will increase for the survivor.
Found our today that COVID related grants are taxable for at least Income Tax. Have to look into SS tax yet. Bummer…
I did a quick estimate of the tax torpedo on a surviving spouse. They lose the lower SS payment, and total income decreases 10%. Taxes increased 26%! It went from MFJ in the middle of the 22% bracket to Single near the top of the 24% bracket; very close to the 32% bracket. Yikes!
I need to sharpen the pencil on this, but it indicates I should do Roth conversions to the top of the 22% bracket, and possibly into the 24% bracket. Again, more study needed.
Okay, I did a year by year analysis to see what the incremental tax rate for DW would be if I kicked the bucket. She stays within the 24% tax bracket filing Single every year, whereas if she and I filed MFJ, we’d be in the 22% tax bracket. So, it will save a little money to do Roth conversions up to the top of the 22% tax bracket, which in 2020 is $171,051. And, it will be a wash to do Roth conversions up to the top of the 24% tax bracket, which in 2020 is $326,601.
That’s good enough until I retire and see how things look then.
I should have quit after the quick 2020 estimate, the year-by-year analysis just showed me it was about the same calculation over and over. Since SS is COLA’d, I devalued my and DW’s pension 2% per year. I did this because I do not know future tax rates, so I used constant 2020 $'s and 2020 tax rates throughout. Oh well.
Retirement is definitely on my operating horizon, but I’m now tending toward kicking the can down the road until there’s some definite SARS-COV-2 [ the virus that causes COVID-19 ] herd immunity out there and things open up again; retiring now would mean being stuck at home with next to nothing to do, which would drive both my wife and I round the bend…being in a non-medical essential service, I’m thinking I’ll just hang in there for a bit longer.
Sounds like a good plan to me. You are very fortunate you have this choice. I am fortunate too. We at SE owe a lot to our wise career choices during this pandemic.
A lot of folks have lost their jobs during this pandemic, and they may get so far behind they can never retire.
Also, I fear a huge eviction bubble is building and will come to a head next year. Other areas are having a hard time too. My son’s state college sent invoices for Spring 2021 about one month earlier than last year. I smell a cash flow problem. I paid up on time to help them out.