retirement income estimate-reality check

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Topic Author
fishboat
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retirement income estimate-reality check

Post by fishboat »

Hi..I'm trying to get a better understanding of my "day 1" retirement annual income as compared to my current-working income.

I've used a couple income-estimate calculators (Fidelity being one) and they don't seem flexible or transparent enough..so I'm trying the spreadsheet below.

This only addresses the question, "What's my day 1 retirement income at age 62 relative to the money I live on today?" Long term simulations of withdrawal rates vs expected returns is a calculation for another day & is not considered here.

I'm looking for a reality check...do you see any glaring errors in the work below? I'm attempting a reasonably good ballpark estimate..it doesn't need to be accurate within a few dollars..

From this estimate is appears about a 2.5% withdrawal on a $1M 401k will net me out at about where I am today in terms of line 16.
(I have a separate account to cover health insurance premiums until Medicare kicks in)

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Bill M
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Re: retirement income estimate-reality check

Post by Bill M »

Simple sanity check-- You need $62K/yr, pension provides 32568 and SocSec provides 22656, leaving 6776+taxes to come from 401k. 2.5% looks about right. But don't be surprised if spending goes up (especially T&E) for the first few years of retirement.

You should also look at a few alternative plans: (1) delaying SocSec to 70 would increase the benefit to ~$40K/yr, but increase the 401k withdrawals for the first 8 years. Very very cheap longevity insurance. And, (2) if there is any penalty associated with taking the pension at 62, calculate the effects of delaying enough to avoid the penalty. Its likely you can get to the point that you won't have to touch your 401k after 70, except for the pesky RMDs.
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fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

Bill M wrote: You should also look at a few alternative plans: (1) delaying SocSec to 70 would increase the benefit to ~$40K/yr, but increase the 401k withdrawals for the first 8 years. Very very cheap longevity insurance. And, (2) if there is any penalty associated with taking the pension at 62, calculate the effects of delaying enough to avoid the penalty. Its likely you can get to the point that you won't have to touch your 401k after 70, except for the pesky RMDs.
thanks Bill! You net out at ~2.5% also..whew..these calcs are not my strongest suit..at least I'm in the ballpark. As for the pension, from what I can tell from the work pension calculator, the pension monthly benefit increases 4.5%/yr from age 60 to 62 at which time the monthly benefit increase due to waiting longer levels off at just +0.2%/yr. My conclusion..take it at 62 as there's no advantage in waiting. I will be taking the monthly benefit as it's a much better deal then the lump sum (worked through that already).

The latter portion of your response, 'strategy', is my next focus, but I'm not overly clear how to make it as 'transparent' as the income estimate I have here. I'm trying to build knowledge, but it's slow going as I'm not sure how to attack the question(s) efficiently. it may be simple..I just haven't focused on it yet.

For reference..I'm 58 1/2 and will soon (within 12 months) be retiring the new 'modern' way..getting forced out of my job..like so many others. I don't think I've seen/known anyone retiring on their own timeline in the last 10-15 years. I have a chunk of cash to get me to 62...just have to figure out how best to get there.
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Aptenodytes
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Re: retirement income estimate-reality check

Post by Aptenodytes »

This is just addition and multiplication. If you want to bring reality into the picture you need to do some scenarios or thought experiments, bringing in things such as home repairs, health emergencies, large-scale market declines, longevity extremes and so on.
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Aptenodytes
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Re: retirement income estimate-reality check

Post by Aptenodytes »

In any event, if you know your expenses are $30K per year, your pension is $32K per year, your age-70 SS is about $40K per year, and you have $1m saved up, why are you even bothering to mess with this?
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fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

Aptenodytes..I was lumping many of those events into the amount of headroom I have between the 2.5% withdrawal and the 4%**. If something unexpected, or expected and a little costly, comes up I have some reserve capacity to fall back on.

**(I know "4%" is another topic altogether..)
Topic Author
fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

Aptenodytes wrote:In any event, if you know your expenses are $30K per year, your pension is $32K per year, your age-70 SS is about $40K per year, and you have $1m saved up, why are you even bothering to mess with this?
I'm working myself out of a deep hole of having zero interest in all this. For better or worse..my entire life I've defaulted to "save a lot and I'll worry about it later..." Now that "later" is becoming "soon"..I'd rather have a good understanding of as much as I can and take the chance of realizing much of the work wasn't really needed, then have any surprises...
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Aptenodytes
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Re: retirement income estimate-reality check

Post by Aptenodytes »

I don't understand the difference between lines 14 and 15. In natural language what you live on and your expenses are the same. But these are off by a factor of two.

But either way I still don't see what the question is. Take the higher of the two expense numbers. Your pension and SS income combined are larger. So your entire portfolio is just a great big emergency fund. Once you get to age 70 you won't have to withdraw from it at all except during emergencies.
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fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

Sorry...I'm not a finance/accounting person..forgive the language. My background is chemistry/math/physics.

Line 13 is cash I have after all taxes have been taken out (AGI - total taxes). From this block I pay my living expenses.

Just below line 13 is the mortgage. I kept this as a separate line item as I knew it would disappear soon.

Line 14 is line 13 minus the mortgage.

Line 15 is my known-daily living expenses, aside from the mortgage. It's a separate line item as I knew those expenses would continue..just easier to read/remember what's going on...bookkeeping..

Line 16 is cash that's left after everything is paid...discretionary income/unexpected expenses/travel/auto-truck...etc..

What was the question..mainly I didn't have a feeling for taxes & the lack of 401k deductions at a lower income level and I wanted to see where I was at versus a known living-reference..that is..how I live today...what income was required in retirement to match where I am now? I think that's one of the biggest questions people have when approaching retirement.."what will change & by how much?" The point of the image was whether I'm missing anything obvious in the accounting..if there are no significant line items missing then, by definition, I have a reasonable understanding of the question I tried to answer.

For those that have had an interest in personal finance and investing for a long time..all this is probably pretty academic. I haven't given all this much thought over the years(hired it all out) so I'm giving myself a crash course (after firing the adviser). The 401k has been converted to the 3 fund portfolio, I'm cleaning up some other accounts..I'm getting there..good thing as it'll be life as I know it fairly soon.

Thanks for taking the time to look at this..
38_Special
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Re: retirement income estimate-reality check

Post by 38_Special »

Why does your taxable investment income not carry over into retirement income columns? Is it assumed to be covering years 58 to 62? It may not make a difference in the end, but a +$1k surprise tax bill isn't fun. Just something to iterate on.
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fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

38_Special wrote:Why does your taxable investment income not carry over into retirement income columns? Is it assumed to be covering years 58 to 62? It may not make a difference in the end, but a +$1k surprise tax bill isn't fun. Just something to iterate on.
That was an investment that reached it's maturity date with my former adviser..glad to see the adviser gone..but it was a nice investment..oh well. (actually the investment was good enough to justify sticking with him..until it ended & I had no reason to stay)
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Watty
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Re: retirement income estimate-reality check

Post by Watty »

From this estimate is appears about a 2.5% withdrawal on a $1M 401k will net me out at about where I am today in terms of line 16.
FYI, you can find out exactly what percentage it is. It will vary with your spreadsheet software but there should be a "goal seek" tool probably under the tools or data menu (as I recall).

You have a line for taxable brokerage withdraws which implies a separate taxable account that is not mentioned. There would likely be dividends and capital gains distributions from that which would affect your taxes each year. You also mentioned that you have a separate account for your medical insurance costs but there is likely taxable income from that which would affect your taxes too.

Delaying when you start Social security is a good choice for most people. You might benefit by doing Roth conversions before you start social security especially if that would help less of your social security be taxed later.

http://www.bogleheads.org/wiki/Taxation ... y_benefits

It would be interesting to add $100 to your income to see what the total increase in taxes is to see just what your effective marginal tax rate is . With the additional social security income that becomes taxable with that extra income it could be very high.
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fishboat
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Re: retirement income estimate-reality check

Post by fishboat »

Watty..thanks for your thoughts.

I'm a number-cruncher by trade these days(build/optimize numerical models of transportation networks), but haven't used the goal-seek function. The 2.5% is a fuzzy number to some extent, but 'goal seek' in Excel would be a useful thing to know.

Yes, there were two taxable accounts. The larger is now all cash(paying taxes this year on that..and living off it for the next couple-few years) the other is a retail brokerage account that I'm currently converting to tax-friendly investments (per taylor's suggestions and the wiki on that area). It's a relatively small amount.

The medical account(s)..One is an HSA at Fidelity and the other is a grandfathered RSMA (retire medical savings account) that was pre-HSA days..but is basically the same (pre-tax dollars go in and can only be used for medical-related costs/premiums on the way out). Frankly, I don't know if this is considered taxable income when used as the programs allow as I've never used either one. (No doubt I've read some documentation on them..that's now forgotten.) I've always paid such costs out of taxed income and let the two accounts accumulate for a day to be named later. The RMSA is only accessible once I retire.

I need to start thinking(crunch some numbers) about how to approach SS. Thanks for the link..I'll read it over. Also..some added income & tax impact sensitivity tests are a good idea..didn't consider that. It would be good to know where I'm at though.

I don't understand the Roth conversions point..I'll need to look into it further.
The Wizard
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Re: retirement income estimate-reality check

Post by The Wizard »

I did something very similar before retiring two years ago.
Goal was to achieve roughly the same "take home pay" in retirement.
I found this to be a better fit for me as opposed to computing my annual expenses and focusing on that number. Reason being that my base expenses are some what modest but discretionary travel expenses can easily be expanded as desired.

I'm currently delaying SS till age 70, five more years to go. So I'm withdrawing more $$ to bridge that gap...
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