Saving For Retirment

[skiehawk11]

I have been planning for retirement since I was youngster. It's a hobby and yes, I do get out once in a while. Every quarter, I generally do a state of retirement analysis. I'll point out assumptions and things I look at.

Facts:
Current age: 26
Age at first year of federal service: 23

Assumptions:
Age of retirement: 60
CAGR: 7%
Salary increase: 1% per year annualized over 37 years
Total eligible years: 60 - 23 = 37 years
Max personal contributions (17,500) + agency match
Roth IRA contribution = 5,000 per year + 2,500 at age 50

FERS pension
Average high 3 salary in 37 years assuming 1% increase (assuming GS14 Step 10): 230k
Multiplier = 1.1*37 = 40.7%
FERS pension = 230k*.407 = 93,610 dollars

TSP Roth
Balance = 3.5 million dollars
4% a year withdrawal= 140,000 dollars

Roth IRA
Balance = 2.2 million dollars
4% a year withdrawal= 88,000 dollars

I don't take into account social security. I figured if its still around when I retire, its just a nice bonus

So total yearly retirement income is: 321,610 dollars in future dollars

Assuming 3.3% average annual inflation, 321,610 dollars is worth 116,542.19 dollars in today's dollars. You could be more conservative and use 5.5% average inflation rate.

Take into account retirement expenses. Calculate 6 to 12 months of expenses assumed in retirement. This figure is the amount that you should have in emergency funds separate from your retirement accounts. Also this figure should be used with a margin of error added to calculate how much you need in your retirement.

The above assumes that you have at least 10 to 20 years left before retirement. This can be achieved by growing your emergency account slowly over the next 10 to 20 years. Say you assume to have a total of 50k in retirement expenses; then grow your emergency nest egg to 50k.

As an example, assume 50k in retirement expenses. If your pension is 36k, you have a 14k shortfall. This needs to be made up with retirement funds preferably withdrawn at no more than 4.5% a year of your retirement principal.

To find this balance, calculate the following: 14k/.045 = 311k

This means you need 311k in total retirement assets preferably minus your emergency funds.

You also need to take into account medical expenses which are sure to grow over time. For those in retirement, could you expand on what factors need to be assessed in terms of health insurance in retirement?

Since I am young and not in retirement currently, I am assuming I am probably overlooking numerous things.

[aarvizo]

Those are nice figures but I am not sure if the salary would really be that high 37 years from now.

The other assumptions that will play into your retirement analysis are:

Continuing max contribution levels even after life events:
New House
Marriage/and keeping up with the Jone's
- Also I believe if your household income is over a certain ammount you wont be able to use a ROTH IRA.
Children/childcare costs and eventually college tuition
Taking care of aged parents
Illness/Injury/Uncovered Medical Expenses

Dave Ramsey says mathematically you are self-insured when you have enough resources to support care in a nursing home for 25 years or more. But you could also purchase a long-term care insurance policy.

[GAHiker]

Just a few pointers from a guy that's "been around the block"
1. It is Great You are planning for retirement now...but don't let that be your goal in life...you NEVER KNOW what tomorrow will bring!!

2. Your assumptions are a consistent ROI over time. Unfortunately TSP, especially over the last 10 years, does not work that way. Even though one year may be up & the other down...that does not make an average in the investment world. On those infamous days (ie 9-11, 2008 Bank scandal, etc) that history delt us an "un-charted" blow to the market, you have two days lag in getting out of TSP (one day that it occurs, if after 12PM and the next day) Many folks lost 30-40%. If you lose 40 % it takes more than 60% to get back even!! That can take years !!

3. Life brings a marraige, a new house, kids, college finances...all cost money & the pressures on your budget to put in more than 5% during those early years is enormous...so learn to slow down & enjoy your family, take vacations, but still plan for retirement.

4. Not sure who came up with the 4% rule, but you don't stop investing when you retire. Look at your ROI models to age 100 & you will see what I mean.

5. And finally, my Dad taught me a lesson that he "didn't mean to teach". He lived all his live for retirement....& when he did, my mom was diagnosed with a dibilitating disease, he had a massive heart attack & died. Dad was well off in retirement...but he didn't enjoy a minute of it...just something to think about from a guy that's "been around the block".

[crondanet5]

The last 30 years or so have focused us on building a secure retirement nest egg to meet all old age expenses. And that is important. But the question is why put all that retirement year money in a tax deferred retirement account when you could build an after-tax account of wonderful proportions with no IRS restrictions on how often you sell and buy things? Say you had 2 million dollars in a Roth and 7 million dollars in after-tax accounts. That would mean you could leave the 2 million dollar account to grow undisturbed until age 70.5 when you begin phased annual withdrawals that then become available to pay medical and other expenses. And the after-tax money would be available for the years between now and age 70.5. Now according to the Center for Retirement Research accrued wealth changes life events. There comes a point when your wealth interferes with your job because you don't have to work and you won't necessarily do what the boss says to do because you have a better plan. And you're worth a lot more money than they are. So you may not work to age 60. And the pension benefit is not significant because you have amassed sufficient wealth to overcome its loss. And so you might retire at 50 or 45. This is another way of looking at your situation, only one of many available. Perhaps it would be best if you found a really good certified financial planner paid by the hour to help you define direction and goals to make sure you do have a nice retiremnt sometime in the future.

[CAMPER123]

"so learn to slow down & enjoy your family, take vacations, but still plan for retirement."

If we could learn to do that!
Good post, GAHiker.

I once worked for a man (I have since retired, he is still working) who avoids vacations and pinches every penny he has. He earns close to 100k a year (more than I ever did) and at the rate he saves, he must have over a million dollars in the bank. No children. I have talked with him about it, but he does not see it my way. Isn't that something?

[skiehawk11]

GAHiker and camper, great points! I think it also depends what you find enjoyable in life too.

If love does come knocking at my door I hope it's a sensible, debt hating, and budget savvy woman. That'll make me happy.

[nadir]

Good on you for planning so early. When I was your age, my income went primarily to the local bar. Then I finally met a "sensible, debt-hating, and budget savvy woman" who showed me the light. And then my parents retired and I saw their daily challenges.

Got on the retirement saving track successfully, and everything was going swimmingly until...kids arrived. People say they are expensive, but before they are school age, you have no idea how expensive. We have two kids and with daycare, pre-school, and 529s, we spend $3900 per month on them. And that's not really high end for the DC area (I assume you live in DC, but I could be wrong). At today's interest rates, a $3900 monthly payment could buy a pretty good house, so we basically have two house payments per month.

I am a 14 and my wife is a 13, and we have both had to scale back our TSP contributions to minimum that will still receive the full match. In a few years, we can return to the max savings plan.

One last thing, you seem like a smart guy, which means you will seek out and likely marry a smart woman who will want to work (and will probably make good money). That means your Roth IRA contributions are off the table since you'll be making too much.

To echo other posters, don't forget to enjoy the ride, but I'll personally thank you for planning ahead to be self-sufficient in retirement. This country needs more people like you.

[TSPNerd]

When you retire, you can subtract 10% of your monthly expenses because you won't be driving to/from work and won't be eating out for lunch etc.

And if you carry over 240 hours the year before you retire and save 100% of your vacation time the year you retire -- assuming you retire the last week in December, you will get paid out for 448 hours of vacation time -- plus your bi-weekly pay is a huge payday.

[bab951]

When you retire, you can subtract 10% of your monthly expenses because you won't be driving to/from work and won't be eating out for lunch etc.

Won't be eating out? My elderly parents eat every meal out because my mother doesn't like to cook. I have retired friends who say they quit cooking when they retired.

[TSPNerd]

When you retire, you can subtract 10% of your monthly expenses because you won't be driving to/from work and won't be eating out for lunch etc.

Won't be eating out? My elderly parents eat every meal out because my mother doesn't like to cook. I have retired friends who say they quit cooking when they retired.

Still don't have to drive as much. That saves a good chunk of change depending on how far you live from work.

My gas budget would drop by 1/2.