John M. Hoffman
Is John Retiring? NOT JUST YET...
So if I have a
budget of $120,000 and $24,000 will come from social security, where will
the other $96,000 come from? That is what I will need to draw from my
accumulated savings. To back into how much savings I need, I have to
determine what a “safe” rate of withdrawal would be. The rate of withdrawal
is the rate that I can take from my accumulated savings without fear that I
will deplete such amounts. As I get older, the rate (percentage) that I can
withdraw should increase as my life expectancy (how long it needs to last)
decreases. I hear people talk about 4% as a reasonable withdrawal rate.
Given that I am not certain of the age that I will (can) retire, and I think
that rate is often mentioned for people younger than I plan to be at
retirement, I think 4% is a conservative number to use.
I realize that
I will need to earn more than 4% in order to withdraw at 4% and not be
dipping into capital.
The math then works
out to dividing $96,000 by 4% and getting $2,400,000 in accumulated savings.
This does not count any money I want to have set aside for special things
like paying for weddings, grandchildren’s education, helping children buy
their first house (see how this can get out of control).
I have a target (sort of) for what I need to accumulate. I also have a good
head start on accumulating that balance, and I have an idea of when I might
want to start tapping into those investments (in my case that is five to ten
years). That leaves me with how to invest my accumulated savings as well as
the question of how much I need to add to it each year. The more I add each
year the sooner I reach my goal.
I can set up a spreadsheet and start with my current accumulated savings
(those that are for retirement income), show what income I hope to earn each
year at some reasonable rate of return, show what I can add to these savings
each year, and the spreadsheet should show when I get to my goal of
$2,400,000. What do I use for a rate of return you may ask? I am currently
using 8%. The S & P 500 index 25 year annualized rate of return from 1955
through 2013 has only had one year below 8% - 1981. A 25 year rate of return
is a long period and you may wonder why I am using such a long window of
historical returns for my spreadsheet that should help me determine when
during the next five to ten years I will reach my goal. The reason is that
while I am still working, my plan will be able to absorb any downticks or
benefit from any up ticks in performance. What I mean is that if the
spreadsheet shows that I need to continue working and saving for five years
and then the next three years are bad years for my investments I can keep
working and saving and it simply might take a little longer to get to my
Here is the important thing that I do. I set up my spreadsheet and I
monitor it occasionally. Monitoring means I update it for investment values.
I also review my budget to make sure that I am comfortable with it. My
retirement plan is like sailing a boat across the Atlantic. Slow and steady
with slight adjustments along the way - not sure exactly what the weather
and winds will be like on a daily basis. My retirement plan is not like a
rocket that is pointed at a target and fired.