Can you retire by 55?

I too want to know where exactly an 8% return can be had. TonyL apparently looks in the mututal fund’s literature and believes that he is getting returns upwards of 11%! No wonder Wall Street makes so much money.

Academics such as Wm. Bernstein state that a 6% return is about what we can expect in the future. Warren Buffet believes the figure for future returns is 5.3%

For the past several months my money market account has done way better than my stock portfolio.

The point is, all of these posts assuming an 8% return are assuming way too much. Moreover, EVERYONE’s portfolio, even those in fixed income, has eroded during this past year, so you can’t even assume that the amount of savings remains the same, much less grows at 8%.

I am 78 and will be retiring in Dec. I have 115,000 in Tax deferred savings with Fed. gov. Where would be a good place to invest this money and how. I have 15,000 in a mutual fund and I pay a commission, I would like to invest in something with no commission.

Im 23 up here in Canada and I am already invested in a pension that matches 125% and have started the equivalent of a 401K and Resgistered Education Savings for my growing family. My wife and I work at the same place. Health Insurance is obviously something we dont have to worry up here. We both are on 40-45k government jobs but I still picked up a part time job that I do 20 hours a week so I can contribute extra to my retirement and kids educations savings. My wife and I will both be retiring at 55 with full pensions (defined benefits plan, 2nd most successful plan in Canada, so it will be there) matching with inflation our present incomes. I own my own house and we have about 35k in debt from school and stupidity. Educating yourself and your children about finances is very important.

Even though we qualified for a much larger mortgage we bought a semidetached for 130k because it was more affordable and fit into our short term goals. Live within your means.

We have had some tough financial slaps in the face. Some things I have learned is that most credit is bad, as a cushion or anything. We have struggled to stray from our parents examples of consistent use of credit, but it is paying off. In the last year we have paid off 5k in debt. We plan on being debt free in 3 years while still contributing to retirement.

I have been undisciplined when it comes to money and for those who have similar problems get automatic deductions, I honestly dont even notice it anymore.

The story about the man who gave 2+ million, I read into that story and what a lot of people are missing is that he bought a lot of property in his youth and rented them out. I dont think they put that as income for him but selling his properties contributed to that 2+ million.

Saving for most isnt difficult its just inconvienient.

to Tom
I am 22 years old and I agree with Justin. He is thinking about his future, Something that many people don’t do, but down the road they’ll wished that they had. You don’t know how Justin lives… I love how you assume he has no life. Anyway kudos to you Justin! You are a wise individual.

As for parents financing their children’s education, I don’t feel there is any obligation or duty for this.

I am young and just finished college recently. I had some scholarship money and worked my way through school. Although tuition has risen over time, kids still have the ability to afford an affordable state school. I believe that if someone is going to succeed, they will succeed at a state school and don’t need to go into debt to finance an expensive education

To Justin in Levittown, NY

Alright dude, I’m 24 myself and make about the same amount of money as you, but you’re going way off the deep end trying to save/make money. You’re going to spend every waking minute devoted to keeping up with your rental properties. 1 a year? Are you dumb? How the hell are you going to have time to do anything when you have 30 properties to take care of? Your friends must think you’re pretty boring, no? You don’t go out to eat, you probably won’t see a movie, you never go to a bar, you’ll probaly never throw a house party, no one wants to come over cause your roommate smells funny, your car gets beat up by hail or a branch falls on it and totals it cause you’re too up tight to use your own garage, ect.

Come on man, we’re still young. Don’t be such a stiff.

Johanna in College Park:

I do understand your side of this, and I agree with some of your points. However, the fact remains that many people are in a position of having to make a choice between saving for retirement and paying a child’s tuition. I personally feel that retirement needs to be the first priority in that situation. That doesn’t mean that college is any less important, as in today’s world, for the average person it’s nearly a necessity. But, there is plenty of money available from scholarships, loans, grants, etc. to make it possible. You can’t get that type of support for retirement.

And for the record, I am 27 years old. So, yes, tuition has risen in the 6 years since I’ve graduated, but I’m not out of touch with the reality of the expense of college. Also, I did very well in school, was accepted to both state and Ivy League universities, and made a choice to attend a very good state university over those Ivy League schools as the finances didn’t make sense. You’re right, coming out of school $100k in debt is ludicrous! But, in no way do I feel it was my parents obligation to come up with that sort of money.

And one last comment, I have a one-year old at home whose education is already being saved for. I plan on helping him attend wherever he’d like to go.

Young rookie here, 24 years old..
Pre-Tax Salary = $50,000

Here’s my gameplan for retirement…
1) Contribute up to employer match on 401K: Instant 50% on investment in first year, investment grows tax free until retirment
2) Avoid bad debt: Made the mistake of buying a new car, but I’m that much wiser now; paid off my car loan, and even looking into downgrading my car (or riding my car until its death)
3) CREATE PASSIVE INCOME THROUGH A BUSINESS: besides investing in 401K, this is where most people miss out. I started a candy vending business, I already make a $400 month just maintaining my candy machines ONCE A MONTH… lemme spell it out, I “WORK” ABOUT 2 HOURS A MONTH MAINTAINING THIS ROUTE, and get compensated dearly for my time… TIME is MONEY
4) INVEST IN REAL ESTATE: Find a house under valued, make some minor fixes, and rent that sucker out! Its not hard if you do your homework, and the house pays itself off (well, the renters do). My one rental property will be paid off by the time im 55, and ill just collect the rent to do whatever I want… and I plan on getting at least 1 property every year, you do the math, and I’ll be living the good life down the road.
5) Live within your means/BUDGET: Don’t go out to eat; shop smartly; get efficient light bulbs; rent out your garage; take on a roomate; get a used car; minimize your driving; find any way to cut down your expenses, I do it myself.
6) Surround yourself with people you want to emulate or who support you: dont marry a spender, drop your townee friends who do nothing but go out and drink all the time and spend money frivorously; DO network with people who are positive, up beat, and have the same ideals as yourself. The rest will take care of itself.

Gavin has a valid point but, I beleive that one of the benefits of increasing immigration into the US is to boost tax revenues.

Now of course with the poor spending habits if this country, we will probably spend all that we bring in plus that much more, but it could alleviate the problem if the right people were elected.

And that is another doubtful prospect.

I am 43 and could retire now. I will retire in 4-5 years, before age 50 but after I am vested in a government retirement plan that provides for health benefits beginning at age 55. Think about that - we’ve heard here that health insurance costs $12,000 a year and that we can draw 4% a year. That means my return for working a few years to earn the health insurance entitlement is aroun $300,000. Not bad considering I will have only worked in that job for 5-6 years. That is like earning an extra $50,000-$60,000 a year to my salary.

So, the advice is, worry about salary and savings, but also focus on establishing a “preretirement career” in a job that provides good retirement benefits even if the salar is bad. This can be found in many government, educational, and non-profit jobs. So spend a few years giving back while earning a very large phantom income.

I do not understand why thi is seldom written about or discussed.

To Highnetworth, Dallas, TX who believes mutual funds will return only six percent:

I wonder if you have any real saving experiences or you just love to pull some text from a poor professor’s text book.

Vanguard 500 index fund’s average annual return is 11.55%. It is a 32 years old fund. If you want to see some really old mutual fund, how about American Funds ICA (AIVSX). It started in 1934 (74 years old to date) and its average annual return is 12.53%.

Remember the fund values go up and down but the long term average of mutual funds will be very nice, beating bonds and CDs. Most financial data would prove it to you.

I am 46 years old. My wife and I have worked 20 years and our mutual funds in both 401K and non-retirement funds are valued at over one million dollars. Plus we have a mortgage-free house value at $300K. Living in the Mid South, our salary is not like high executive type.

The truth is you must study this thing called financial planning. If you don’t care, you would not have much at the end. Back to the first point, it does not matter what one professor’s study said. It is your life. It is about how much YOU will have at the end.

Mike in Chicago:

You don’t say how old you are, but I’ll bet that college tuition costs a lot more than it did when you were in school. That’s why it doesn’t work to say, “Well, I worked my way through school, why can’t these lazy brats today do the same?” Because the amount of money required is so much higher, that’s why.

I think that a student whose parents say, “We’ll pay your tuition and basic expenses, but if you want spending money, you can go out and earn it yourself” will learn the value of a dollar at least as well - probably even better - than a student who knows she’s going to be tens of thousands of dollars in debt when she graduates no matter what she does.

Depending on the situation, I don’t think parents are necessarily obligated to foot the entire bill, but I do think that making a good faith effort to make a substantial contribution should be considered part of the normal cost of having children. Parents should not delude themselves into thinking that they’re somehow doing their children some kind of favor by cutting them off financially when they reach 18. And parents who take early retirement (for non-medical reasons), while their children are struggling under mountains of student loans, are being very selfish.

“Shame on me?” if I don’t have 100k saved up for retirement? How dare you! Not everyone’s situation and/or choices;circumstances during their primary “working years” has allowed them the luxury of saving. Being a single parent and needing to put a roof over a child’s head,food in her belly and clothes on her body set me back just a tad.Add to that, absolutely NO help from her father. So, shame on you for your ignorant judgement!

I think the expert takes 1000 words to say this with lot of uncertainty. I will take one word “NO”. Appx 30 years ahead of you and your wife after retirement. The way $ has lost 50% in value and OIL has trippled in 2 years, no retirement calculator will work or be trusted. Bottomline, get off your butt and go to work.

I agree with Mike, that I would prefer to see advice that could actually be put to use to help me.

For instance, I refuse to invest in socially irresponsible investments. I don’t want to find out that my money was used to finance child slave owners (as in the cocoa industry) or for coffee plantations that are destroying the ecosystem and adversely affecting the people who live there.

I’d love to find out how I can invest, knowing my money isn’t harming others.

I got my company’s 401k provider to find a few investments listed as “socially responsible” but even they aren’t great. One investment is Yahoo!, even after they turned over a user to the Chinese government for speaking out against their abusive regime.

That’s not really a place I want to invest, you know?

And how about actually advising people who weren’t able to invest until they were in their forties? I was a SAHM until my oldest were pretty much grown, and unlike others here, our near-poverty level income did NOT allow for savings. (We chose to sacrifice luxuries in order to keep our kids out of public schools and daycares and most of the time did not even own a car. And now that we can afford multiple cars, we only own one, which we bought used, and we opt to take public transportation whenever feasible, including my daily commute to work, as it seems the environmentally responsible choice.)

We are now able to begin investing (and paying off debts) but where could we ethically invest, and how much would we need to invest in order to retire at 65?

I’m sure we aren’t the only couple in our 40’s, with kids nearly grown, who are now able to begin investing.

More importantly, they need to remember that Social Security and Medicare will eventually be insolvent. I suggest you read “Grey Dawn” by Pete Peterson. The age demographics of this nation can’t support the unrealistic expectations of its baby boomers. I suggest you get used to the notion that you will be working until 70, perhaps later.

Those who believe their mutual funds are returning double digit figures are drinking the Kool-aid of the fund company. Fund company literature famously uses selective information to sell funds. If there were funds with double digit returns, every investor would be in them. Check out your prospectus for truthful return information. Don’t forget to subtract all the transaction fees, taxes and hidden charges.

Prominent academics (Siegel, Bernstein, Edleson) have determined that the stock market will return about 6% real return (after inflation) going forward. So the situation of living off of income from your portfolio for 30-40 years becomes even more challenging.

a $1M portfolio would allow you to safely draw down about $45k a year. This amount + SS makes for a reasonable retirement. Why would anyone want to retire early w/ an $850k portfolio that allows them annual income of $34,000?? And no SS to supplement it? What can you do on annual income of $34,000 - for 30 years? $850,000 having to last for 30 years is NOT a lot of money.

I think there is too much focus on early retirement, as though it is a pie-in-the-sky paradise. People need to take a reality check, maybe find work that is more satisfying than the jobs they can’t wait to retire from. At 55 I am in my prime earning years and at the pinnacle of my career. Why retire?

Fed reserve interest policy and inflation are bane of retirees. Earnings at 5.00% can suddenly drop to 2.00% under fed manipulation. Add in double-digit inflation on things that really matter to sustaining human existance, like food, gas and medical care. You are in serious trouble. Now factor in stock market volatility with market gyrating down 50 percent to up 50 percent, and you could easily get caught taking subtantial loses in retirement, when you need to take out the money. Bottom-line is that early retirement, or any retirement, is highly risky proposition.

To Johanna in College Park-

I understand your point, but I guess we’ll just have to disagree here. While a parents has an obligation to provide care for a child, I don’t believe that extends to paying for their entire college education. Paying for a portion of my education was one of the better experiences I had in transitioning to the “real world”. While I think it’s great that some parents choose to pay, and hopefully can still teach “value of a dollar” lessons, I don’t think it’s their obligation. Just as they shouldn’t have to buy the latest video games or jeans for their kids, just because “everyone’s got them”. Values and a work ethic are the best two items any parents can provide their child. Just my two cents.

Unfortunately, I am 40 yrs old and not part of the affluent baby-boom generation, hence I have no previous pension, 20K in my 401K no job security (I have been laid-off, by baby-boomers, 3 times over the past 7 yrs). Can I retire at 55 too? My thanks to the Republican party, more baby-boomers, who have given almost all of our middle class jobs to India and China. Maybe I should go into selling security systems and guns because the baby-boomers are going to need them to protect themselves from the starving, poverty-ridden younger generations!

Any thoughts for those in the under 30 crowd about how much to save? For example is putting 10% of your income into a 401K enough?

My wife and I are under 30. We both contribute 10% to tax deferred retirement plans (mine is a roth 401K and her’s is a traditional 401K). We own a house that will be paid off around the time we turn 50 based on our current payment plan. We are currently balancing between building on our emergency fund and slowly raising our standard of living (replacement of college furniture).

Are we on the right track or should we stretch to save even more (15%)?

Retirement, what’s that? Nah, I’ve spent a lifetime building, shaping, and sharpening my skills. I know the fat old guy I see in the pictures is me, although I barley recognize him. When you work at what you like to do you never want to stop, it’s not in your equation. My nature is to not spend much, save some, and try to follow my own path.

I work part time for four separate employers. I leaned early in my career to not put your career eggs in one basket otherwise you’ll end up a paranoid chicken. Retirement is not the sum of your investments and earnings, that’s a false meaning invented by investment companies. Retirement is leaving the world better a better place than when you discovered it.

If you are like most of us and do not get your medical coverage covered in retirement or have a pension to fall back on then 850K is peanuts. If you retire at 50 or even 55 and live until your 85 you will run out of money. If you live longer you will wish you wouldn’t have.
Don’t think that if the government takes over our health care system that our problems will be solved. I hear commercials daily on the Canadian radio stations about their(free) healthcare system all the time pleading how their system needs to be reformed because of the fact you wait inline (sometimes months) to get the tests and procedures you might need. Hopefully your still alive by then. My point is it will still be a system where if you have the money and can afford it, you will get good healthcare. However, it might be in another country. This is still going to be a huge expense that everyone should plan for in retirement.

I hope to leave this gig at 55, I’ll have to do something else but at 55 I will have had it up to my ears in this career if not sooner!

At 55, I’m like many and looking forward toward retirement. To prepare, I live off of my Social Security equivalent income. That gives me enough to make payments on a decent new car, pay household expenses, and a few indulgences.
I garden, build & renovate my home, read, volunteer, cook, and exercise for leisure. I have everything I need, so I invest the rest. Money is an important part, but only part of retirement. Learning to live a rich life without money is a skill all by itself.

My husband and I looked forward to our retirement and were so excited when the day came. My husband worked hard and saved in a 401 where the company matched up to 6%. He invested 400k with a local firm (with a good reputation) and we thought we would never have to worry. Our home was paid for and had little debt. We never lived “high off the hog”. Just the simple life for us. One vacation a year within the states and for only a week was all we planned on doing. Then we lost half of our investments after the Sept 11th tragedy. My husband had triple by-pass and a stroke. Our health insurance doubled. We had to start thinking that what was left would never last us for the rest of our lives even with the help of S.S. We live modestly like we always have. We hope that the day never comes that we will have to ask our children for help. I have gone back to work and it helps pay the insurance and buy some groceries. At 70 we never thought we would have to worry about having enough money to make it go. Not everyone even though they save in a 401 and live within their means has a good retirement. Just ask us.

Great numbers and ideas for retirement possibilities. My wife and I paid off our mortgage when I was 48 and she at 45. Live in a suburb near Salt Lake City and have retirement savings similar to the ones that have been mentioned. And sent two of our kids on Mormon missions with all expenses paid by us. Pay 10% of earnings for tithing commitments to my church and in return have been blessed with careers that will accomodate the adjusting human needs for the future. She a Registered Nurse and me an entrepreneur/operations manager/auditor that works from home. What retirement ? Being productive and enjoy a fulfilling life. And may I add I was born in the Pacific Islands and have done my fare share of travels. The country of New Zealand is my preference for kick back stage and do a little teaching.

I built a financial model ten years ago that shows my annual income and expenses and cash surplus of deficit for the year. I update each year with actual numbers. It runs until I’ll 99, about as long as I could possibly live. I use this two ways: one to try alternate lives out with, sort of “what ifing” and the other to reassure myself that I can retire if I am diligent.

What I can report is this: Half of those reading this will be dead by 75. The other half are the ones who have to worry about too early retirement. You can run out of money if, say, things hyperinflated, like gasoline, food, medical costs (!) And it only takes a few years of hyperinflation to wipe out a life time of planning. YOu can’t escape this once you retire. AND, no matter what you do, you can’t avoid it when you are old. If it happens, you are screwed.

This may argue for spending it all as soon as possible. At least you’ll enjoy it. But it is an unfair burden on your kids to place your troubles at their door. “Early Exit” planning is an option. Spend the bucks, have a ball, and duct tape the garage door and start the engine.

My point is this: Most Americans will not have enough money to retire and live with dignity. A whole bunch of them are going to wish they were dead. Mental health resources will be in great demand.

I may have missed this as lots of entries here but using 7 or 8% as a prediction of long term gain in the market one would need to adjust that for a real return after inflation. Therefore subtracting 3 or 4% depending on your inflation expectation would indicate a real long term return of maybe 3 or 4 per cent if your time frame is truly long enough.

You forgot to include the Kerry-McCain strategy; marry M-O-N-E-Y…BIG money!!!

The problem with retirement planning is allowing for the unforeseen. Using the standard retirement planning tools I could retire comfortably at 50 (in 5 years). Married, no kids. Current assets: $1.5M, house paid off, will get a pension of 1500/month starting at 55.

The numbers all add up, but what about:
a) a major health crisis for myself or my wife requiring long term care. Do I start paying for long term care insurance now or follow the actuarial tables and risk that our health
insurance will be good enough.
b) a period of high inflation (which seems increasingly likely as the fallout from the debt bomb spreads). All the pretty projections go out the window after a few years of 10-15% inflation like the late ’70s.

I’m not saying either of these (or other) nightmare scenarios will come to pass, but all of us considering early retirement must face the fact that we’re taking on a considerable risk.

Of course, the opposite risk is that by being overconservative we fail to live our lives fully prior to retirement. Take that year long dream vacation now, or wait? Try teaching part time now like you’ve always dreamed and risk losing that promotion to Vice President?

No easy answers here.

Given the rather insane price changes of the basic needs of society in the last six months alone, I find it amusing that everybody seems to think Western civilization if going to remain unchanged for the next thirty years. I’m going to drink nice wine and enjoy good steak while it still exists for the middle class…..

Love your articles but you always seem to focus on people who are obviously very wealthy couples with two great high paying jobs. No one wants to hear about how these wealthy boomers can retire at 55. I get the impression most are writing in just to brag about their wealth rather find out whether they can retire or not. Of course they can retire at 55 given their current finances. What about the other 90% of the population who at 50-55 doesn’t have $100,000 in the bank because they have average paying jobs or single incomes and can not afford to save buckets of money. Lets here about the real people and what they need to do to afford to retire at 65 if they are lucky.

Posted By Mike Detroit Michigan : May 2, 2008 8:33 am

Response for above comment:
It seems like many people have been responding to this one in very negative and unhelpful ways. Shame on all of you that have been making Mike feel worse about his financial situation. He is actively looking for help and advice for his current situation and many of you are saying things along the lines of, “too little, too late” and “looks like you’re SOL”. Then these people go on to brag about their secure financial future and how proud they are of themselves. Shame on you.

Realistic solutions:
1) Spend less money on things that you don’t really need. Spending more money doesn’t necessarily make happier.
2) Any remaining money put away into your 401K, Roth IRA, or other investments from now on.
3) Take public transportation if possible
4) Bag your lunch. You’d be amazed how much moneyh this saves. While you are at it, maybe you can make something healthier than eating fast-food at lunch (i know, assumption).
5)In general, there are many opportunities to save money, you just have to take the initiative to look at your own spending habits.
6) Teach your kids to save their money so they do not run into any difficult situations in the future (if you have any). Even if they are older its never too late to start.

Don’t let yourself get bogged down on what you could have done. Just look to the future and try to see what you can do now.

I remember a prayer that a friend once said when he was going through difficult times:
“God, grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.”

You are already on the right path by reading this article and considering your retirement options. Now, it’s time to change what you can. Good Luck.

What little spare we had after paying for medical bills, was put into savings. We lived paycheck to paycheck and lived in the moment. We thought life was good - if not somewhat basic! My husband died when he was 47 and I have great memories of all we did do. It’s not all about money; it’s about living every moment of your life to the fullest NOW… We can hope we live long enough to get to a retirement age!

To Gebe,

I know someone who made six figures a year. He had nice homes, nice vacations, maids, landscapers…. while he was working. In retirement, he’s gotta watch every penny. He might still have 20+ more years of doing that. But what if he needs to go back to work at age 70 just to afford a roof over his head? Would you want to work at age 70, unless you really wanted to? You’re looking at life the wrong way. Too many people like you work for things, not for themselves… you’re working for things - cars, homes, maids, landscapers, launderers, etc… not for yourself. Wakeup… You’re owned.

It cracks me up, people who say things like “I have six people in my household and only one small income, so how am I supposed to save a million dollars?”

Exactly! It ain’t gonna happen! We all make choices and either pay for them or benefit from them. People can have ten kids and be penniless, no kids and be multimillionaires, or somewhere in between.

I am blown away by how many people think “I’ll figure out retirement when I get there.” No you won’t! That’s why I am strategizing my finances for 30-60 minutes, seven days a week and will eventually be very weatlhy. It’s not rocket science, it’s just goal planning, sticking to the plan, and adapting when necessary.

To Dave in Denver:
I actually just started the cash flow deal a year ago. Bought a rental condo, and as long as it’s occupied, it generates a 12% after tax return. Loving the extra cash flow too. Didn’t finance the place. Didn’t want to pay the closing cost and get leveraged. All profits get turned around and invested in high yielding, good free cash flow companies with histories of increasing their dividends and those dividends are reinvested too. Hopefully it will pay off. If I find another rental, I’ll be doing it again.

To LB in Temecula:
My parents didn’t pay for my college education. I turned out alright, actually managed to finish college without debt. My friends who’s parents footed the bill are debt ridden and living pay check to pay check. Teach them the value of money and make them chip in towards their own education.

Cash is king.

If I had $850,000 to draw on I would quit work tomorrow

Last years retirement plans are no longer valid with home prices dropping, energy, food, taxes and medical costs going sky high.

Flexibility is an excellent asset!

K.FOos in AR:
kudos.
I can recall a joke I heard once. It goes like this: “Just when I think I can finish the race,someone moves the finish line on me!”
Funny, but true.

In my dads case, he retired from American Airlines as a Mechanic.

Yet 3-5 years later he was making as much in one day as a independent locksmith than he made all month at AA.

Point, retirement in his case gave him the flexibility to do and take risks for things he wanted to try.

If not for his retirement funds (savings, investments) he never would have tried.

I figure by age 60 (10 more years) I will be doing similar.

Those who are poor can still become closer to un-poor by doing slow builidng of wealth.

Example:
Doing DRIPs is how I will be worth $2m by age 70.

I only started 2 years ago and can now project positively what I will be worth soley due to DRIP activity.

There are so many quality comments here I feel compelled to post my own plans for comment. I am 45, single, no kids and will be taking severance from my job of 25 years November 1. My desire is to stop working or at least redirect my time to personal interest and rewards -not necessarily pay. My assets are (will be after tax Nov.1) ~$450k tax differed accounts (only 8K is roth, 5k HSA) , another $450k in investments, a Naperville home I paid $350k for in ’05 (present estimate $375k but you see the headlines) and still owe $206k on (15yr 4.875%). My intent is to slip into unemployment, sniff around for dream jobs while I unload my crap, try to sell my home next spring and, if I succeed, take a year or two of travel to find my next home (life). If the home does not sell I consider roommates, and local work. I have done some calculations and it seems the hard part will be getting to 65 on the taxed investments. If I can do that, the tax deferred accounts will rise to the occasion with reasonable real returns. My spending is already under control. I have lived for the past 3 years on less than $3500/mo with a $2400 motg.,tax,ins bill. On the other hand I am retiring to improve lifestyle (mo money) and will lose health care from employment. I am figuring 100 for life expectancy.

Questions;
-What should I do about health insurance? My plan is to go high deductible and continue to contribute to HAS. Better ideas?

-My portfolio needs a lot of work to get current income. Recommendations?

-Is $40k/year just too little to make a worthwhile retirement? I read about sailing couples spending less and loving it.

-Inflation scares the poop out of me -Any bright ideas for solid real returns?

-Is there room in my finances to start a business? How much dare I risk? How do I account for it? Is it possible to start this year and cut down my current income to reduce taxes? (I get severance in a lump this year).

I know that in my own case… when it comes time to ‘truely retire’ I have no intention of going to FLORIDA OR CALIFORNIA to live.

Even with $$, only a fool would move to two of the worst places to live.

Neither have been the best choices for years.

In my own case, I will be worth $2mil by age 70. And If I die before then my spouse will be worth at least 25% of that.

To Gebe:

You may not want to live a miser’s life now, so you live it up. But when you’re old and retired, I’m sure you’ll regret not having saved more to make your golden years more secure. (Unless you know you’ll be financially secure, like $5M+ minimum in savings. In that case, disregard this post.)

All of you young (under 35) people busy planning your retirement should not forget to live now. Sometimes current circumstances are more important than sitting in a condo in Florida when you are 75.

How many wealthy people do we see having only 1 or maybe no children because they “cannot afford it”?

And those condescending comments about Wal-Mart greeters are offensive. Those old people are probably much much happier than the savers sitting alone in their condos checking their mutual funds.

Gebe in VA,

If yo want to spend our money and that makes you happy. Then do it. But I’ll repeat what I said before. A high income does not necessarilly translate into high net worth. KNOW THE DIFFERENCE.

To Mike in Chicago re: LB in Temecula

I would say that if LB cannot afford to adequately fund his (her?) childrens’ education AND his own retirement, then he cannot afford to retire at 60. When you choose to become a parent, you owe your kids the very best shot in life you can give them. And why wouldn’t you want to give them that?

If your retirement plan relies on sticking your kids with part of the bill (either directly or through loans for educations that you chose not to pay for), then either you’ve had more kids than you can afford or you’re living a bigger lifestyle than you can afford.

(And no, I’m not bitter about student loans of my own. I got a scholarship, but I don’t know what I would have done if I hadn’t.)

Those of us who are fortunate to be dual citizens, I am retiring in Windor, across the border from Detroit where I worked. I am covered under health insurance and I spend the winter in India where my wife is from. Significantly less costs for 6 months.

To have a decent post-retirement life you need to make sacrifice during your golden years of life when you are more energetic and more ambitious. You should make good money but not spend rather save every penny possible just so you have a “SAME” lifestyle as you ENJOYED (rather suffered) pre-retirement life.
Now may I ask, for whom are we earning? when we are not supposed to spend money on what we like to enjoy? it is obvious after retirement we will not LIKE to spend lavishly and rather live low. So by this means we would never enjoy the high-end lifestyle. And I hate that part, rather, I would say, I like to treat myself better, if I make good because of my hard earned skills so I would treat myself better too. Why should I cook myself, laundry clothes myself, clean house myself, stay in 2 star hotel, drive Ford/Chevy/Toyota/Honda etc etc..
I make good money and will use dry-cleaner, maid service, fine dining, 4-5 star hotels, BMW/Mercedes and business class Air, and enjoy the best available that I can afford, and not think about post-retirement life. At least by doing so I will have a satisfaction that I had a good life.

Yes, I don’t want to live miser’s life when I make good money.

By the way. Here is an excellent article that gives a very simple straight forward explanation/example of the time value of money.

http://beginnersinvest.about.com/cs/personalfinance1/a/101303a.htm

To answer your question LB in California. I would start by saying you own too much house for your income. 360K mortgage on 90K a year is a stretch. I would guess you have little left to save. I would suggest putting 15% of your salary in your 401K and then make your house buying and large ticket item purchases based on your take home pay AFTER paying yourself first ! You would be surprised to find out you never miss it. You might end up in a smaller house initially but you can trade up with equity later. If not save until you can get a mortgage that will not drain your income. My house has gone down in value like everyone else’s but it is not my largest asset, I have plenty of equity and at 6% fixed interest rate with 4% inflation my net cost on my loan is 2%. Why would I ever pay it off? Especially if I include the tax advantage. If I can make more than 2% with that money it would be foolish.

I think a great rule of thumb is to put enough money into a 401k so your company will match. This should be done at a relatively young age, say 22, to make sure you start early and continue doing it.

If your company does a 1:1 matching, then investing $500 a month (plus another $500 from your companies matching), over a course of 40+ years will lead to a 401k of over 10 million dollars. This is assuming the total investment each month is $1000 and your money it put into a mutual fund averaging 12% (like Vanguard). A goal like this isn’t totally outlandish, considering that’s a constant $500 you are investing each month. Just imagine what would happen if you invested more towards the latter half your career when you probably make more than the first half.

I find these comments more useful than the usual punditry from the “financial writers”, since it comes from real people grappling with this issue.

My own experience: I’ve used Monte Carlo models, including my own constructions, using the historical returns (best info we got, but no guarantee!=> 3.9% real return for my particular mix) and US life expectancy tables with a 3% flat inflation rate to come up with a 2.5% withdrawal rate. This gives a 90% probability both my wife and I will be dead before it’s exhausted (we’re both 55 and in good health). This withdrawal is much more conservative than anything I have seen proposed by the “writers” but pleased to see someone else in this thread agreed: perhaps the sellers of mutual funds and 401k plans don’t want to scare anyone off with the grim facts!

Points made on average returns of 8% being only a part of the whole story, and the dangers of inflation are well taken. Certainly one could put everything in SPYs and stock mutual funds for higher return, but then one will inevitably get hammered by the volatility. Diversifying into bonds and cash reduces volatility (and return), but you still can’t forget their vulnerability to inflation. Basically you must have a nominal rate of return that is consistently higher than inflation; both historically have fluctuated quite a bit. It ain’t a simple problem!!

As an aside regarding inflation, interestingly here in Russia as an expat we get taxed on any loans or mortgages we have in the US that have interest rates less than the Russian inflation rate (8 to 10% per annum); the tax authorities view the difference as income!

Many here use the phrase “don’t forget the power of compound interest”, usually meaning a favorable aspect of saving. Let me add “don’t forget the power of compound inflation”. Inflation is actually much higher than the CPI or other phony numbers put out by the government. That’s because the things real people MUST use -gasoline, food, medical care, heating, etc., are rising much faster than the 3% or so in the government figures (they conveniently exclude most of the above items). Presently it’s probably more like 10%. Our present national debt, the mountain of future government entitlement spending, declining energy resources, all assure inflation will continue and probably get worse. Real returns on fixed income investments (CDs bonds, annuities, etc) are negative. Don’t be too optimistic about compound interest without taking into account compound inflation.

To LB in Temecula, CA,

The emergency fund was the first indication for me that you are on the right track for retirement. The mortgage is a real headache though for a 90K per year income. Since you live in CA, I doubt there is little you can do about that. Have you or your spouse considered a second part-time job? Stashing an extra 5K per year into savings or, better yet, paying off your mortgage early, will substantially benefit your situation in the long run. Retirement is not just about saving money, but reducing expenses. Good luck to you and your family! P.S. Google ‘diehards’. Your first hit should take you to a discussion board where you can obtain, at no cost, further financial guidance. This website has been a great influence in shaping my financial strategies.

To the many other comments,

Some of you already appreciate this, but others I suspect do not — life is not a sprint, but a marathon. Unfortunately it’s a marathon where some start the race and at the finish line while others must run a 10K just to get to the starting line. That’s life. It may not be fair, but it’s the one you have so make it a good one. If you wish to have the opportunity to retire (it’s a privelege, not a constitutional right), work hard, save (i.e. skip the latte and big screen tv), and with some luck, you might be able to relax, travel, and enjoy some of the finer things in life during your golden years. Regardless of where you end up though, be thankful for what you have, because it could always be worse, and for many, it is.

If anyone does not know what the term “time value of money” means then I suggest you look it up and memorize the definition for it is the key to answering your questions on how you can attain the amount of money that some of the posters have saved. Some of the younger people that have posted here have figured it out. Good for them! (I likewise figured it out when I was 22 and now turning 50 this year) The key is NOT HOW MUCH YOU MAKE or even HOW MUCH YOU SAVE, but WHEN you start to save. I have never made a six figure income but I will be a millionaire by the end of this year. The key……….START EARLY and stick with the plan. It is difficult to see the light at the end of the tunnel when you are just entering. But its very satisfying when the earnings are far exceeding your contributions. But still contribute. Luckily I married a wonderful woman who also understood (grudgingly) how important that she save some of her income too. Also to some of the other posters, don’t worry if your not making 8% return today, your goal is to AVERAGE 8% over time. Does it take discipline? Absolutely! Do you have to sacrifice enjoying life. Nope. Will you have worry free retirement? Thats the goal of “the plan”. Finally, realize that a high income does not always translate into a high net worth. Know the difference. I have to teach my children that constantly when they hit me the Sarah has this and Jenny has that syndrome. When Sarah’s mother confides in my wife the truth is she is 2 payments behind on their house payment. I just ask them if Sarah gets to go to northern California staying at resort hotels for 10 days this year with her family and they usually don’t know what to say. Other than, Oh yeah. LOL.

Mike in Detroit,

Many authors, including Mr Updegrave, have written books about retirement planning that include some excellent advice for people who are getting a late start. Cliff’s notes version.. make every effort to save as much as you possibly can each month, and take full advantage of any tax-advantaged retirement accounts that are available to you. It may hurt now, but if you don’t it will hurt a whole lot more when you are older. Tax-free compounding over the course of 10-15 years can make a huge difference. Consider postponing your retirement date. Every year that you can continue working will boost your savings and reduce the length of time that your savings will have to last. Don’t discount Social Security. You won’t get as good a deal as your parents did, but it will still be there. Resist the temptation to speculate in high-risk investments. Most of the people who do this end up worse off than before. Consider working at least part time after you retire - many retirees are doing this even if they don’t have to, because it gives your life some structure and purpose. Playing golf every morning and drinking Cutty Sark in the clubhouse all afternoon gets old in a hurry. If you have home equity, consider a reverse mortgage or moving into a smaller house. Consider moving to another part of the country where the cost of living is lower. If you live on the east or west coast, this can cut your living expenses by 25-50%. Many retired Americans are living abroad in expat communities where the cost of living, including good health care, is a fraction of what they would be paying in the US. Some of this may sound drastic, but so is eating cat food the last 10 years of your life. Stop complaining about wealthy boomers. Most boomers have been living beyond their means for the last 30 years and are financially illiterate. Take a trip to the library and start taking advantage of the opportunities that are still available to you.

Anyone living above the poverty line can afford to save enough to retire comfortably (based on their current lifestyle) without much effort or sacrifice. Here’s a couple examples:

Hard luck Joe makes $30,000/year his whole life and never gets a raise. He contributes 6% of his pay to an IRA or Roth IRA starting at age 18. Assuming a conservative 8% stock market return, he’s got $880,437 when he’s 65. This for a piddly $1800/year investment.

If he instead worked for a company with a standard 401k match (50% of the first 6%) got a 3% raise every year, and made the same 6% contribution to his 401k, he’d have $1,651,268 when he retired.

Imagine what you could do if you save more than the bare minimum? Say 10-15%?

Personally, I max out both my 401k and Roth IRA plus a bit extra but I’m hoping to do my part to drive wages up by removing myself from the labor force at 45. So far I’m on track.

An interesting combination of analysis, bragging, whining, and I suspect, in a few instances, fabrication. I would like to brag about my own situation, and a comfort level I have developed through hard work, saving, initiative and a little providential provision. I finished college in 1971, having paid all my own expenses through a working scholarship and part time jobs. After about 3 months looking for and not finding a good job, I joined the Army in Feb 0f 73. Was supposed to go to OCS after basic training, but they cancelled OCS for a period of about a year, so I had the choice of staying enlisted or getting out. I stayed in, and liked it. Served 12 years, then got out and went in the National Guard. I have stayed in the guard, and will retire at age 60 with about a $30K pension. I went to work for the federal Govt, and over 23 years, worked myself to a GS 14 position, earning about $110K. Have maxxed out my TSP (401K) which is worth about 600K. Non retirement savings of about 150K and home equity of about 150K. Plan to retire at 62 with about a $43-45K pension. TSP should be $700-750. Social Security for me and my wife about $25K. Survivor benefit plans giving my wife 50% of each pension costs about 10%. Military retirement benefit includes health care a little better than medicare which turns into medicare with supplements and costs about $1200 annually (actually less). I will also have the option of retaining FEHB into retirement at a cost of about 5K - have to run the numbers and evaluate depending on where we live. Bottom line looks like this:
Mil 30K less SBP= $27K
Civ 44K less $4.5 = $39K
SS (minimum) $25K
Sub Total: $91K
TSP $700K@3% withdrawal $21K

Grand Total $112K

Current Income ~ $120K
less TSP/IRA contrib $ 25K
SS/FICA $ 9K
Total less expenses $ 86K

Not adjusting for commuting and lunches etc, I will still have a $26K net increase in pre-tax income when I retire.
I have often thought of retiring earlier, but I still love both of my jobs, and the extra certainty is comforting. Leaving the fed gov job at age 60 would mean a net loss of nearly 10K in retirement income because of the way the plan works, plus at least $70K less in the TSP. It has been a struggle at times, and I have not always liked working two demanding jobs, but I am pretty happy with where I will be in 3 years!

Great topic, some informative responses as well, thanks all.

My two-cents:

Saving is nice, and everybody wants a nice, active retirement, but I think something is missing in all these discussions….CASHFLOW!

No, this isn’t an infomercial, it’s just that the concept of raiding the ole’ nest-egg every year for your ‘extras’ over-and-above your measley social security income seems risky.

If you are still relatively young (say between 25-45) it’s definitely time to get your hands on some INCOME PROPERTY. No, I’m not a long-suffering real estate agent either!

I started buying multi-family properties almost 10 years ago (when I was 30) and it’s a great hedge against retirement. Yeah, sometimes the tenants are a real pain in the ass, and sometimes my weekend are not 100% my own…but with 20 units my retirement is looking pretty good.

The trick of it is to get your hands on in-expensive, older buildings (hey, everything’s relative!) in great locations (I bought 4 buildings over time 2-3 blocks from the ocean in OC and up in the Rockies in Denver). No, I’m not a trust-fund kid and don’t have any inheritance…I just bought one building every 2-3 years.

The key is living in your buildings when you’re younger (and don’t have such big responsibilities). This keeps expenses and outside contractors to a minimum. Once you get to your late 30’s, find a cool lady and live together in one of your buildings. Once she starts helping you with little things (painting, collecting rent from the ‘nice’ tenants, banking), then you know you’ve found a real gem and marry her!

Besides that, the MOST important things to do are keep 100% occupancy, collect ALL late fees immediately, keep a good, regular w-4 job going at least 90% of the time and watch your credit score…you’ll need it.

Also, do all the other “regular guy” retirement stuff….I do it, but I don’t even think about my 401 K stuff…it’s just funny money anyway til 59.5!

If you pursue both strategies (i.e., income properties, 401K, etc), then in the end YOU’LL be that classy older couple that gets to take all their grandkids to Europe and the Caymans every-other year instead of sitting home comtemplating your navel!!

Best of luck-

Dave in Denver

To LB in Temecula-

As a quick follow-up, focus first on your retirement. While saving for the kids education is important, it shouldn’t come at the expense of your retirement. Money for education is plentiful in the forms of scholarships, grants, and at the very least, loans. You can always find money for education, but nobody is out there looking to fund your retirement. When the time comes, if you’re in a great situation, help the kids out all you can. But honestly, it’s a much bigger burden to them if they have to worry about taking care of their parents than to have to worry about paying back student loans.

To LB in Temecula-

There are a lot of factors to consider that I don’t have from you to be able to give you a complete answer. First of all, I’m not sure how old you currently are. Second, what do you envision your lifestyle to be in retirement? You seem to be off to a good start, most don’t even have your emergency fund set aside. Without more info, all I can give is the generic answer of making sure to maximize your 401k and your ROTH IRA. If you do that until you’re 60, assuming you’ve got time on your side, you have a good shot of being comfortable. Spend some time with one of the many calculators here to help get a better idea for your situation…and quite honestly, if that doesn’t help, search out an honest financial planner who can tailor something specific for you.

Has anyone thought about the posibilities if you could invest the money you waste on social security. You get only a measly 1-2% return which is less than inflation. Then figure that the government isn’t even actually saving your money in a fund, but is blowing it on something else instead. Seems to me that a blind monkey could do a better job investing than that. I just figured out what my social security contribution COULD be worth with a conservative estimate of a 7% return over the 42 years until I retire, and I must say it makes me quite mad to think about this legal theft any more.

My husband and I are 33 and 34. We have almost $140K in our retirement accounts, $60K savings set aside to buy a house this year, and two newer (2005 & 2006) fully paid for cars.

If someone is 55 and doesn’t have $100K set aside for retirement, then shame on them. I started out saving for retirement at 26, putting aside just enough to make the company match. I slowly raised that amount to 17% of my income over the course of 2 years (a few percentages every few months and whenever raises/promotions came around).

My husband and I travel frequently with our son (11 months old), go out to movies and eat out a couple of times a month. It can be done, but you have to plan and be diligent about saving. You also have to remember that you can’t have everything you want, right now, just because you want it.

I am so overwhelmed by the comments; I get the gist though - it is possible, even for people who don’t have 6-digit incomes to accumulate wealth and live a comfortable life after retirement. Now, if some of the math whiz could help lead me to the right direction: Our combined earning is $90K/yr, we have $25K set aside for emergency fund, $15K in 401K, $15K in the 2 kids’ ESA’s (kids are 7 and 3), $10k in Roth IRA. We have a $360K mortgage and no other debts. Our monthly expenses total $5k. 1) how much do we need to save to send both children to college? 2)how much do we need to save to ensure we can support our lifestyle even after retirement at age 60? Thank you for your input…

To Del in Tampa-

You say “I make over 65k/yr (greater than the median US family income) and save 12% of my salary and assuming 8% return on those savings I won’t have 850k when I retire. This is not an average couple and 850k by the age of 55 is not achievable for greater than 90% of the USA.”

Over 40 years, given your assumptions, you should save around $2 million. Either your math was wrong, or you simply started saving too late!! That is the problem with most, they think they can start saving late and catch up easily. Sorry, that’s not the facts. The fact remains that if people lived according to their incomes, more than 90% of us would be able to retire comfortably. Comfort being a relative term, but comfort nonetheless.

Cook your own food, wash your own clothes, mow your own lawn, clean your own house including the toilets, buy your dry goods and everyday clothes like jeans and tees at the big warehouse clubs, pay off credit cards monthly or cut them up, don’t listen to realtors buy a comfortable home with payments you can afford, pay cash for your cars, buy a nice Stanley thermose for your commute and take your breakfast with you, pack your own lunch, you don’t need and investment guru - follow the index fund strategy with John C. Bogle, contribute the maximum to get your employer’s match in the 401K, don’t loan money to relatives, reward yourself once in awhile with a good bottle of California Cabernet and a nice grilled tenderloin steak, both can be had for under 20 bucks vs 60 or 70 per person at Outback, plus you can enjoy the entire bottle of wine and walk peacefully to your bedroom with no risk of a DUI and sleep peacefully knowing you will end up with a nice retirement nest egg of a few million to take care of you for the rest of your life. I guarantee success!

To Al from NY, NY:
You are right on showing the different returns during a number of years. Your example shows why mutual funds should be for the long term, not short term.

As an investor, we have to believe that we are investing for the long term and can count on the market to work, as it has.

Other “safe choices” are not that safe either. Your saving account or CD will not give much less return that is not enough to buy food later.
The long time range will still bring up 10 to 12 % per year on average on good mutual funds.

To Dave from San Diego,

8% annual return in good growth stock mutual funds or an index fund over 10+ years is not unreasonable to expect; it is in fact even on the conservative side. The market has done between 11-12% annually on average since the 1930s (same percentage also since late 70s), and that time includes recessions, downturns, etc.

If you are new to investing (within the last two years), you have likely seen very poor or even negative returns on your investments. Just happens to be a down time (though the DOW has risen over 1,100 points in the last few months). If you look at returns following the DOT COM bust, for a few years there they were AMAZING. The rule of thumb is that in any 10-year period, 3 years will be outstanding, 3 will be negative and 4 will be average.

So, where to put your money? Hard to beat index funds. I’d put it there.

Alex, Portland, OR,

I just want to echo what you said and add to it. Getting a good job can go a long way toward improving your retirement outlook. But it is also just an amazing investment. The money you put into your education is generally not as large as the monetary value you get from increased earning potential, and that increased earning potential is practically guaranteed (low risk / high reward).

Oh, and for those of you who are about to complain that you didn’t have the opportunities, there is only a small segment I am willing to hear. If you are a minority, the bar is so much lower for you to be admitted to med school, law school, etc. Some schools will practically hand you an admission letter just for being a minority, and you can get into great schools like Harvard and Yale with credentials that would barely qualify you for the local state professional school. The opportunities are out there. You just have to make the sacrifices to go after them.

Sorry, slipped a gear on my calculations

600K at 3% inflation:

2009 - 618,000
2010 - 636,540
2011 - 655,636
2012 - 675,305

So, the net value of their portfolio should be viewed in todays dollars as
$806,291, rather than the 880K number

To Larry from Michigan -

While I do believe it’s possible for these folks to make it, you need to understand inflation.

At 8% per year, these folks’ expected earnings would be:

this time in 2009 - 648,000
2010 - 699,840
2011 - 755,827
2012 - 816,293
2013 - 881,596

But what is that number worth? To calculate that, take the 600K, and figure 3% per year

this time in 2009 - 630,000
2010 - 661,500
2011 - 694,575
2012 - 729,304
2013 - 765,769

So, in terms of how they ‘feel’ about their money, the question is how they’d feel if they had 115,828 more than today (or $715,828)- because that’s what they’ll have in 2008 dollars. Not a bad number, but NOT 880K

Stocks aren’t the only investment you can make with your savings. We have 4 houses, the first one bought at 24 years old. Even with the latest downturn in the market, if you buy a house that is a good value and not in an overpriced market, you can leverage your money over time. We have about 900K in equity in the houses plus 401K and retirement at an average of 52 yrs old.

Steve from Washington wrote:

“I currently am 25 yrs old and plan on retiring at 55 with closer to $3 mil and I see that as an attainable goal.”

Remember, $3M 30 years from now may not be as much as you think it would be…

Planning on age 36. But then again, I’ve been investing since about age 15, and live a very simple life style and have no expenses or debt compared to my friends and most folks overall. I’d much rather pop an extra couple grand in retirment and brokerage accounts than eating out all the time. Plus I learned early in life that I don’t enjoy working for someone else.

PS. Alot of those financial calculator suck. Fractions and percentages have an asymetrical property to them that would never get taken into account for the calculators. For example, you have an investment go down 50%, to get back to break even, you need the investment to go up 100%. Geometric Averages are much better to use compared to Arithmatic Averages. Geometric takes better into account negative returns. Most calculators and numbers used in the real world are based on Arithmatic averages. Monte Carlo simulation is another step to use in calculating your goals.

“What about the other 90% of the population who at 50-55 doesn’t have $100,000 in the bank because they have average paying jobs or single incomes and can not afford to save buckets of money. Lets here about the real people and what they need to do to afford to retire at 65 if they are lucky.”

The simple answer is that they cannot retire.. It is a very brutal answer but what else is there if one does not have enough money? This happen a lot in third world country as well (people work until they die). The truth is that if someone cannot save enough nest egg for their retirement, they live a life that is beyond their mean and they are paying the consequence. People make choice on their life without considering money (want a kid, want a car, don’t want to study hard while they can, don’t try to haggle when spending their money….) and they are paying for the choice at the end..

I am 48 and I retired 2 yrs ago and after reading through all the comments, look like there is a lot of misconception about what it means to be retire (or financial independent) and how to invest their money.

1) Retirement spending - you need to have a very realistic plan for you spending (at least the first 3-5 yrs). Health care cost is a big part of retirement cost. Would it shock you to know that it will cost about 800-1K a months for medical insurance if you want to retire early (before qualify for medic care)?

2) I ran most of the retirement planners available (Money, Smartmong, T. Rowe price, Vanguard, Fidelity). They recommend an initial draw between 2.5% to 4% of your nest egg and raise the amount each year following the inflation.. So with 500K portfolio (not include your equity in the house), one can have an initial draw 12.5K to 20K a year. And each one of us can decide if you can live with this much money (don’t forget healthcare cost of 10K to 12K a year if you retire early. The health care cost make early retirement a very problematic proposition for small nest egg). And the earlier you retire, the less you should draw closer to the 2.5% of nest egg..

3) 8% return is a mirage.. There is no such thing as 8% constant risk free return in a world of 2% Fed fund. Investment return fluctuate as the market going up and down by a considerable percentage each year. There is something call Monte Carlo simulation in the retirement planning tool that account for the market gyrations (Fidelity, vanguare and T.Row Price planner use it). It basically takes the last 80 or so years of S&P return and put you nest egg going through a sequence of calculation (using a premix percentage of cash, bond, index fund etc.) by changing your starting year of drawing your money. At the end of the simulation they give you a probability that you money can last until 80 or 85 or 90 years old. The math is complicated but the concept is simply. If you retire in 2008 and market crash in 2009 and loss 40% of your principle, but you still need to draw you 20K a year to live. Even thought the market rebound in 2010, you have a lot less pricinple (compare to your yearly draw) working for you in 2009. If the same crash happen 20 years from now in 2029, you nest egg already grow a lot bigger compare to your yearly draw, so the crash is no big deal to your retirement. That make retiring early a real crap shot (depending on the fluctation of market return) if you try to maintain a constant standard of living. Each big market drop has some possibility of derailing your retirement draw. For most of us, making 8% average a year need a lot of research in picking the right mutual fund. Most mutual fund don’t make this long term average but some exceed it handsomely. So research and hand on management of your mutual fund is a must.

So after doing all these research, I come to the conclusion that I will do initial draw of 2.5%. If I don’t have enough capital with the 2.5% draw to support my spending then I cannot retire. Fortunately I met that test in 06 and I retired just in time to spend a year with my two kids at home before they headed to college. And I will adjust my draw (and standard of living) every 5 years based on investment result. If I do well, I will draw the same 2.5%. If my return did poorly, I will draw less and if drawing less mean lower standard living, so be it.. If the money is not enough even for minimal standard of living, I will go to find a job to supplement the income.. Once I get pass 65 or so I will start raising my draw percentange (may be 3% or 3.5% ). I am pretty sure when I get to 75 years old, I will be willing to withdraw 6-7% of the nestegg to support my living given that I don’t think I will live pass 85 years onld

From all the retirement articles that I read, it is interesting that everyone is concerned only about their own retirement. My husband and I took a different approach. On the first day we started working, we were concerned about our parents’ retirement as well. Both of us came from very poor families where our parents did not have even high school degrees. They washed dishes and picked over left over foods from restaurants to raise us and send us to very expensive Ivy League college. Needless to say, they have little (if any) savings for their retirement. They are now in early 60’s and we just turned 40’s. We saw it as our responsibilities to take care of them financially to make sure they enjoy their retirement. We are fortunate enough to have saved about 8 to 9millions in the last 15yrs that we worked very hard, so hard that we delayed having children. Today, we are not a traditional family by some standard. We have paid cash to buy 3 moderate houses for each set of parents and for ourselves. My husband stays home to take care of our children and our parents who are in poor health, while managing the family’s portfolio of assets. I work full time in the corporate world because I am not as successful as he is in managing the household and the family finance. Because our parents have a lot of health issues and doctor appointments and our children are all young under 10yrs old, we actually need to hire babysitters and household helps from time to time. In any case, having my husband in charge at home makes me feel good about working outside home and allows me to bring home a decent six figure salary and healthcare coverage. I don’t have to worry about our children and our parents because I know they are in good hand. We live modestly but we enjoy a lot of family travels with our parents. They love to take vacations with our children even to Disney World. To us, it is priceless to see our parents enjoying life now at their retirement. We want to make up to them everything that they missed when they were struggling to raise us and educate us. We feel so fortunate that we learned to save aggressively early so we can afford the financial security today to take care of our families. We will continue to live modestly but comfortably. And we will continue to save and invest prudently for our children and for our parents!

Correction to my last post:

With 3% inflation, the teacher would start with a $7855 yearly salary, not $14,000. He would then need to maintain a 5.4% annual interest rate over 66 years to reach $2.1 million with the same rate of saving.

I love that people are assuming 8% returns for these folks over the next 5 years. Historically, it really depends on which 5 period span.

S&P500
01/99-01/04 - lost ~13.1% or -2.6%/yr
01/00-01/05 - lost ~18% or -3.6%/yr
01/01-01/06 - lost ~6.7% or -1.3%/yr
01/02-01/07 - gained 21.4% or +4.3%/yr
01/03-01/08 - gained 37.9% or +7.6%/yr

An 8% return is not only attainable in the longer term (5+ years), it is likely. The stock market as a whole has returned far more than this over most 5-year periods. Heck, SPY (an index fund based on the SP500) has returned about 7% in the last quarter and 52% over the past five years (an annualized return of almost 9%).

I always find it interesting when people choose a low paying career, compound the problem by spending whatever money they make, and then complain that they will never be able to retire.

Huh?

This country is awash with possibilities…there are many ways to make a lot of money. There are people who choose the more lucrative careers, do the hard work required in those careers(making money isn’t easy), and then reap the rewards the rest of their lives.

Everybody wants everything…only a few people have what it takes to go out and do something about it.

If you want 8% a year…invest in Brazil…

You guys are very optimistic about the future of the stock market, when I read these posts, I wonder about the ‘01 crash, returns depend on the in and out time of the stock market. 8% is possible but in no way is it a minimum gaurantee and a loss is always a possibility (wcom, ahm, enron etc.), don’t be naive the stock market is a risk even if your in a mutual fund, Warren Buffet said very recently ‘don’t expect the same returns as in the past’ RE Berkshire??

Quickest way to save money? Start early, ofcourse…..but ALSO take a HARD look at your lifestyle at any age.
I can’t tell you how many people I know who make “average” salaries yet seem to always be broke……let alone
able to save. A simple thing such as going out every weekend at the bars (ya hear, kiddies?!?!?) could rack up as much as $90 a weekend. Total that up and think of what that same money would do in a good mutual fund over 10 years. That’s a small fortune in pricipal alone, let alone compounding interest.

Yet, time after time, I see people who complain about “how hard they have it,” while they are standing in line with enough beer and cigarettes to keep a frathouse happy. Go figure.

Steve from Washington, you do realize that $3M thirty years from now is worth approximately $1.07M today, right? I imagine in 30 years some naive kid will be like, “$3M!? I’m going to retire with $9M!,” because $3M will not be a very big amount of money by the time you retire, just like $1M is not now.

Have to say that I am VERY proud of some of the younger people’s commitments to planning for their retirements, no matter what age. Shortly after he received a small inheritance, my husband planned TO retire early, not plan FOR retirement and did so at age 53 with a pension (paid the buyout to 30yrs service). I was a housewife (raised 4 kids) for our entire marriage and we had no savings. Now we struggle to live month to month. I wish I knew what the future held, as I am only 53. I hope people take this article and comments to heart and take a strong hard look at their future.

Just to clarify a point…my dog could figure out how to get 8% return…and he doesn’t even speak English.

Re: Paul from Madeira

I was wondering if anyone would catch that. That is correct - a schoolteacher would not have been earning $28,000 a year in 1936. My “quick-and-dirty” calculation was meant to show that it was possible to save $2.1 million on a $28,000 salary, without taking extreme risks or winning the lottery.

A more realistic scenario would be to assume 3% inflation every year with salary raises to match, so our teacher would start with $14,000 and work his way up to $28,000 when he retires. $750 a month is about 30% of the $28,000 annual salary, so if he saved 30% of his salary for the 43 years he worked and then sat on it, he would still end up with about $2.1 million if he could maintain 4-5% return on interest.

You can make the scenario more and more complex to model the real world better, but it doesn’t change the fact that it is possible to save a lot of money over time for retirement, even with “little” money.

Quibble with the scenarios all you want, but the simple truth remains the same - you can save up enough money for retirement, if you make the effort to save.

The variation inherent in the market makes a very large number of outcomes possible, even with the same average annual returns. It depends on the order in which your returns vary over time.

Anyone who uses any set percentage as an “average” return needs a statistics class and a lesson in stats.

I can give you lots of lists of returns that have the same mean value, but the results on the other end will vary.

I also don’t think the previous 60 years means a darn thing about the next 60 years. YMMV

I do not find that many of these bloggers are bragging, but that instead they are very proud of their financial discipline.

Coming from the family of a poor dairy farm with income around the poverty level, I can tell you that even small amounts of savings add up over time.

In my father’s case, he never made more than $12K a year, hence paid no income taxes and received grants for his 5 children to attend college. All of of us are immensely successful-and we are all good savers. We understand that leaving the lights on costs money. We understand to stock up on necessities when they are on sale. My father used to talk about his family walking a mile down the road to get the neighbor’s already read paper- but over time, this saved not only the few pennies the paper cost, but expenses with medical bills, etc. You can have a very simple life and amass relative wealth without the stress that causes most people wanting to retire early.

The problem with these columns is that they talk to the upper 10% of wage earners, not those making around the median $37K for a family of four. These poorer folks get overwhelmed with these $850K and comments like “2 million is the new 1 million” and they walk away, further digging their financial grave. My advice to the other 90% of Americans, start saving as soon as you can, and what you’re not putting in your gas tank, put in your investments. One of the best creations for most Americans is the auto-adjustments for increases to 401(k). Even 1% increase per year will help you put away a few more pennies, that will turn into hundreds, which will compound to thousands and hu