How to think about FI number with later pension and SS

[Petuniajo]

I'm hoping to get some perspectives on how much I really need to have saved by age 53 to retire comfortably.

Here’s my situation:

• I’m currently 43, and my goal is to retire in about 10 years, at age 53.
• We’re a family of four with two teenage kids and currently spend about $72,000/year. I know it’s spendy – we’re in our peak spending years and I expect that to continue for at least a few more years. Facepunch if you want, but I’m probably not going to change our spending too much until the kids are out of the house.
• We expect spending will drop once our mortgage is paid off in 6 years and kids are through college in 8 years, but to keep things simple (and conservative), I’m planning for $80,000/year in retirement spending to account for taxes, health insurance, and some general cushion.
• Using the 4% rule, that implies I’d need $2 million in investments.

However, there are two factors that change things and should mean I need substantially less, given I only need to draw that full amount for ~9 years:
1.   I’ll receive a pension of about $40,000/year starting at age 62. This is the rate with full survivor benefits should I die first (important as my spouse does not work).
2.   My husband and I will both claim Social Security at 67 (we are the same age), which we estimate could be $30,000–$60,000/year total, depending on when we retire and potential benefit reductions.

So essentially, I need to fund ages 53 to 62 with about $80,000/year in withdrawals, then only $40,000/year from ages 62 to 67 (once the pension kicks in), and possibly nothing or very little after age 67 once Social Security begins (pension plus social security should cover nearly all of our expenses).

My question: Given this timeline and the future pension + SS, how much do you think I really need to have saved by age 53 and/or how would you model this out? I'm ok with spending down the principal and do not have passing a large inheritance down to my children as a priority, so waiting until I hit $2 million so I can draw 4% and have it last forever seems like overkill.

Posted here in Ask a Mustachian since I didn't feel a full blown case study was needed, but mods can feel free to move if it's better over there.

[Laura33]

First:  there are calculators that allow you to put in those changes, and that's probably the easiest way to get a more specific answer.

Second: I'm a big-picture person, not a calculator/spreadsheet guy, and one of the most helpful things I learned here was the "bucket" method.

You start by dividing your life into buckets, based on periods with similar income/expenses.  You've already done that:  you're looking at around 10 years at $80K/yr, followed by 5 years at $40K/yr, and then from 67 on, say maybe $10K/yr to account for possible changes in SS.

Now you multiply out each of those buckets:  in 10 years, you will need $800K to cover the first bucket; in 20 years, you will need $200K to cover the second bucket; and in 25 years, you will need say $250K to cover the rest.  [Yes, this is overly simplistic, because it ignores that your money will grow over that time period, so you don't actually need all $800K on day 1.  Like I said, I'm big-picture.]

But note that those buckets do not account for the time value of money.  If you need $250K in 25 years, you don't need $250K today -- a simple web calculator says you need only between $35K-$75K now, depending on what rate of return you choose.  So do that for each of your buckets.

Then you start filling your buckets from your current savings -- backwards, starting from the furthest-out bucket.  Start with whatever amount you have saved for retirement as of now.  Subtract out that $35K-75K from the total.  Assuming you have some left, congratulations!  You already have your retirement covered from age 67 on!  Then do the second bucket -- in 20 years, you need $200K to cover you from 62-67.  So that's something like $50K in today's dollars.  Subtract that from what you have left -- if you have enough to cover that, then congratulations, you are now set from age 62 on! 

That leaves you with the earliest bucket.  When what you have left after filling the later buckets equals the amount you have invested, congratulations, you can FIRE!   

[Just_Me]

A lot of life can happen in 10 years, but you're asking a good question now.

One thing that comes to mind is to minimize draw on your accounts, you can start collecting SS early. If you live to median age, it works out to be about the same amount.

You don't mention savings rates and projected amounts by 53, nor satisfaction with lifestyle or job. Do your spending or savings habits change based on the amount you need, or do you want to move up the timeline?

As far as how much... You'll be able to get a lot of ideas on what's generally considered "safe" or "should be enough", but really what it comes down to is your risk tolerance and ability to continue another year til 54, cut spending in lean years, or be ok with having over saved.

I agree with you, saving to $2m is overkill.

[Petuniajo]

First:  there are calculators that allow you to put in those changes, and that's probably the easiest way to get a more specific answer.

Second: I'm a big-picture person, not a calculator/spreadsheet guy, and one of the most helpful things I learned here was the "bucket" method.

You start by dividing your life into buckets, based on periods with similar income/expenses.  You've already done that:  you're looking at around 10 years at $80K/yr, followed by 5 years at $40K/yr, and then from 67 on, say maybe $10K/yr to account for possible changes in SS.

Now you multiply out each of those buckets:  in 10 years, you will need $800K to cover the first bucket; in 20 years, you will need $200K to cover the second bucket; and in 25 years, you will need say $250K to cover the rest.  [Yes, this is overly simplistic, because it ignores that your money will grow over that time period, so you don't actually need all $800K on day 1.  Like I said, I'm big-picture.]

But note that those buckets do not account for the time value of money.  If you need $250K in 25 years, you don't need $250K today -- a simple web calculator says you need only between $35K-$75K now, depending on what rate of return you choose.  So do that for each of your buckets.

Then you start filling your buckets from your current savings -- backwards, starting from the furthest-out bucket.  Start with whatever amount you have saved for retirement as of now.  Subtract out that $35K-75K from the total.  Assuming you have some left, congratulations!  You already have your retirement covered from age 67 on!  Then do the second bucket -- in 20 years, you need $200K to cover you from 62-67.  So that's something like $50K in today's dollars.  Subtract that from what you have left -- if you have enough to cover that, then congratulations, you are now set from age 62 on! 

That leaves you with the earliest bucket.  When what you have left after filling the later buckets equals the amount you have invested, congratulations, you can FIRE!

Thanks for sharing your thoughts! I've played around with firecalc to sort of test out different amounts of money at different starting ages, but I have some tendency to bury myself in data, so I have also bee exploring "big-picture"/bucket/back-of-the-envelope estimations too, especially since I'm not imminently close to retirement.

I like the way you built up the bucket thinking. I had been sort of backing in... For example, what if I start with 1.5M and and draw $80k for 10 years and assume only 3% growth (7% to account for inflation, then deduct a few more % to account for bad markets) on a compound interest calculator. Get the final value, then use as the starting value and run again at $40k for 5 years, etc. I think that's a generally conservative approach, but does not really appropriately model sequence of returns risk.

I'm not desperate to retire, but I would rather not work longer than I have to! Figuring out my "FI number" given I don't need a standard ~4% SWD has been tricky...

[Petuniajo]

A lot of life can happen in 10 years, but you're asking a good question now.

One thing that comes to mind is to minimize draw on your accounts, you can start collecting SS early. If you live to median age, it works out to be about the same amount.

You don't mention savings rates and projected amounts by 53, nor satisfaction with lifestyle or job. Do your spending or savings habits change based on the amount you need, or do you want to move up the timeline?

As far as how much... You'll be able to get a lot of ideas on what's generally considered "safe" or "should be enough", but really what it comes down to is your risk tolerance and ability to continue another year til 54, cut spending in lean years, or be ok with having over saved.

I agree with you, saving to $2m is overkill.

These are good questions. On taking Social Security early at 62 - I've been considering that (and obviously have plenty of time to decide), and might end up doing so. It may depend on how my health is at that time. My parents both have died quite young (early 60s) as did my grandparents (mid 60s), but I do have a healthier lifestyle than they did, so it's hard to predict what is genetics and what is not.

Savings rates and satisfaction with job - We started a bit late due to grad school for both my spouse and I, and then we maintained a strong savings rate for about 8-10 years. Then we slowed down on savings so he could leave work and stay home. Conservatively, I estimate we could easily have $1.5 million (in today's dollars) by age 53, but quite probably more. If I were able to stop working a little sooner than that, I would like to. I probably would not leave sooner than 50 or 51, however, as my children will get college tuition benefits as long as I stay with my employer, and I would like to retain our affordable health insurance that covers the 4 of us through the time they get through college.

My job right now is very stressful as I took on a new role last year, but in another 2-4 years I plan to step down from this role and back to my regular role (tenured professor - very stable, and without my admin role has a lot of autonomy). So ideally what I'm wanting to do is ramp down my pace at work in about 2-4 years, then work another 4-6 years after that.

Overall, I'd like to leave sooner than later, but for the reasons outlined above I am not likely to do so prior to age 51. And so, I'm trying to balance goals of early retirement with spending goals we have right now (a few home updates, increased college contributions, vacations before our kids fly the nest in a few years).

[Just_Me]

These are good questions. On taking Social Security early at 62 - I've been considering that (and obviously have plenty of time to decide), and might end up doing so. It may depend on how my health is at that time. My parents both have died quite young (early 60s) as did my grandparents (mid 60s), but I do have a healthier lifestyle than they did, so it's hard to predict what is genetics and what is not.

Savings rates and satisfaction with job - We started a bit late due to grad school for both my spouse and I, and then we maintained a strong savings rate for about 8-10 years. Then we slowed down on savings so he could leave work and stay home. Conservatively, I estimate we could easily have $1.5 million (in today's dollars) by age 53, but quite probably more. If I were able to stop working a little sooner than that, I would like to. I probably would not leave sooner than 50 or 51, however, as my children will get college tuition benefits as long as I stay with my employer, and I would like to retain our affordable health insurance that covers the 4 of us through the time they get through college.

My job right now is very stressful as I took on a new role last year, but in another 2-4 years I plan to step down from this role and back to my regular role (tenured professor - very stable, and without my admin role has a lot of autonomy). So ideally what I'm wanting to do is ramp down my pace at work in about 2-4 years, then work another 4-6 years after that.

Overall, I'd like to leave sooner than later, but for the reasons outlined above I am not likely to do so prior to age 51. And so, I'm trying to balance goals of early retirement with spending goals we have right now (a few home updates, increased college contributions, vacations before our kids fly the nest in a few years).

So, to recap:

- You're going to push though an intense position (chair?) for another few years
- You'll downscale in effort at work and drop to full professor work schedule in 2-4 years
- You'll pay off your house in 6 years
- You'll work for another few years to get free tuition for your kids
- Pending stash amount, work for another few years to get your stash to a comfortable amount (TBD)

That seems like a solid offramp to retirement.

A couple of followup thoughts:

- Overall, it sounds like you're saving much more than you spend even if you throw in house projects and trips. This means that the hard work now is figuring out what your dollar number is, which also means determining how much risk you are comfortable with.

- Moving back to professor is a huge quality of life improvement especially if your classes are built. Moving back sooner might help your stamina even if it comes with a pay decrease unless you do summer school.

- Once your house is paid off, there is a lot less pressure on the amount you need to draw from assets to cover expenses.

- Depending on how fast your stash grows and your minimum number to cover expenses, working another year for free tuition might be overkill.

[Petuniajo]

These are good questions. On taking Social Security early at 62 - I've been considering that (and obviously have plenty of time to decide), and might end up doing so. It may depend on how my health is at that time. My parents both have died quite young (early 60s) as did my grandparents (mid 60s), but I do have a healthier lifestyle than they did, so it's hard to predict what is genetics and what is not.

Savings rates and satisfaction with job - We started a bit late due to grad school for both my spouse and I, and then we maintained a strong savings rate for about 8-10 years. Then we slowed down on savings so he could leave work and stay home. Conservatively, I estimate we could easily have $1.5 million (in today's dollars) by age 53, but quite probably more. If I were able to stop working a little sooner than that, I would like to. I probably would not leave sooner than 50 or 51, however, as my children will get college tuition benefits as long as I stay with my employer, and I would like to retain our affordable health insurance that covers the 4 of us through the time they get through college.

My job right now is very stressful as I took on a new role last year, but in another 2-4 years I plan to step down from this role and back to my regular role (tenured professor - very stable, and without my admin role has a lot of autonomy). So ideally what I'm wanting to do is ramp down my pace at work in about 2-4 years, then work another 4-6 years after that.

Overall, I'd like to leave sooner than later, but for the reasons outlined above I am not likely to do so prior to age 51. And so, I'm trying to balance goals of early retirement with spending goals we have right now (a few home updates, increased college contributions, vacations before our kids fly the nest in a few years).

So, to recap:

- You're going to push though an intense position (chair?) for another few years
- You'll downscale in effort at work and drop to full professor work schedule in 2-4 years
- You'll pay off your house in 6 years
- You'll work for another few years to get free tuition for your kids
- Pending stash amount, work for another few years to get your stash to a comfortable amount (TBD)

Generally yes, that's an accurate recap. Technically the tuition benefit is 50%, but honestly my kids both seem on track to score hire enough on their testing to qualify for free tuition (or close to it) even without the benefit. In that case, we'll use our college savings (will be ~$40k/kid) to contribute toward their housing if they opt not to live at home, or if they decide to go to another school (assuming they have scholarship to cover most of it).

A couple of followup thoughts:

- Overall, it sounds like you're saving much more than you spend even if you throw in house projects and trips. This means that the hard work now is figuring out what your dollar number is, which also means determining how much risk you are comfortable with.

- Moving back to professor is a huge quality of life improvement especially if your classes are built. Moving back sooner might help your stamina even if it comes with a pay decrease unless you do summer school.

- Once your house is paid off, there is a lot less pressure on the amount you need to draw from assets to cover expenses.

- Depending on how fast your stash grows and your minimum number to cover expenses, working another year for free tuition might be overkill.

Totally - the hard work is definitely figuring out my dollar number! Since I do plan to work at least another 8 years, and probably 10, I really would like to do some home projects that are fairly costly (probably about $30k-$50k total) and honestly, are totally optional. Psychologically, that's difficult for me to do since I worry it will delay my timeline. Since my spouse has been staying at home the past few years, I've been growing envious! A huge part of the difficulty is that it's hard to know what my timeline HAS to be since it's hard to pin down a FI number.

I agree that stepping back down to Professor will be a huge quality of life improvement. But I feel obligated - both due to our current spending while our kids are in their expensive years (driving, car insurance, eating 1 million pounds of food, etc.) and due to commitments to my department - to see it out for at least a few more years.