Author Topic: How do I figure out how much money I need if I only need it to last X years?  (Read 9416 times)

mustachianteacher

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I apologize in advance if this reveals my shocking lack of mathematical knowledge!

My husband and I are both public school teachers who plan to retire in our early 50's. At this point, our plans are vague because we each have about 10-15 years to go, and a lot could change between now and then.

The general plan is this: We teach until we have 25-30 years of service credit in our pension system. At that point, we'll be between ages 48 and 56. In order to maximize the pension benefit, we'll hold off on starting the pension payments until we each reach age 60-63. (This is allowed; I checked.) We will use our own savings to support ourselves in the gap years between when we stop working and when we start pulling from the pension system. At that point, the pension payments will fully cover our expenses (with room to spare), so we won't *need* to have our own money left over, but obviously, we would like to keep a generous cushion for anything that might arise.

So, is there an online tool or calculator that will help me figure out roughly how much we need to save for those gap years? Suppose it's 10 years. At first I just multiplied our annual expenses by 10, which yielded a pretty large number. (Duh.) But then I realized that, in year 1, we would take out 1 year's worth of expenses, while the remainder of the stash continues to grow, so it's not just a matter of straight multiplication.

Suggestions? 
Thank you!

EDSMedS

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MSJD,

I crafted a quick, simple calc for your situation.  Play with the numbers in C3, C4, and C5 (stash, interest, expenses) to determine how long your ER money will last.

Cheers!

mozar

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It would be your expenses times 10. Expenses times 25 would be enough for the money to generate interest and dividends to cover what you spent. But you will be spending it all down. If expenses are 20k, so need 200k for 10 years.

bacchi

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http://www.bogleheads.org/wiki/Variable_percentage_withdrawal

A spend to zero calculator, guaranteed not to drop to zero until the last withdrawal. Of course, the withdrawals will fluctuate.

MrsPete

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Numerous random thoughts: 

I'm a teacher too, and one thing that concerns me is the possibility that the pension could disappear.  I suspect it's more likely that it'll disappear for new hires, but it's not impossible that it could be changed for those of us who have a significant number of years "in".  Be vigilant in watching what your legislature's doing.  I'm sure you've verified your details about when to start collecting . . . but yours do vary from my state.

I agree with the above poster that a paid-for house is a necessity for your plan to work. 

One item of concern:  You're talking about 2 pensions equaling a comfortable retirement, and I don't disagree . . . but consider this:  Suppose one of you dies relatively young, while the other is still in good health and may reasonably have another couple decades of life left.  That remaining spouse's income was just cut in half.  Is that second spouse going to be okay? 

Does your pension include medical benefits? 

Do you want to save enough money to last you 'til you can collect your pension . . . or would you be willing to supplement that money with seasonal or part-time work? 

Finally, I think you should definitely plan to go "above and beyond" what you think you'll need.  While my own teacher pension will be enough to cover my daily expenses, it isn't going to be enough for the occasional new vehicle or a special trip with the grandchildren.  I want to know I have some money in addition to the pension. 

« Last Edit: October 23, 2014, 07:01:44 PM by MrsPete »

whiskeyjack

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This one is fun to play around with and you get the sort of information you want by changing the "number of years to receive income".  It always spends all the money to zero, unfortunately.

http://www.calcxml.com/calculators/savings-calculator?skn=38#calcoutput


MsWillow

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Following, similar situation.

BooksAreNerdy

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You could play around with this one and sort ofwork backward to find the stash size that gets you to 10 years.


http://www.calcxml.com/calculators/how-long-will-my-money-last?skn=#results

Dee

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Thank you for this thread! I am also in this situation and these calculators are super-helpful!

bogart

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If I were planning to need to live on savings for 10 years, I'd assume a zero rate of return.  Over a 10-year interval during which I'd need the money, I wouldn't want to have it in anything risky, and it's not hard to find recent periods (see:  now) when the effective rate of return on such investments is negative after inflation.

So I'd take annual living expenses * 10, and then add something to it, to be on the safe side.  But then, I'm risk-averse.

Alternatively, if you're willing to work during your retirement, that provides a different sort of safety net.

Goldielocks

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If you only need to cover your expenses from 48 yrs and 56 yrs to 63 years...  I would just save up money for that time span (as if it were a long sabbatical or vacation).

No or minimal interest assumed, to be conservative, because you want to keep it in cash like investments.  So at best, you will match inflation rate.   Plan to pre save a bit extra, for a cushion for the "what ifs".

e.g.

You want to live on $30k per year.
 You both retire in the same year, one at 48 and one at 56 yrs old.

Easy math -- assume you each contribute exactly half of the living costs, and that the pension will only be used to cover half the living costs when the husband reaches 63...  so the spouse must continue to contribute half from savings...

63 - 48 = 15 year x $15k
63-56 = 7 years x $15k

Total is 22 years x $15k.

$330k to be saved, total, put into a guaranteed investment that will match the inflation rate.

Add a buffer for contingency.
Live off pension.   Accept the risk of possible no pension the others pointed out, as you like.

Ynari

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look up a present value calculator for an annuity. That's what you're asking for - what's the PV of an annuity that gives $ X, growing with inflation, per year for Y years at (reliable bond rate)%. There are formulas and calculators out there that will do it for you.  When you have the present value of that in the bank, you're ready to retire.

EA_Mann

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This is an interesting case study, because it's the opposite of the usual MMM method of amassing a bunch of money and spending 4% of it per year.

Because you're planning on drawing down a stash in it's entirety, it's much more important that you "lock in" this investment into something more conversative - like bonds - as soon as you know you have enough to survive. You don't want to be halfway through your drawdown period, experience a 2008 50% stock market crash, and suddenly not have enough money to survive until your pension kicks in. To do this, it's absolutely necessary to transition away from riskier allocations.

Keep in mind that in taxable accounts this will likely generate capital gains taxes.

Hope this was helpful.

FarmFam

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I found this one this blog.  I thought it was pretty cool.  http://www.firecalc.com/

It runs different scenarios based on historical information and gives you a range.  I thought it worked great because I like to know best and worst scenarios and it shows you that.  This way you know a range of what you may need and can adjust to cover the worst scenarios.

snshijuptr

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I second firecalc.com. After filling in the 3 boxes on the first tab, go to the Other Income/Spending tab and put in your pension income. Then check your %. The ER forum guys say that 80% or more is a good number. I like 100%. If you get that number then (after checking the other tabs) retire today. If not, go to the Not Retired? tab and put in your contributions and play with the retirement date. You can also play with the other tabs if you are only a few years away because they hone things like your Portfolio and Spending plan. I usually stick with the first 3 tabs because we are years away.

YoungInvestor

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If X is the amount of money you want per year, ROI is the return on your investments and i = inflation rate:

Amount needed = X * ( 1 - ((1+ROI)/(1+i))^(-#Years))/((1+ROI)/(1+i))

alternatively : R = (1+ROI)/(1+i)

Amount Needed = X*(1-R^(-#Years))/R

YoungInvestor

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It would be your expenses times 10. Expenses times 25 would be enough for the money to generate interest and dividends to cover what you spent. But you will be spending it all down. If expenses are 20k, so need 200k for 10 years.

No. Look at my post just above for the formula. There will be interest even if it is not enough to cover the full expenses.

Let's say they need 20k a year and have 200k as you suggest, and get 5% return after inflation is factored in.

t = 0, they withdraw 20k, stash = 180k

t = 1 , stash (inflation adjusted) = 180k * 1.05 = 189k. They withdraw 20k, stash = 169

t=2 , stash (inflation adjusted) = 169k * 1.05 = 177.5k. They withdraw 20k, stash = 157.5k.

After withdrawing for 3 years, they're 17.5k ahead of schedule using a simple multiplication.
« Last Edit: October 24, 2014, 09:01:42 AM by YoungInvestor »

begood

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I'm following this with interest because we'll probably also have a need to "fill the gap" with funds while we wait for pension/SS:

We hope to retire in 10 years. I'll be 60, my spouse 59. My mister will get a non-COLA pension at 65 that we expect will offset between 1/3 and 1/2 of our living expenses, depending on how much traction it loses to inflation. We plan to delay SS until 70.

So we'll need to use either tax-deferred or taxable to fill that gap, but unlike you, we're not trying to get to $0.

It's one more CHUNK of funds we're trying to plan for, along with, in our case, eventually buying a house in a low COL area and paying for higher ed for our kid.

I like the idea of saving (or categorizing existing savings) for that stretch the same way we'd approach any other large expense.

At $60K - our anticipated early retirement annual expenses, we'd need to save $360,000 to fund those six years. By then the kid will be through college and we'd have a good idea how much we'd feel comfortable spending on a house. I think it's doable. The key is having enough to fill all the different buckets.

MarciaB

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Public employees should check this site out for a look at how safe/stable their state's pension system is:

http://www.chicagobusiness.com/article/20130110/NEWS07/130109847/pension-fund-rankings-by-state-were-no-50

I'm in a pretty good state (Oregon), but if you're not, this may affect what your later years look like.

Meaning - save more than you think!

arebelspy

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Also keep in mind inflation.

Even if the pension is inflation-indexed, those gap years won't be - if inflation hits hard in the 10-15 years between you quitting and you taking the pension, the value of the pension in real dollars will be significantly reduced, and so you may need to have some stache left to boost it (unless the pension is already way more than you'll need, such that if it's reduced you're still okay).
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

mustachianteacher

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MSJD,

I crafted a quick, simple calc for your situation.  Play with the numbers in C3, C4, and C5 (stash, interest, expenses) to determine how long your ER money will last.

Cheers!

You are so sweet to do this! Thank you! I will have to play around with it and see what it shows. So impressive!

mustachianteacher

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Wow, this community always impresses me with its wealth of knowledge! I am reading and rereading all the posts, and I appreciate the questions. I've thought about many of them, but some were new, and I like that -- I have a lot to think about.

I'm glad to hear that a paid-off house is considered to be a necessity in this situation because I was thinking the same thing, but I often questioned my thinking about that because I understand the argument NOT to pay a house off: keep the money liquid, invest it elsewhere, etc. For us, paying off the house means we reduce our expenses by almost $1,800 a month, so it seems like a no-brainer because reducing expenses means we can retire sooner.

Anyway, thank you, thank you!! I always appreciate the time everyone here puts into answering each other's questions so thoroughly. :-)

MattC

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I think some of these answers are too conservative.  So there's some debate in using the calculators as to what interest to rely on.  I would suggest that if you own your house, or at least will have significant equity in a house, that that can be expected to bail you out if you invest aggressively and the market tanks and you run out of money.  And that's not even accounting for the fact that you could work if things really got bad.

If it were me and you've got a couple years of expenses worth of equity built up in your house, I'd keep investing in a balanced portfolio, mostly stocks, and count on an 8% return.  Under that "average" return, using the calculators above, make sure you're not going to run out of money with your planned expenses.  However, if things go badly for your investments, you would be forced to take money out of the house.  Not the end of the world.  Just make sure the retirement money could put it back into the house to pay it off in a reasonable time.  But more likely, you wouldn't run out of money, and you would be maximizing the money you enter retirement with. 

I just always cringe when folks do hugely risk-averse things like take all money out of stocks.  I think a big principle of this site is to live simply and have margin in your life so that you can maximize returns and live risk-neutral.  When you do things like forego investment returns, or unnecessarily buy insurance, it just sets you back in the long run.

alstonalvin

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Try this calculator. http://www.acalculator.com/savings-calculators.html I already used this calculator check for my savings calculation. You can check with the help of this calculator check investments, saving, tax. Retirements, business, auto, persona, debt , insurance, loan saving calculations

curler

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One option I didn't see mentioned is to buy an annuity from an insurance company for this time period.  Essentially, it moves the risk of market fluctuations to the company, and can sometimes provide better returns than a CD, and can sometimes come with inflation protection.  https://gie.fidelity.com/estimator/gie/gielanding  Just another option, may not be the best one.