SWR and Social Security

[Half Stached]

Let's assume that 4% is a SWR, and that Social Security is going to last our lifetimes.

Given this, has anyone applied these two together for those of us looking to retire in their late 40s or 50s? For example, let's say that Alan is aiming to retire at 57 and has an annual spend of 40K. This alone would say that he should save $1 million. Now assume that he also will get a annual social security payment of $5K, starting at age 62. In this case, he could set aside 5 * 5K = 25K and look at an annual spend of 35K with a 5K supplement. The first 5 years he pulls from the set aside money and after that collects $5K from social security. This would suggest that he needs a total savings of 35K * 25 + 25K = 900K, or 100K less. (This could be optimized further by looking at the invested money needed to get 5K per year for 5 years, but I wanted to keep this simple.)

Is there anything wrong with this logic? Anyone else retiring in their late 40s or 50s that is using this kind of thinking to determine your target stache? What refinements do you have to this?

[Goldielocks]

Let's assume that 4% is a SWR, and that Social Security is going to last our lifetimes.

Given this, has anyone applied these two together for those of us looking to retire in their late 40s or 50s? For example, let's say that Alan is aiming to retire at 57 and has an annual spend of 40K. This alone would say that he should save $1 million. Now assume that he also will get a annual social security payment of $5K, starting at age 62. In this case, he could set aside 5 * 5K = 25K and look at an annual spend of 35K with a 5K supplement. The first 5 years he pulls from the set aside money and after that collects $5K from social security. This would suggest that he needs a total savings of 35K * 25 + 25K = 900K, or 100K less. (This could be optimized further by looking at the invested money needed to get 5K per year for 5 years, but I wanted to keep this simple.)

Is there anything wrong with this logic? Anyone else retiring in their late 40s or 50s that is using this kind of thinking to determine your target stache? What refinements do you have to this?

This is like the basket approach that I use to manage risk and funding during various stages while FIRE (and before).

Another great part of this approach is that you remove 3-10 years worth of investments from equities to fixed income, to allow you to ride out down markets, especially in the early FIRE years.

[Mr. Green]

This is like the basket approach that I use to manage risk and funding during various stages while FIRE (and before).

Another great part of this approach is that you remove 3-10 years worth of investments from equities to fixed income, to allow you to ride out down markets, especially in the early FIRE years.

Putting 10 years of expenses into fixed income is almost half of your savings, assuming you saved 25x expenses. Having almost half your portfolio in fixed income will have a huge impact on your rate of return. I would definitely experiment with this in cFIREsim or something else because I doubt the return will be high enough that you can get away with saving just 25x expenses. You'll need to save more since almost half the portfolio is earning a very marginal return. Something to consider.

[Spork]

I know your assumption is "SS is going to last our lifetime."  I don't doubt that it will.  It will always be there.  However, it is important to remember that the program has changed many times in the past... and I think there is a relatively good chance it will be different.  If you're 55+... it will probably not change at all.  But the younger that, I think you should include some amount of buffer to handle change.  (How much buffer is a bigger question.)

[boarder42]

someone retiring in their late 40s or 50s will have way way more in SS than 5k per year.  i'm looking at retiring at 37 and 36 respectively and if everything was equal we would get around 1900 and 1500 a month per person .

[nereo]

Let's assume that 4% is a SWR, and that Social Security is going to last our lifetimes.

Given this, has anyone applied these two together for those of us looking to retire in their late 40s or 50s? For example, let's say that Alan is aiming to retire at 57 and has an annual spend of 40K. This alone would say that he should save $1 million. Now assume that he also will get a annual social security payment of $5K, starting at age 62. In this case, he could set aside 5 * 5K = 25K and look at an annual spend of 35K with a 5K supplement. The first 5 years he pulls from the set aside money and after that collects $5K from social security. This would suggest that he needs a total savings of 35K * 25 + 25K = 900K, or 100K less. (This could be optimized further by looking at the invested money needed to get 5K per year for 5 years, but I wanted to keep this simple.)

Is there anything wrong with this logic?

I don't see anything wrong with your logic (other than taking out SS at age 62) and if you are within a decade of taking SS it would be a simple way of handling the calculation. 
I'd also recommend seeing how cFIREsim and FireCalc change based on SS inputs (which you can program into the model).  That would be a far more nuanced way of dealing with the sequence of returns that any fixed WR is based on.

I agree that SS will be around in some form for many decades to come, but as Spork said it has been changed many times in the past and will likely receive small changes at some point in the future (or a large change will happen sometime around 2034 by default to account for the shortfall projected then).
Again, cFIREsim will allow you to tweak SS payouts and examine how likely a portfolio is to succeed under various scenarios.

[Half Stached]

I started with cFiresim and the bullishness of its projections led me down this path of thinking. In our actual case, we were looking at ways to bring our retirement from 2020 to 2019 (when my wife will be 56 and I'll be 47). We'll be looking at a larger social security than in my example, but I used these numbers to simplify the question (and that simplification includes the 25K under the mattress...). It now looks like 2019 will be a very comfortable target, rather than a stretch goal. :) Thanks, all! I wanted to run this by others before moving it into our formal plans.

[nereo]

I started with cFiresim and the bullishness of its projections led me down this path of thinking. In our actual case, we were looking at ways to bring our retirement from 2020 to 2019 (when my wife will be 56 and I'll be 47)....

i don't understand what you mean by "bullishness of its projections".  cFIREsim is looking at historical data, it doesn't attempt to make predictions.  The assumption is that the future will be no worse economically than the worst periods over the last century or so.
You can modify future SS payments to whatever level you like, along with a bunch of other inputs.

[mathjak107]

many people just have a misunderstanding of what these calculators look at . as soon as they talk about the great bull markets and growth of the past you know they do not understand it is not based on that at all .

only the worst outcomes ever count . the likes of 1929 ,1937 and the worst ever 1965/1966 time frames  .

it is all about what it took to get through the worst combinations of markets ,rates  and inflation in the worst sequences they could happen .

that does not mean things can't be worse but they would have to be a lot worse than anything to date .

it is no different than  me building a house here in nyc .

if i at least build to hurricane sandy standards i am likely pretty well protected and the odds of something worse can still happen but not so likely .

[Goldielocks]

many people just have a misunderstanding of what these calculators look at . as soon as they talk about the great bull markets and growth of the past you know they do not understand it is not based on that at all .

only the worst outcomes ever count . the likes of 1929 ,1937 and the worst ever 1965/1966 time frames  .

it is all about what it took to get through the worst combinations of markets ,rates  and inflation in the worst sequences they could happen .

that does not mean things can't be worse but they would have to be a lot worse than anything to date .

it is no different than  me building a house here in nyc .

if i at least build to hurricane sandy standards i am likely pretty well protected and the odds of something worse can still happen but not so likely .

Don't forget the stagnation years due to inflation often more than the stock market returns... 1970's and early 80's had very high inflation.

[mathjak107]

it was not market returns or interest rates that made the 1966 group so bad . it was inflation .

inflation soared  from very low to double digits in a few short years . it crushed retiree's .

the 30 year returns were very respectable for that group . but it was the returns and inflation the first 15 years that did them in . in fact every worst time frame to date was destroyed in the first 15 years .

here are the 30 year time frames for the worst cases  , none are bad

30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%



here are the first 15 years ,  it destroyed the retirement in all cases

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

[Goldielocks]

it was not market returns or interest rates that made the 1966 group so bad . it was inflation .

inflation soared  from very low to double digits in a few short years . it crushed retiree's .

the 30 year returns were very respectable for that group . but it was the returns and inflation the first 15 years that did them in . in fact every worst time frame to date was destroyed in the first 15 years .

here are the 30 year time frames for the worst cases  , none are bad

30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%



here are the first 15 years ,  it destroyed the retirement in all cases

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

. Nice post!

[mathjak107]

thanks . kitces did the homework on that .

[nereo]

thanks . kitces did the homework on that .

all those values are mean annual returns, yes?

[mathjak107]

average annual returns cagr  over  the   15 year period and 30 year period  had you retired starting in the years listed .

those starting years represent the worst case dates to have started a 30 year retirement .