Author Topic: Establishing Financial Independence  (Read 3827 times)

coffeetogo

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Establishing Financial Independence
« on: September 11, 2014, 08:05:41 AM »
From what I learned on this website, I thought that I could save $1 million and be able to withdraw 4% of this money for the rest of my life without touching the principle.  Based on this, I can retire in 1.5 years. 

So I went into the "Ultimate Retirement Calculator" that I found on-line and plugged in my numbers: I am currently 41.  I want to retire at 43.  I will have $1.1 million saved by my 43rd birthday.  I anticipate pulling $40k per year from my investments with a 2% inflation rate.  I will have a $400 pension starting at 65 and $2000 SS payment starting at 67.  I anticipate dying at around 95.  So "The Ultimate Retirement Calculator" is telling me that I am $70,000 short....even after including social security (which may or may not be there) and my little pension.  So what I am doing wrong? 

RWD

  • Magnum Stache
  • ******
  • Posts: 3965
  • Location: Mississippi
Re: Establishing Financial Independence
« Reply #1 on: September 11, 2014, 08:40:30 AM »
Can you link to the retirement calculator you used? I searched for "The Ultimate Retirement Calculator" and found this: http://financialmentor.com/calculator/best-retirement-calculator, but I don't know if that's what you used. You didn't provide enough information for me to fill in that calculator anyway, so it's hard to guess why it's telling you you'll be short.

In theory the 4% withdrawal rate is good enough that it should last forever, with some assumptions about inflation and your investment allocation. See MMM's post on the subject here:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

sandandsun

  • Stubble
  • **
  • Posts: 187
Re: Establishing Financial Independence
« Reply #2 on: September 11, 2014, 08:52:45 AM »
if it asked for an anticipated return rate on your investments (either it did or it is making an assumption) that could be it- play with that number and see what happens?

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1261
  • Age: 40
  • Location: Texas
Re: Establishing Financial Independence
« Reply #3 on: September 11, 2014, 08:54:57 AM »
In a super low interest rate environment, I'd personally work part-time in retirement unless I had a very large nest egg (like $2-5 mil+). Even a little side income goes a long way in making your nest egg last. I'm sure you'd get bored playing golf every day for the next 40 years, so a little work would probably be enjoyable.

coffeetogo

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Establishing Financial Independence
« Reply #4 on: September 11, 2014, 09:14:55 AM »
Thanks, RWD! 
Yes, I used the one from Financialmentor.com (The Ultimate Retirement Calculator).  I plugged in all my numbers again and it says I am still short $50k (last time it said -$70k).  But according to MMM, my $1.1 million should last until I die without touching the principle amount.  I've read the article you attached numerous times, so this is why I don't understand why I would be running out money. 

It is from the "Financial Mentor" website. 
Desired estate is 0.
Desired Income is $40k.
Estimate Inflation Rate: Around 2%
Total current savings: $840k
Monthly Savings: $6700
Age to Stop contributions: 43
Expected return: 6%
Estimate tax rate: 25%
Monthly Pension: $400/month from 65 years-95 years
Monthly SS: $2000/month from 67 years to 95 years

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 33
  • Location: Colorado
Re: Establishing Financial Independence
« Reply #5 on: September 11, 2014, 09:19:43 AM »
Have you tried using this? http://www.cfiresim.com/

Should be able to put everything in there and see what your chances of running out of money are.

Jellyfish

  • Stubble
  • **
  • Posts: 154
  • Age: 48
Re: Establishing Financial Independence
« Reply #6 on: September 11, 2014, 09:31:01 AM »
Have you tried using this? http://www.cfiresim.com/

Should be able to put everything in there and see what your chances of running out of money are.

This is amazing.  Great resource!

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: Establishing Financial Independence
« Reply #7 on: September 11, 2014, 09:31:46 AM »
A few comments:

1. You misunderstand the 4% rule.  You may have to withdrawal "principle".  However, 4% will last 30 years in almost all scenarios.  In most scenarios it will last 50+ years.  In a big downturn (especially right after you retire) you will certainly be taking out part of that $1MM nest egg.  This does NOT mean you need more money to retire.  I just want to make sure you understand the theory.  Here is the study, it's worth reading and understanding: http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable

2. Retirement calculators are all flawed in some way.  Mostly because it is impossible to predict the future of the stock/bonds/etc. markets.  The 4% rule is a distillation of many years of research trying to answer the question of how much do you need to retire.

3. The reason this particular calculator is showing a shortfall is that you have put in assumptions on portfolio returns that are a bit too low to support the 4% rule.  Your $40,000 is increased to $41,616 by 43 and then you have no margin between your withdrawals (4+%) and your real investment gains (6%-2% inflation = 4% real).  Try putting in  6.1% returns and notice it now tells you that you have more than enough.  That return has a HUGE impact on the results.

4. Your tax assumption is too high.  For $40k, even for a single person, the federal tax rate will be about 10%.  I love this tool for income tax estimates: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

« Last Edit: September 11, 2014, 09:37:06 AM by sirdoug007 »

coffeetogo

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Establishing Financial Independence
« Reply #8 on: September 11, 2014, 09:50:48 AM »
You're right, Sirdoug!

As per your advice, I re-entered my numbers using a withdrawal amount of $42,000 rather than $40,000 and it looks like I will have smoothing sailing until I am 95. 

Thanks for your help everyone!


SwordGuy

  • Walrus Stache
  • *******
  • Posts: 6502
  • Location: Fayetteville, NC
Re: Establishing Financial Independence
« Reply #9 on: September 11, 2014, 10:23:23 AM »
When you get off your high about the possibility of early retirement, go back and REALLY READ the links the other posters provided.

There is NO GUARANTEE this will work.

You have to friggin' PAY ATTENTION.

If you pay attention and have several fallback plans (and use them/adapt as needed), you SHOULD be ok.