While there was a little more follow-up to this interview for Michael Foster's Bankrate.com article, Early Retirement Without a Fortune, most of that made it to the final piece, so this is the final part I will publish here:
How much did you save to retire? (If you don't want to use actual figures: What is the ratio of your savings to your annual income the year before you retired.)
I've never believed in calculating your retirement nest egg based on a percentage of your annual income, so I won't quote it that way. I projected what I thought my retirement expenses would be (item by item). That exercise worked out to be about 65% of my pre-retirement spending level (not pre-retirement income--I didn't spend all of my income when I was working, so that measure isn't very relevant.) That's turned out to be very accurate, although, we've even spent a little less than that.
My nest egg (both retirement and non-retirement savings) totaled 33 times my projected annual retirement budget. This was my target before I retired, as it would mean that I could withdraw 3% of my nest egg each year and most likely not run out of money before I die. (For those retiring at a more "traditional age", the safest rate could be as high as 4%, requiring a nest egg of 25 times annual expenses.) Those multiples are based on the work of William Bengen and produce a pretty conservative approach. I'm not saying it's the perfect approach but it gives you a ballpark number. I think there are ways to do it on less, but this was just my starting point.
How much do you live on a year? (Again, if you prefer, what percentage of your total net worth do you use to retire?)
I didn't consider my primary residence in the calculations above. Again, I figured at some point I could tap into my equity (either downsizing or a reverse mortgage) but didn't want to count on that. That way I'd have a little extra room for error if things didn't go exactly as planned. So, as a percentage of our net worth, we lived on 3% of our net worth, which excludes the value of our primary residence. That was 3% of our net worth the first year. As you know, the market has gyrated wildly, and is significantly down from when we retired, so as a percentage of our net worth, this figure isn't constant from year to year.
We lived on 3% the first year of retirement, and while we expected to inflate our budget over the last 3 years for inflation, our particular basket of expenses overall has not changed overall, so we're still living on about that same dollar amount so far.
What advice would you give to a would-be retiree?
Retirement is a big adjustment. The first couple years will be surprising as you figure out what you want to be doing with your newfound time. Don't rush it. Try to just see where it takes you rather than forcing a pre-determined idea of what retirement "should be."
As far as financially, I highly recommend having 3 years worth of living expenses available in liquid assets so you don't have to be overly concerned about stock market gyrations. (At least for those of us that will be living on our 401(k)'s rather than a pension.)
Related Posts:
More on Early Retirement-Part 2
How to Lose Money in the Stock Market: Don't Invest in it
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We've heard so many different views about how much money you need when you retire. I'd love to know how you arrived at 65% of your previous spending level. Does it include cost of medical insurance; do you include a mortgage in your cost of housing; and how do you figure taxes? Thanks for your insights!
Posted by: Sightings | March 24, 2012 at 06:30 PM
@Sightings: It seems you have read my subliminal message--the orderly stacking of wood in the photo. I didn't arrive at the 65% by using some sort of formula. I just took our existing spending while I was working (we tracked it for two years before I retired) and added and subtracted things I expected to change.
I decreased things that were likely to go down on their own like taxes, lunches, commuting costs, and clothes. I decreased things that we would be willing to let go down like dinners out, housekeeping/gardening (we do it ourselves now), gym memberships, and some maintenance and repairs (again DIY).
Then I increased for the things I knew would go up like health insurance (I got quotes--I didn't guess), utilities (from being home more), and groceries (from eating out less). Something you might expect to go up would be travel--we wanted to do more travel. But I tripled our travel on the same budget by home-exchanging, looking for deals, and giving up luxury ocean-front accommodations.
I built the budget from the ground up and it landed at 65% of what we were spending the year before (while I was working.)
I don't think those standard rules (70% of your income or x% of your current spending) work. You have to do the work and go line-by-line, as they say in politics, and build the reality you are willing to live with.
As it turned out, the first three years, we have lived on less than I projected. Last year, I loosened the purse strings because I had the extra income from a part-time consulting gig, so we spent more than that.
(By the way, we do have a mortgage. I was considering paying it off, but I felt better about holding on to the cash over these first few years since the market was tanking, and I didn't want to have to use up all my cash while we waited that out. Our variable rate keeps dropping, it's now 2.875%, so I'm not really in a hurry to pay it off. While the total payment represents 12% of our budget, the interest portion (the part that's not going directly back to me in the form of equity), is only half that %. So, I'll just make a year-by-year decision depending on the interest rate it adjusts to.
Posted by: Retired Syd | March 24, 2012 at 07:34 PM
I completely agree with the "woodpile". The % figures are too general. Need to track expenses, and then try and forecast future expenses, realizing that is an estimate, but hopefully an accurate one.
Posted by: Canadianmdinvestor.wordpress.com | March 25, 2012 at 02:19 AM
Using a percent of income to estimate a retirement budget never made sense to me. This was because the income in my workng years got reduced not once but twice due to a voluntary reduction in my weekly work hours. So, which income level should I have used in my estimate?
My retirement expenses initially were sbout the same as what they were in my last working days because the added cost of health insurance was around the same as the savings from the elimination of FICA taxes an commutation expenses. [Since that time, I have reduced my HI costs so my current expenses are slightly lower.) The rest of my budget is pretty much the same.
Posted by: deegee | March 25, 2012 at 08:31 AM
nice picture. the trees draw you to the center as a frame. the barn has that aged weathered patina. what are those little white flowers, clover? you do have some good pictures on your blog. then you said it was subliminal (i think more allegorical) i thought? hmmmm there are no accidents in art?
Posted by: fred doe | March 25, 2012 at 11:43 AM
@fred: All the best photos on my blog were taken by my husband. But I got a new camera for my birthday last year and I'm starting a photography class next month, so hopefully some future good ones will be mine!
Posted by: Retired Syd | March 25, 2012 at 11:57 AM
Syd -- Thanks, guess I've got some homework to do!
Posted by: Sightings | March 26, 2012 at 05:27 AM