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Thoughts on Retirement and Financial Independence
Tuesday, 24th June 2008 (by J.D.)This article is about Planning, Retirement
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This may seem strange coming from a fellow who’s not yet forty, but I’ve been thinking a lot about retirement lately. Now that I’ve repaid my debt, now that I’ve begun to save money, I’m curious how much a person actually needs in order to retire. How do you know when you have enough?
Too many experts
It seems like every expert has a different answer. Some say that you need 70% or 80% or 100% of your current income. Others say that you need to calculate your “retirement number” based on actual expenses. 
There are experts who argue that costs rise during retirement. But there are those who cite figures demonstrating that costs fall.
Whom should I believe?
I’ve also been wondering what is retirement anyhow? For the past three months, I’ve been working from home, writing. This is work that I love. How is this different from retirement? Does it matter? What would I really want to do differently with my life?
To explore these questions, I’ve been reading books like The Number and Work Less, Live More. I’ve been browsing personal finance magazines and online forums. I’ve been watching programs like Retirement Revolution. None of it really helps. I know about the 4% safe withdrawal rate, and I understand that inflation is a silent enemy. Individual pieces of the retirement puzzle make sense to me, but the Big Picture is just as confusing as when I started.
When people ask me where to begin with stock market investing, I feel like the answer is obvious: start by making regular contributions to an index fund, and then expand to other investments as your knowledge increases. But this is only “obvious” to me because I’ve done so much reading on the subject that I’ve been able to develop a strong set of opinions. I haven’t done as much reading about retirement; I find the subject just as baffling as some people find the stock market.
Financial independence
I’ve decided that “when can I retire?” may be the wrong question, especially since I can’t even decide what retirement is. Instead I’ve shifted my thinking to financial independence.
Your Money or Your Life defines financial independence as “having an income sufficient for your basic needs and comforts from [sources] other than paid employment”. Financial independence is “having enough — and then some”.
To me, financial independence implies freedom. It’s the condition of having saved enough money that you can do whatever you choose. Whether or not you elect to keep working doesn’t matter — you have enough saved and invested to follow your dreams. If you’re financially independent — if you’re doing what you want — isn’t that the same as retirement, anyhow?
I have no idea how much money is “enough — and then some”. How do other people determine this? Do they determine it? Have you? What does retirement mean to you? Have you set a target figure that will allow you to stop working? What will you do then? What is your definition of financial independence?
65 Responses to “Thoughts on Retirement and Financial Independence”
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June 24th, 2008 at 12:58 am
There are a lot of people who think that retirement makes them useless, but I think retirement makes you free. Of course, however, you need money to enjoy this freedom. This is a reality that is difficult to deny, but I still believe that you can live well without being “rich”.
June 24th, 2008 at 1:38 am
If I’m honest, I’m pretty set-up financially at the minute. I have enough money to go on regular trips abroad, buy all the clothes that I need, enjoy hobbies, and so on. My FI number would be enough to keep me at my current level of income.
To retire now, I’d need a little over £1m (assume only 2% return - I’m young). To retire ‘early’, I’d need £700k (assume only 3% return). To retire ‘on time’, I’d need a little over £500k (assume standard 4% return). All these target figures are in today’s money, so would need to adjust for inflation.
Currently, I’m about on track to retire ‘on time’.
June 24th, 2008 at 2:44 am
Early retirement was something I just couldn’t comprehend the value of until I paid off all my debts. Now it seems like the next logical goal!
Even though I don’t know any of the answers to your questions or my own questions, I do know that if I keep on saving, early retirement (or semi-retirement or whatever you want to name your new lifestyle) is definitely an option!
Please do return to this topic somewhat regularly. I’m so interested in what insightful things you and your readers will be sharing!
June 24th, 2008 at 3:16 am
I can’t imagine ever fully leaving the workplace, when you spend the majority of your adult life with a work routine it must be very hard to break free of it.
My grand-father who retired at 70 continued to do consultation work until he passed away. My father who retired at 50 from the fire service is currently working as a cook and doing some light construction here and there. I plan to keep on working right into my twilight years, I may just be the people greeter at the local Wal-mart but heck it’ll be a small income as well as benefits.
This is of course a long way off for me.
June 24th, 2008 at 4:24 am
To retire (ie never work again unless I wanted to) tomorrow, my husband and I would need about 2 mil with a 3% withdrawal rate. I priced private health insurance, and it would cost about 1200 a month for the two of us to have basic medical and dental coverage, hence the large number.
Without needing to cover health insurance, we could retire right now with 800,000 at 3% withdrawal rate.
We’re planning to save up as much as we can and take a mini-retirement in 5-6 years. We want to volunteer abroad and live in different places for 2-3 years. We figure we’ll need about 75k to do this.
Financial independence is what I’m striving for. I’m not sure I believe in retirement exactly, since I hope to get to a point in life where both my husband and I can be free to do what we want to do without having to worry about emergencies or bills pulling us down. Not being in debt and not living paycheck to paycheck is a huge step in that, I’ve found.
June 24th, 2008 at 4:29 am
Great article. I am a retired teacher/coach. I actually make more now than I did when I was working. My retirement benefits was more because I didn’t have to pay union dues, insurance, and State taxes. That being said, I have slowly seen my expenditures going up. At the present rate with gas going through the ceiling, utilities, and food. It won’t be long until they pass up my retirement check. To counter this I started three small money streams just to help a little. The streams are not MLM’s they are just small jobs that will be there until I let them go.
June 24th, 2008 at 5:07 am
“I have no idea how much money is “enough — and then some”. How do other people determine this?”
Here’s what I did:
1) Figure out how much money we currently spend, after taxes. Exclude expenses we will no longer have when we retire (such as a mortgage, and investing - no need to invest when you’re already retired). Say this ends up being $50,000.
2) Adjust your “expense” number for inflation, to your desired retirement year. I’m 32 now, and wish to retire at 55, so I’d adjust it by 23 years, assuming a pessimistic 3.5% inflation. This gives you an excellent inflation-adjusted, top-end estimate of your expenses in retirement. For me, that $50,000 becomes $110,000.
3) Account for taxes. I’ll need $110,000/year after taxes, so assuming I’m in a roughly 30% bracket, I’ll need $143,000 before taxes.
4) Subtract any other expected income, like pensions or Social Security. Since I’m planning to retire at 55, that’s too early to expect any other income sources. However, if you’ve worked in a pensioned position from a young age, you may qualify for benefits earlier than most people.
5) Multiply by 25. This gives you the “grand total” nest egg you’d need in order to provide your annual income at a 4% Safe Withdrawal Rate. I’d need $3.6 million in order to generate $143,000/year.
That’s it. My number is $3.6 million. That’s how I came up with it. All that’s left is to figure out how much I’d need to invest per month from now until age 55 in order to get to $3.6 million. I use custom-written software to make those calculations. For me, it turns out that I need to be investing $4,700/month (assuming a 7% average rate of return) in order to reach that goal. That’s a little higher than I’m capable of achieving at this point, so I’d need to adjust my assumptions a little. Maybe I’ll have to work until 57 instead of 55, or maybe I need to consider more tax-efficient investment vehicles, or count on some inheritance (a bad plan) or learn to live off less than $50,000/year, or hope for lower than 3.5% inflation, or… whatever. At this point, you have your “number” and can make the necessary adjustments.
June 24th, 2008 at 5:12 am
FI’s been our goal for a while. I don’t see us retiring forever from any kind of employment. I would prefer to volunteer or be able trade my time than have to try to get a reliable top dollar with benefits for the rest of my life.
Heck, at this point, I’d consider it “retirement” to be in a part-time job that I thought it was important, and/or I loved it, not in a full-time career job that provided benefits and paid me well. DH has been a stay-at-home dad for several years now, and he’s said that sometimes he considers himself “semi-retired”, after 19 years of full-time employment. I guess it depends how you look at things.
We have pretty much same picture as AB, but with kids. DH and I could retire or each work a bit, and live on 3% or so of our savings, were it not for the issue of medical insurance. At this point, I look at it as having a huge “FU” fund, should a job become intolerable [;)]. We could mini-retire for quite a while before we had to take whatever job comes.
Our FI number drops a fair bit when we reduce our housing costs, so we’re working on that. It’s a balancing act — what kind of life is “enough” when the choice is that you may never have to work for pay again? My need for living space and stuff drops a lot when those are the stakes! (Ah, but the travel bug!)
June 24th, 2008 at 5:26 am
Hey J.D, i’ve done this exercise a few times to calculate my retirement needs. First, you need to decide whether or not you want to deplete your nest egg, or if you want to leave some of it behind when you pass.
After that is determined, I think the best place to start is to calculate what you think will be your expenses during retirement. You’ll notice that since you don’t have to “save” or put money in your 401k or IRA, that you’re expenses are much lower than when you are working.
Last point, all of the above is assuming that all debts are paid off, even the mortgage.
FT
June 24th, 2008 at 5:32 am
I like to work backwards. I take my retirement nest egg, calculate its compound interest based on stock market return averages less inflation (http://www.moneychimp.com/calculator/compound_interest_calculator.htm) assuming age 100, and see what 4% yields. If this is enough, I move back a few years. For example, right now my husband and I can retire on 80% of our current income at age 76. Every dollar we save beyond that number gets us closer to an earlier retirement. Quite the incentive to save, to boot!
June 24th, 2008 at 5:46 am
Great summary by Kevin. These are the steps that I’ve been using for the past few years. I’m in a very similar boat being 31, and that NUMBER can be scary at first. Just start working at it and see how it grows.
JD. I’d love for you to revisite this often. I think it’s the next step in getting rich slowly after getting the credit cards taken care of.
PS. Thanks for pointing me to the 100 pushup chanllenge.
June 24th, 2008 at 6:08 am
JD-I think you hit the nail on the head when you explored what it is that you really want. I don’t think most people want to retire. They may want to work less. They may want to start their own business. Heck, they may want to try an new career. The big question is…why wait?
I think one reason is their finances. If you are up to your neck in debt you have no business making the change. Once you clear that hurdle it becomes easier.
I also like the definition of financially independent. This is the goal most people would have if they truly did the research.
June 24th, 2008 at 6:09 am
I’m totally overwhelmed by trying to calculate something like this. A lot of people have formulas that still don’t help me because I have no clue what I’ll be spending more or less on, or what my tax bracket will be, or any of the other factors I need to know.
For now, my goal is just to fully-fund my Roth IRA. I’m trying to read more about investing and retirement, though, but like JD said, no one agrees and it gets pretty confusing.
June 24th, 2008 at 6:19 am
I have done some quick computations and I can live off about S$36,000 (about USD 28,000) a year for living expenses. If I can get a return of about 10%, I’ll need S$300,000. But realistically, if I can get 4-5% returns, I’ll need about S$600,000 thereabouts in investible savings to be financially free excluding my home which is fully paid for.
It’s a rough figure but works for me.
June 24th, 2008 at 6:21 am
I’m not sure you ever fully retire. Sure, my 90 yr old grandmother has. But my 65 year old parents both still do something they love and make very good money at it. They have 2 adult children who are out of the house, what else are they going to do?
My dad retired from the state at 58, which is early, but he was miserable in that job. Now he is doing something else and making more money. In fact together they make more money now then they ever have. They have no drains on their income - everything is paid for. They’ll both probably buy another car in their lifetime, but not for the next 4-5 years. Basically they pay for food, utilities, some insurance and anything else is extra.
I think the retirement number is less than you think. Sure inflation is the hidden enemy and is something to consider. But I doubt most of us will retire to do nothing until we are 75 or so. At that point you are either near death or you’ll really have very little to pay for because you’ll be limited to what you can do, like travel. Few people really travel in their 80s.
My firm belief is that 15-20% of your income should be saved for retirement. Use the rest wisely to pay off your debt and enjoy your life (so you’ll live longer). You will have plenty.
June 24th, 2008 at 6:27 am
I think the problem is that retirement (the number, at least) is a moving target that everyone’s trying to lock onto before it’s really feasible. Life’s unpredictable, so any calculations are just best guesses.
Count me as another “financial independence” person; that’s the goal for me. When we have enough to where we can reasonably live off of interest and dividends, that’s when we’re free. Whether that means we keep working, scale back, or drop out, well, we’ll find out when we get there.
June 24th, 2008 at 6:31 am
I think I’m in a stage similar to April. I’m trying to live financially responsible and save every penny I can. I’ve found a certain amount of joy and peace in knowing that I’m not being wasteful but I’d really like to know if I am saving enough.
My goal is to remain financially independent until the day I die. I’m a big fan of freedom and being independent financially is a key component of that.
For now, I’m 30 and work full time. I depend on my job but that’s not such a big deal. I’m a teacher in Missouri (yay for my pension) and will be able to take full retirement at age 54 thanks to busting my hump in college and getting my career started at 22.
Health care is the scary cost for most of us so that is what I worry about.
Still, to answer your question about when you can retire I would like to make an observation.
My grandfather is retired on a crappy pension plus social security and medicaid. He lives frugally in a paid for home. He gardens. In his small town he even joined to country club so he can play golf every day (and he plays every day–badly–but every day). He sits outside when the sun goes down to cool off at night. He drinks two cans of beer every evening and eats what he wants for dinner. He eats leftovers for lunch.
In other words, he’s learned what is important to him and doesn’t let the world tell him he needs a bigger house or a new car (actually, I think his old Buick is pretty cool and even offered to buy it from him a couple of times). He lives on what he has acquired and the joy that life gives him and he makes ends meet on less than $2,000 each month.
When you are mature and wise enough to live on $2,000/month you are ready to retire.
June 24th, 2008 at 6:37 am
Retirement for me is as soon as I have 20 years of working with the US government in. I’d say the minimum that I would be comfortable retiring with would be $30,000 a year in todays money. I don’t want to live a lavish life. Not working is lavish enough for me.
June 24th, 2008 at 7:02 am
I sort of feel you can never have enough for retirement. Especially if you retire early. That way you can really enjoy doing all the things you like to do.
June 24th, 2008 at 7:09 am
Pete wrote: I can’t imagine ever fully leaving the workplace, when you spend the majority of your adult life with a work routine it must be very hard to break free of it.
Ah, this is very insightful. After working from home for three months now, I can attest that this freedom is a blessing and a curse. A work routine may be oppressive at times, but it also provides structure to one’s life. Also, a workplace contains co-workers. Which provide social contact. My biggest struggle lately is trying to keep from going stir crazy. It would be different if Kris were working from home, too, but she’s not. Instead, I have to go out of my way to see people during the day.
@AB: Wow! Adding health insurance doubles what you need to retire? See, that’s information I need to know. But it scares me.
@Kevin: Awesome response. I love seeing how you figured your numbers. They’re intimidating, but they’re good to see.
KC wrote: My firm belief is that 15-20% of your income should be saved for retirement. Use the rest wisely to pay off your debt and enjoy your life (so you’ll live longer). You will have plenty.
This is the approach I’m taking so far. I’m just going to save as much as possible right now. If it turns out I’m saving more than I need, I’ll either be able to retire earlier, or I can reduce my savings and use the money to do things now. (Pay off the mortgage? Travel?) I think that this is the most reasonable philosophy I’ve found so far…
@RoosterTeacher: Great comment.
June 24th, 2008 at 7:10 am
My idea of retirement is debt-free with income, even a little, coming in. Enough to buy the essentials, and enough to follow some dreams (including those that continue to bring in money). We’re building an off-grid home and once we pay off the mortgage (10-15 years), we plan on remaining debt-free and “working” how we want to work. It’s very important for us to OWN our house. My husband won’t feel comfortable retiring until it’s all ours. I work from home and LOVE it, now we just need to find a way to get my husband out of his office and into something he loves. Retirement for us would be: own our home, head to warmer climes in the coldest winter months (we’re in VT), working as much or little as we WANT to.
June 24th, 2008 at 7:23 am
At first I had to wonder at Kevin’s example, but then I looked at some of the numbers in today’s dollars. 3.6 million saved taking away the inflation numbers is about 1.7 million in today’s dollars. So you’re expecting to save 1.7 million in 23 years on say a 75K salary equivalent? That would lead to 15% of the annual salary assuming 200K already in the retiremement account at 32, all earning 7% *above* inflation (possible, but not guaranteed by any means).
But if you only had 100K now, you’d have to save around 30% of your salary to get 1.7 by 55. But you could do it at 15% and just wait another 4 years or so (age 59) until you retired.
Then if you only had 50K now, you’d have to wait until 62 with the 15% annual savings. (Think about it, every year you don’t draw income from a million plus account, is a huge chunk of interest income into that account, making up for the 50K and it’s original interest pretty quick)
So, assuming your income grows with inflation as a minimum, and that you can get 7% above inflation returns (index fund over 23 years may make this possible), this is doable. At worst, you have to wait a couple of years more to reach your goals.
Moral is, if you consistently increase your income to keep up or exceed inflation and put away 15% or so of said income for 30-40 years, you should be able to retire in the ballpark of what you’ll likely need (i.e. what KC said) baring any catastrophies or ridiculous debt burdens.
Just don’t forget to have fun getting there.
June 24th, 2008 at 7:38 am
I have a target figure in mind, but when I gain ground on it I am reminded of the many expenses between me and retirement. For instance, with two kids spaced exactly four years apart I can count on eight years of college costs (at least). I got a late start saving for my oldest child, so much of her college expense will likely have to be cash-flowed, reducing my ability to save large amounts of money.
I love spending time with my family. I was lucky; my grandfather retired from the USMC at 47, and spent the next thirty years caring for family members, and helping my mom raise me (my parents divorced when I was only four). We took camping trips, spent summers working on projects around his house, and spent a lot of time tossing a ball. He wasn’t rich, but had enough income to cover his modest expenses without requiring additional work, leaving him time to do the things he loved. To me, that is an ideal retirement.
June 24th, 2008 at 7:38 am
Everyone points out that in retirement, costs are lower (you aren’t saving for 401K, hopefully mortgage is paid off, etc). But what about health care? Currently, I pay a minimal amount because I am covered through work. If I weren’t, my premiums alone would be close to $400. And that doesn’t include deductibles, co-pays, etc. If I’m 70 and on 6 different medications and have 4 different doctors, I imagine I’ll be spending well over a grand a month just on health care. That’s no small expense.
June 24th, 2008 at 7:44 am
Not to inject any partisan debate into these boards, which I enjoy reading, but I continue to get extremely frustrated with government employees getting incredibly generous pension and benefits that facilitate a comfortable retirement while the rest of us slave away, and pay 40-50% of our income to taxes to support government employees’ early retirement, and face an uncertain financial situation in our (much delayed) retirement. I don’t begrudge any individual their retirement, but it seems like a broken system when government employees are treated better than their private-sector counterparts.
June 24th, 2008 at 7:44 am
In Get a Life: You Don’t Need a Million to Retire Well by Ralph Warner - a book I think I read about here, actually - the story is way less scary. Warner interviews lots of vital, relatively low income seniors and shows that quality of life at that stage doesn’t correlate to income/assets. What he thinks is important to invest in is FAMILY, FRIENDS, COMMUNITY, MENTAL & PHYSCAL HEALTH. THose assets serve one well in “retirement”. ANd of course pursuing passions and interests. The saddest retires, according to Warner, are tycoons with a ton of money & stuff but no interests, tense or disrupted family relationships, no community, and no purpose or meaning other than material comfort.
Here’s an observation from my mid-50’s perspective. Both of our dads lived into their 80’s and one to the 90’s. They traveled and did stuff that cost a chunk in their 60’s and 70’s, but by their 80’s they did a lot less of that. They lived in retirement communities that provided most of their activities and needs. My mother-in-law at 86 spends practically nothing beyond her room & board at a nice assisted living facility. (Of course they had the money to buy into one, a different question.) My point is that in retirement you might have less money, but you have more time, so you can be creative and strategic. As you age your energy for doing things which are expensive declines. You don’t need to maintain a jetset retirement to be happy!
June 24th, 2008 at 7:50 am
Betsy makes a good point when she writes: What he thinks is important to invest in is FAMILY, FRIENDS, COMMUNITY, MENTAL & PHYSCAL HEALTH. THose assets serve one well in “retirement”.
I just read an article yesterday (though I can’t find it now — Washington Post?) in which the author wrote that the rich are sometimes less happy than the middle-class because they’ve spent too much time focusing on money and not enough time investing in social capital. (That’s not how the author phrased it, but it’s what he means.) Interesting stuff.
June 24th, 2008 at 7:54 am
As usual, JD, great post! I don’t think it’s strange at all to think about retirement or financial independence before age 40. I wish more people did, the younger you start planning the easier it will be to meet your retirement goals.
Based on most of your posts, I bet you would agree that retirement planning isn’t really about acquiring assets. For many of us, it’s more about reaching an overall state of abundance, security, and happiness. I’ve been reading your blog for quite a while and, based on how fast you’re learning and making progress, you have nothing to worry about. You will definitely be prepared when the time comes, you are way ahead of the game. If I was a betting man, I’d guess that you’ll be completely financially independent in less than 15 years.
I was recently asked a similar question by a 49 year old who wanted to retire at 65 but had never taken the time to learn much about saving or investing. I tried to layout a basic road map to retirement that you might find interesting, maybe even helpful. http://blog.money-and-investing.com/?p=25
I have never posted a comment to your blog before, JD, but personal financial planning is something I’m very passionate about so I couldn’t resist. It has been absolutely fascinating to watch your journey towards financial independence. I’d wish you luck, but I don’t think you’re going to need it.
Cheers,
Odd Lot
June 24th, 2008 at 7:55 am
I like the idea of the cross over point put forth in your money or your life. Also, just because you can “retire”, doesn’t mean you have to or you will.
What I find confusing in all the reading is that the number you need for retirement as a percentage of your salary is climbing. I understand this comes from concerns of Social Security, longer lifespans, etc. but it still seems to me to be a bigger increase than necessary.
Just keep in mind that the people who most want to manage your money for you, want more money to manage since that increases their income, so it is in their interest to try to get you to give them as much as possible. You will need to decide if you want to have so much money that you’ll never need to touch the principle and you plan for it to increase with inflation. Or, you’re willing to bet you aren’t going to make it to 90 or 95, and plan on running out of money then.
If you want to play around with this, MSN has a fairly simple retirement calculator (go to MSN.com, then click on Money under the main titles, then find retirement under planning in the left hand column, and then under retirement on the left hand column click planner) where you can play with different scenarios to give you an idea of various options you may want to consider.
My personal opinion is that if I die before 90, the heirs get a nice chunk of change. If I die at or near 90, they should have their own retirement ready and shouldn’t be counting on me. If I make it longer (science and medicine will have to have gone a long way), well, they owe me. Also, there’s no saying I can’t change some of my options as I near retirement, or even while in retirement which could extend the “life” of the money significantly.
June 24th, 2008 at 7:58 am
The health insurance piece of this equation is more than just the high cost of individual health insurance. If your old enough to have saved enough to retire early but too young for medicare, individual health insurance may not be available at any price if you have medical conditions.
June 24th, 2008 at 8:31 am
You might want to check out the book “Die Broke” by Stephen M. Pollan. Even though it was written 10 years ago, Mr. Pollan’s advice to Pay Cash, Don’t Retire, and Die Broke is more relavant today. Basically the gist is, continue working as long as you can, invest your money, as you get older and can’t or won’t work as much, buy immediate income annuities to insure you never run out of money, donate money to kids, charity, etc. while you are still alive to reap both the pleasure of seeing that money help worthy causes as well as taking tax deductions (”Do your given’ while you’re livin’ so you’re knowin’ where it’s goin’!) and use your last quarter to call your kids to say goodbye on your deathbed. Check it out….
June 24th, 2008 at 8:32 am
Here’s a link to a synopsis of Die Broke:
http://keelynet.com/unclass/diebroke.htm
June 24th, 2008 at 8:44 am
JD,
Welcome to my own little piece of hell. Trying to determine a number depends on a lot of things and in the end it’s just a guess. It is one of those decisions that in the end is all about how you feel about it. EG: Do you want to include SS benifits, is your inflation number 1.5% or 4%, do you want to leave anything to your kid(s)? It goes on and on.
I wrote a entire series of posts on how to do this for my Canadian readers, but the general process is the same for the US.
http://blog.canadian-dream-free-at-45.com/?p=357
Tim
June 24th, 2008 at 9:09 am
I’m with Martin @29 — if the situation was as bad as one sometimes reads, our streets would be impassable because of the elderly poor who were out begging.
Instead, I think that if we look around at the elders in our neighborhoods and family, we’d see a variety of choices and lifestyles. While more money isn’t going to hurt, lots of people find themselves able to live on lower incomes in retirement. If you have to take your top income as an earner as the
standard for your retirement, there will be lots more options…
Social Security was a committment from an earlier US society to decrease poverty among the elderly — and it worked. I think it can continue to help, and I think that as a society, we are also moving toward ways to address health issues for all of us. Which, I think will be of great value in retirement!
June 24th, 2008 at 9:40 am
I believe financial independents and retirement are 2 completely different things.
1 Retirement is simply where you have saved up enough money to help you get by. You are able to live off of your cash, hopefully.
2 Financial independents can come at any age. Unlike retirement it does not mean that you have a lot of cash sitting around. It means you have enough passive income to live off of without having to work. This can be things like internet income, investment income, or business income. Having more income then you need is where the “enought- and then some” comes in.
June 24th, 2008 at 9:40 am
Financial Independence. Those two words have a great sound. I feel you are financially independent when your passive incomes is more than your expenses. Then you are financially free.
June 24th, 2008 at 10:29 am
I don’t think it’s really possible to calculate a number with any confidence given all the variables involved.
Our approach is to always think about how close to financially independent we are _now_. I assume a 3.33% withdraw rate, so our “percent independent” is
(invested assets) / (current yearly expenses * 30) .
Our thought is that over time our expenses will morph into what they’ll be like when we retire. We expect to go from two incomes, to one, then zero. When we pull the trigger on zero incomes we’ll drop our job related expenses and add health insurance expenses. But frankly I expect health care policy, and our workplaces, to be different by then so I don’t see the value in running hard numbers until we’re a year or two out.
Another benefit of tracking the “percent independent” ratio is that it gives an incentive to invest money and keep expenses low. Adding a new monthly expense will lower the percentage.
June 24th, 2008 at 10:50 am
tdr, there is nothing stopping you from getting a government job if you think government employees have the edge. In general for the qualifications, goverment jobs pay less than private sector jobs. Some people sacrifice a higher earning wage for more stability and better benefits in a goverment job, other people go for a higher paying private sector job, but that means you have to be more individually responsible for your own retirement. Personally I think anyone who is looking at jobs should calculate the total benefit of the job, not just salary but benefits as well as they can make a big difference. It’s too bad that businesses are dispensing with pensions, but there is evidence that many employees undervalued the benefit of pensions, so it was an easy and cost effective thing to get rid of. It doesn’t make government the baddies here though.
Ps if you are in an income bracket that pays 40-50% in taxes then you should have more leeway to save for retirement than many folks.
June 24th, 2008 at 11:03 am
I was just pondering all these questions too about retirement. I bought a book “Retire on Less than You Think” by Fred Brock. He addresses all these in depth and has come to the conclusion that the 70-80% figure is too high. Especially if you’re open to retiring in a less expensive area. It also has lots of resources for finding health insurance, etc.
Great post!
June 24th, 2008 at 11:22 am
@tdr comment 25
On the soapbox time:
Ten to fifteen years ago you would have scoffed at government workers limited salaries, low promotion potential, and limited benefits when compared to private industry (I know plenty of my buddies have questioned my choice for a long time). Not to mention your obvious prejudice that government workers are somehow undeserving of the same opportunities or benefits as private sector employees got when they were hired decades ago.
So now that a good chunk of the private sector has tightened their belts and turned away from defined benefit plans for pensions in preference for 401Ks, you feel it’s unfair that “suddenly” government workers have “incredibly generous” benefits and pension plans (we won’t include the salary reviews that indicate government workers are still underpaid across the board as compared to equivalent private industry positions). How nice of you to conviently forget that in the relatively recent past most government plans were considered middle of the road, at best, in their generousity when compared to private industry.
Also, before you rag on the pension percentage and how it’s all your tax dollars, keep in mind the following:
The plans (at least federal and the state I’m in) require buy in, like SS.
The old federal system doesn’t pay SS, doesn’t match the 401K equivalent system, and significantly limited amounts allowable to be placed into the 401K equivalent.
The new federal system requires both a buy in to the limited plan and SS, but does provide matching in the 401K equivalent.
Do you feel that per your argument you are undeserving of SS because it’s tax dollars? If you pay into a system don’t you deserve to get the compensation promised by the system? So they’ve paid into their defined benefit plan just like you pay into SS and more than likely like a private sector employee would pay into any Corporations defined benefit plan. Where’s the difference?
Finally, before you talk about the 40-50% as a pension in total, you need to subtract the SS difference they would have gotten versus the difference in pay-in on SS versus the Government retirement, etc (speaking only with respect to federal and my state). I think you’d find that 20-30% dependant on their salaries, would have been SS, reducing your number to something like 10-30% strictly from their pensions, which they bought into.
So yes, government workers currently retiring are getting decent pensions. That is what they were promised when they got hired. They’ve typically put in 30+ years in service to that government agency (local, state, or federal) to qualify for such a pension. Just like if you were hired 30 years ago you could have gotten a company benefit plan if offered and for many who just retired or are very close, you still would. If the government (like corporations) decides to switch over to something else or use something else for new hires (the feds did this in the mid 1980’s), fine. But don’t act all “how dare they get that, they’re only government workers” when these people have done the jobs they’ve been asked to do and deserve to have the commitments they were hired under honored just like you would argue a corporation should honor their commitments to their employees.
Off the soapbox.
June 24th, 2008 at 11:29 am
A related question is how you know how much you need while you’re not retired. You get the best job you can, and then you have to live off that income (or go into debt). So there is similar flexibility after retirement.
I want to warn those who never want to retire that many people end up retiring before they planned to either because they got laid off and couldn’t get another job or because of health issues. So it’s a good idea to save some money just in case.
tdr, if it makes you feel better, although I’m going to get one of those awesome government pensions one day (if they don’t change the rules on me before then), it took me seventeen years to start making as much as a first-year teacher, even though my job requires a degree. Now, three years later, the first-year teachers have caught up to me again, even though I kept getting raises.
My answer to the retirement question came to me like this: I will first be able to retire and collect my pension at age 52. My pension will be about 60% of the average of my highest five salaries or, assuming a raise of 3% a year, about 56% of my final salary. My house will be paid off at age 50, so I’ll only need to pay for upkeep, taxes, and insurance. If the taxes get too high, that means my house is valuable and I could sell it and move someplace cheaper, right?
If I keep living like a student, I could totally afford to live on that salary. Meanwhile, I’m also maxing my Roth IRA [and now adding a bit to a Roth 403(b)] to help make sure I really get to retire then even if they do change the rules on me. (I could not afford to max out my 403(b) because I do not make that kind of money.) And I think of Social Security as an inflation hedge–it will probably be around in some form or other and will come in handy when I’m 62 or 67 or whenever they let me start collecting.
After retirement, I will have the freedom to decide whether I’d rather work so I can have more money or not work and keep living on less.
As far as a first step, I’d say it’s to save 10% of your income toward retirement. More if you can, less if you have to. In addition, find out what genetic disorders to watch out for. (In my family, I have to be careful about diabetes and osteoporosis, so I try to stay thin, stay in shape, do weight-bearing exercise, and get plenty of calcium.) In addition, keep in touch with your friends (including relatives and pets) and maintain several hobbies. Some grown-ups actually forget how to have fun; don’t let this happen to you. Keep paying attention to what makes you happy, and think what it will take for you to continue being happy as you get too old to work or rich enough to quit.
June 24th, 2008 at 11:41 am
@ tdr #25…
I have to agree with everything getagrip just said. And besides, you are more than welcome to get one of those government jobs if you’d like.
Speaking for myself and my husband, as officers in the active duty Army, I think we more than earn a generous pension after 20+ years of service. I love the Army and there are some fantastic benefits, but I could easily be making more money in the private sector. I also wouldn’t have to relocate every 3-4 years, and I wouldn’t have to spend so much time away from my family. Oh, and neither my husband or I would have had to go to Iraq and risk being shot or blown up by a roadside bomb (and who knows where we’ll go to war next…) I’m proud to serve but I would certainly think twice about staying in 15 more years if that pension weren’t at the end.
June 24th, 2008 at 12:22 pm
I have wrestled with this retirement issue as well, and I know it’s a widely shared concern!
I’m 46. 4 years ago, I battled cancer. It changed my life. I realized that I… WE… spend so much time planning and working for our future - without the guarantee of even having one. Many people sacrifice a current quality of life for the promise of one.
I realized that my true avarice is TIME, and with that knowledge, I redefined my definition of retirement and independence.
I now work 32-34 hours a week instead of 40, but I telecommute. Telecommuting has drastically improving my quality of life. My field has evolved and is now telecommuting based, so should my job vanish, I’ve no worries about finding another similar set up. I’m also union protected, and I work an enormous health care provider. My pay is a bit lower than others in my field, but I have job security, great benefits, and I LOVE my job and employer! I’m very blessed!
I boosted my retirement savings to 18%, but also focused on changing my life. I took a Home Eq loan, and purchased a 4 acre parcel with a small home/wood barn about an hour from the city, in a smaller town. It’s absolutely beautiful and peaceful, with wonderful folks & neighbors, and I plan on creating a small organic farm here. The city house is now a rental investment.
The point is - my goal of setting a retirement date changed to creating a life that I could happily live until the day I drop dead. I cannot sacrifice my current quality of life for the promise of a future one! If I choose to retire one day, I will. But that will be my choice - and to me, CHOICE is true freedom.
Planning for the future is wise, it is necessary - but it is not all. It should not trump your present quality of life, and you should never count your riches in financial treasure only.
June 24th, 2008 at 12:28 pm
Many people don’t determine this until they are forced to. I started early and saved and invested all I could. A 15%-20% savings rate over a work life is reasonable, 20%-25% for early retirement. Naturally, if you are saving 25%-50% it will come much sooner. If you don’t start early though, these have to increase considerably and early retirement may not be possible. Some imagine a future life completely different from their present one. This is a bad way to plan a life. If you really enjoy something, shouldn’t you be doing it now? If you aren’t, how do you know you even will? Financial independence means being debt free with sufficient income to cover your expenses, 25 times is a good measure. More than money, it provides freedom and the possibility of time. Retirement may not be necessary or it may be forced, which is another reason to start early. Mine was forced, but my life changed relatively little. I would still work on something interesting. There isn’t enough money to work on something uninteresting. I don’t need work to absorb my freedom and my time.
June 24th, 2008 at 12:28 pm
For me it is simple, I plan to work until I die. I do not want a life of leisure, of picking up seashells on the seashore, while there is so much work to be done to leave this world a better place than when I arrived on the scene. As such, I will probably work for a nonprofit.
I do plan to be financially independent. Currently I am debt free except for the house.
June 24th, 2008 at 12:32 pm
I think healthcare makes a big difference, one that isn’t nearly as important in the UK as the US. But still, if I want ancillary medical care, e.g. physiotherapy, or I want to jump the waiting list, then I’ll have to pay some money. I should probably increase my weight-bearing exercise too. After all, not all investments are financial.
June 24th, 2008 at 4:09 pm
I think about retirement a lot, and I’m only 25
Because my parents and my boyfriend’s are so ill prepared and rapidly approaching retirement it makes me a little anxious. I have never thought of retirement as a time to do nothing, but rather to do all those things you want to do that you don’t have time for now. I would like to volunteer, sit on the boards of some of my favorite non-profits; travel; sew more, maybe start a small business related to making things, but just as a hobby to keep me entertained. I am confused by people (like my boyfriend) who believe that you are only contributing to society if you are making a salary. There are so many good things you can spend your time and energy on when you don’t have to stress out about work, the possibilities are just endless.
As far as planning, well I am currently saving 20% of my $28,000/yr income, but only half of that is towards retirement. I try not to think about how much I need because I’m just beginning my career I honestly have no idea how much I’ll be making in 5 years let alone 20-30 and retirement at 65 is still 40 years away. Of course any children I have will throw a wrench in my plans, best to do the best I can, stay out of debt and enjoy life… right?
June 24th, 2008 at 7:30 pm
My goal is to retire early, 56-59 years old. To do this I plan on having all the kids out of the house and self-sufficient (this is the big hurdle), the house paid off, and then retire.
Except my idea of retirement would be to work barely part time, just enough to keep benefits (medical being the key) till I am eligible for medicare.
If I work two 10-12 hour day(s) a week, have them at the beginning and end of a pay period, I could have 10 days inbetween to do “retirement stuff”.
June 24th, 2008 at 7:59 pm
The how much is enough question depends.
How much do I need versus how savvy and disciplined am I willing to be about saving? So far my fantasies of retirement seem so far from my means.
Fantasy:
Win $10 million in the lottery and quit working for the man forever! I imagine giving notice at my current job and immediately boarding round the the world cruiseship complete with daily personal trainer and masseuse.
ok, here’s my fantasy a little closer to reality but based on luck and ability to earn and invest remarkably better than I am now. I am assuming inflation and a much higher standard of living. (Definately the fantasy)
I work full time to 60 in relatively good health and have $4 million saved and can stop working for money when it is convenient for me. I can afford medical expenses and long term insurance. I have enough to travel, pay for repairs and help around the house and be generous with others. I don’t want to depend on others financially.
June 24th, 2008 at 9:23 pm
Retirement is a state of mind..
I’m retired now, I just have to go to work every day to pay for it
After all.. Life is not a rehearsal!!
June 25th, 2008 at 5:35 am
Retiring early is very important to DH and myself. His family health history is horrible (parents, uncles, and grandparents didn’t live to see 60) and I will not have him work all his life only to keel over dead three days into retirement.
Truthfully I’ve been too chicken to run the numbers. Thanks for that formula, Kevin. Time to bite the bullet.
June 25th, 2008 at 7:52 am
Financial independence to me is having money to do the things that are important to you. Retirement confuses me as well. I also wonder, will I still desire to work even when I am of retiring age. I know many seniors who work because they like to interact with people or just really find pleasure in what they do.
I personally am satisfied and happy with the thought of working yet having enough money in the bank to not live paycheck to paycheck. Living this way is what makes financial independence seem so desirable and needed. But it really all depends on your lifestyle and what makes you happy. Being able to make yourself happy without having to hold back can be defined as being financially independent. But that’s an intrinsic point of view.
Great post!
June 25th, 2008 at 10:24 am
First time poster here, but long time reader, I love what you are promoting here JD.
I’m 25 right now, but early retirement has always been a goal (thinking 50). I currently have ~$35k, and are on our way to ride the compounding wave. I found a great retirement calculator online which allows you to adjust different scenarios to get an idea of best case/worst case based on your current situation. The closer to retirement you are, the better idea you will have i think.
http://www.dinkytown.com/java/RetirementPlan.html
But as many people mentioned, living a happy and comfortable lifestyle up until retirement is important. And everyone’s definition of retirement is different. This calculator gives you flexibility to put in the numbers that work for your scenario.
June 25th, 2008 at 10:27 am
The general advice “out there” for saving for retirement is backwards,imo.
Everyone pretty much should be approaching it from max out 401k, max out IRA(s) annually.
Most will never even be able to do that (for a couple who do this, it would mean saving $42,000 a year).
Until they are able to do that, the question of “how much will I need” is irrelevant, because this should be the #1 priority for almost everyone out there.
It’s interesting to run numbers to see “what will be needed” but at the end of the day no one knows what unexpected circumstances may happen and when you are in retirement you will want to be able to take care of those unexpected circumstances.
This also applies to people who say “I like what I do, I always want to be able to work” but guess what?
That may not be the case as you get older. You may grow tired of working when you are in your 70s, or 60s, heck I know people in their 40s that are tired now (physically) of working.
Or you may have an age related disability that keeps you from your job (e.g. a stroke).
Save as much as you can, you won’t regret it when you are older.
June 25th, 2008 at 11:38 am
I’ve never come across online content regarding taxable accounts as they relate to early retirement. Even if a person isn’t maxing out both a 401k and an IRA, shouldn’t they also be saving outside those vehicles so they don’t get slammed with penalties?
June 25th, 2008 at 11:45 am
Re: #5
If you can retire on 2mil with health insurance, or 800k without wouldn’t you be better off self-insuring at that point?
Just set aside, say, $700k for self-insurance and you’re still ahead a half million dollars. Certainly medical bills can exceed this, but I imagine it’s extremely rare.
June 25th, 2008 at 6:32 pm
Justin- It might be better to have the 700k, but lots of places jack up prices for things for the un-insured. Also, dental insurance for my husband and I is pretty much a must since we both have genetically terrible teeth. I’d want to have a nice safe withdrawal of 2-3% of total to take care of everything…
Also, I’m fairly conservative in my investing, so I’m not expecting huge returns either, hence the 2 mil. The 800k is a very low estimate for me, and we certainly wouldn’t be able to live a very extravagant lifestyle (about 2k per month, which is 200 more than we have now budgeted).
If 1 mil dropped into our laps tomorrow, we’d likely try to figure out a way to retire now, even if it isn’t that magic 2 mil number. We have a lot of years left however (27 and 28 years old), and I don’t want to be old and tired and not have any money for comforts. (Or food, or shelter).
June 26th, 2008 at 12:04 pm
Having benefits helps a lot when you get sick.
My mom was a housewife all her life and lived modestly on alimony after her divorce.
Unfortunately, the disease she developed (a rarer, non-Alzheimer’s dementia - onset in your 40s) meant she had forgotten to pay for private health insurance by the time she needed it.
Diagnistic costs were several thousand out of pocket.
She was unable to stay in her home because of her wandering (common in dementia) and had to be placed first in a secured assisted living, then rapidly needed nursing-level care (for most of her illness).
Even though she had no acute or chronic medical needs (no drugs, etc.), she required nursing-level care just to have those activities of daily living (ADLs) like feeding, cleaning, and changing done for her - ran her about $150/day at private pay rates.
I later found a much smaller (12 resident), more home-like (it was a converted private residence) facility for about $100/day, where she spent the final 6 years of her life.
Everyone can do the math, I think.
I’m piling up as much cash as I can - mom got ill well before the age anyone would have considered purchasing long-term care insurance.
Note that LTC insurance probably would *not* have paid for her last facility (though it was a much better fit) because it was not a certified skilled nursing facility.
June 27th, 2008 at 8:26 am
Whether your goals are to retire early, achieve financial independence, or anything else, options on preparing for retirement are dwindling. Social Security is in a precarious position and pensions are going the way of the dinosaur. Personal savings seems to be the main option open to people, but half of Americans don’t have any access to workplace retirement savings programs. AARP has supported an effort to bring automatic IRAs to the workplace and Massachussetts Congressman Neal has voiced his backing for this idea on AARP’s blog ShAARP Session.
June 27th, 2008 at 5:06 pm
This is a topic I’ve put a lot of thought into and is the main thing I’m working towards financially. I’d really LOVE to be financially independent so I don’t have to worry about work or fear a random layoff.
Figuring out exactly how much you need to retire is a pretty complicated thing with a variety of ways to do it. I don’t think theres any one way to get the ‘right’ answer but a variety of ways to ballpark estimate it.
For starters you could throw “retirement calculator” into google and it will give you several calculators to play with. Throw some numbers into a few of those and see what they tell you.
There are some variables in the equation that are hard to figure decades in advance like medical costs and social security.
I’ve been looking at fixed annuities a bit in my blog. One way to look at retirement is to figure your annual expenses, add a % margin for safety and then find the cost of an inflation adjusted fixed annuity. For example if you figure you have $60k annual expenses, then add a buffer to make it $75k then someone 50 years old could buy an inflation adjusted annuity to pay them that for life at a cost of $2M.
Jim
June 28th, 2008 at 2:50 pm
My magic number is only $200,000. I’m there. I’ll retire in a year at 55 and live off the interest only from that til 59.5 when my $450/mo pension kicks in. And a $300 property sale income. If I needed to, my pension can start at any time after 55. Then at 62 the $800 soc.sec. kicks in, and I’ll be living high on the hog.
(But if SS goes away, I’ll still be fine!)
I only want about $1100/month - and that’s living comfortably. That’s more than I take home now! I’m debt free and am just finishing up the remodeling on the house, new roof and windows, etc, so that the house should be fairly maintenance free for the next 50 years hopefully.
In the meantime, last year I cut my hours to 32/week - 4 days - and consider myself semi-retired… I want quality time to spend with my grandchildren who live nearby
Including volunteering at their schools and going on their field trips. (Their mom’s going to college, and working, so can’t do it right now)
Years of living frugaly have taught me that I don’t need much money to get along just fine.
July 2nd, 2008 at 7:02 pm
I think you may be over analyzing it my friend.
for myself all I need to do is pay off my apartment (within three years) and I can then quit my regular job and do what I love to do to generate income. I call this “Financial Comfort”.
I can then work doing what I love and once my savings hit $250,000, I then never have to work another day in my life. I could literally sit in a beach for the rest of my life at this point. I call this “Financial Freedom”
After this, if I choose to continue working/investing and reach $2.5 million in savings/investments, I could then do literally whatever I want, whenever I want e.g. sail around the world in a luxury cruise ship. I call this “Financial Abundance”.
my advice is: keep it simple. pick a target and go for it.
July 4th, 2008 at 9:08 am
There is no magic number. Once you hit what seems like enough you will think of other possibilities. What if one of us has to spend several years in a nursing home? What if that grown child who has always struggled needs help? What if runaway inflation eats at my pension? What if Medicare or Social Security that you are counting on isn’t there for you – or the benefits are reduced? What if one of us gets sick and we want to try a new therapy that our insurance considers experimental and won’t cover? How much would you need for all of that?
I’m semi-retired at 55 and my husband (62) retired from his teaching job and took another job in another district. He isn’t doing the things that used to take so much time – coaching, extra duties, summer school teaching - or continuing education classes for him. So I’d consider him 1/3rd retired. We do a lot of fun things but we are still saving and though I thought we’d have enough to fully retire early, I see a lot of things that might prevent that. Some of these are inflation, volatility in the stock market, a pension that does not include a cost of living increase, difficulty finding affordable health insurance for older people, … Still, if we had a reason to retire tomorrow, we could. We’d just have to make different choices. There are lots of things that we enjoy that aren’t very expensive – and even result in some savings – the garden, volunteering at the local nature center or theater… We’d rather have a bigger buffer and generally enjoy our work and feel productive. So are we financially independent? Only the very wealthy can say that they could weather all storms without returning to work. We could handle most possibilities, but not all.
I think the only way to face this is to recognize the need to be flexible and have an alternative plan or two. If the amount of money that you thought would be enough is not, get a part time job – or even go back to work. I know a man who made his living well into his late 50’s as a potter working for himself. For his last decade, he decided that he needed a job with health insurance because individual policies had become too expensive. He retired from being a potter. This isn’t a tragedy. He had all of those years of doing what he loved and working for himself. He still makes some special pieces. One decade of working for someone else is a change of pace and something new for him, even though it resulted from necessity.
Being without debt, having a reasonable amount of savings based on your best predictions of the lifestyle you’d like and possible needs, and having some flexibility if it doesn’t work out is about the best that we can hope for.
July 8th, 2008 at 6:45 am
@Michele on #55:
You don’t have to worry about penalties if you retire early. There is something called a Section 72(t) election which will allow you to avoid penalties on your IRA distributions. It basically requires you to take substantially equal periodic payments under one of the IRS’s payment options. See the following website for detailed information:
http://www.retireearlyhomepage.com/wdraw59.html
Or you can just read the Treasury Regulations, but that’s pretty boring and very unclear.
October 16th, 2008 at 6:31 am
In line with the subject of this post, can anyone recommend “non-traditional” resources on retirement planning?
Although I’m in agreement with much of the “Your Money or Your Life” credo, I just don’t think the 30-year treasury bonds for income make sense in this economic environment — even if you have enough capital to generate enough interest at current rates, what about the very real (in my opinion) of the dollar tanking in value?
I’d appreciate any leads or suggestions…