Hello,

We're late bloomers, I'm 43 and my wife is 38.

I'm entitled to a state pension, but only for the years I've lived in my home country. That would be about EUR 400/month for me. And as my wife also is a late starter, her pension won't be that great either: about EUR 1000/month, provided she'll keep paying into this pension fund until she's 65. Which is not likely as we hope to retire earlier than that, therefore we calculate with EUR 600/Month for her pension (this includes a small state pension for her home country), making a total of EUR 1000/Month.

Due to the nature of our work, we'll be able to save up a lot of money in the years to come (we did manage a cool EUR 100.000 in the last two years), so we're not too worried about our retirement income. Though we will also need income between the date we actually retire and when we reach retirement age (and thus the pension starts being paid).

Based on our current expenditures (over the last 5 years), we would like to have at least EUR 2000/month (USD 2600), but are using EUR 2500 (USD 3300) as calculating value. (We don't NEED the extra 500/month, but it would enable us to go on holidays more often etc.)

We are considering two scenario's:

Scenario A) A two-tiered saving plans
1) After retirement income
save up to amount X which provides additional income (interest/return/?) when we are retired (and we use my wife's age as the marker). This money would sit somewhere and would not be touched at all.
2) Earlier retirement income
save up to amount Y which would cover the years between actual retirement and when the pension starts getting paid.

Number 2 is easy. Provided we have reached the first goal, for each EUR 30.000 we save, we can retire one year earlier before retirement age.

Number 1 is more difficult to calculate, because the amount we need depends on the return we manage to get and the taxes we have to pay over it. If we stick it all in a savings account, we might be able to get 3%. This would mean EUR 3000 before taxes per annum for each EUR 100.000 we have. Assuming 40% taxes it drops to EUR 1800/year or EUR 150/month. With these numbers we'd need to save up to almost a million... (and if we take our minimum, it would be EUR 650.000 to have EUR 2000/month). Higher interest/return of course would mean a lower total amount; if we can get 5% then we'd need to save EUR 600.000 to have our EUR 2500/month.

The big advantage seems to be the security: no matter how long we live, there's always sufficient income.

Scenario B) Save up and withdraw.
1) After retirement income
Assume we'll live another 25(!) years after my wife reaches retirement age. This is 300 months. Our goal is EUR 2500/month and our pension is EUR 1000/month. So if we save 300 * 1500 = EUR 450.000 and start withdrawing EUR 1500/month when my wife turns 65. This approach has as advantage that it doesn't matter how much return we get nor how high taxes of these returns are. And of course the amount we need to save is substantially less than for scenario A.
2) Earlier retirement income
It's the same as B.1.: the more we save the earlier we can stop working, where the only difference is that we need to calculate the full EUR 2500/month as our pension will not be paid yet.

(For both scenario's)
My biggest concern is inflation, I know what it is, but I'm a bit lost on how to incorporate that into our retirement planning. And I'm also not sure if inflation would be a bigger factor in either scenario.

Another issue I'm not sure how to take into account is our health. Presumably when we get older, we'll need to rely more and more on healthcare, thus increasing costs.

Further complicating this is that we also don't know where (country) we will retire; though this is likely going to be an European country. Though I do think that when we're getting close to retiring, our actual financial situation will be an important factor in our choice.

We don't have kids, so we don't have a need to leave something, though it would be nice to leave something for our nieces. (We do realize that for scenario A when we die, a substantial amount of our money will go to the state. But in all honesty, we're dead so we don't really care.)

Finally, not sure how important that is, we're not very keen on taking risks with our money.


As I'm not financial expert, I'm really not too sure how solid these plans are and I'd very much like your -financial savvy people as you are- input on both scenarios, what the drawbacks are, the pitfalls, possible alternatives, etc.

Thanks,

Bob

Just a couple of thoughts here on uncertainties and risk:

1. Inflation: the sad fact is that the future is unpredictable. A projection forward of current inflation trends is unlikely to be accurate, and any assumption is really just a barely educated guess. The only percentage that's almost certain to be wrong is zero, so you could choose anything above that and hope for the best. If you want to be really careful, you could do a high-inflation scenario and a low-inflation scenario to see how things could play out.

2. Risk: while you don't want to take risks with your money, you do have to keep in mind that inflation itself represents a risk: if you're too conservative with your investments (e.g., putting them in a high-interest savings account, CDs, or bonds), their value when you need them could be lower than their value today if inflation overtakes them. That's why most people argue that you should invest a significant portion in equities (e.g., index funds) if you're still 15 years or more from retirement: stocks have a higher likelihood of beating inflation over the long term. On the other hand, the value of any given stock has the nasty potential to fall to zero, which wouldn't happen with more conservative investments, although you can spread your risk by buying index funds or something equally diversified.

I feel compelled to respond because my wife and I also plan to retire early, and are just a few years ahead of you in age.

Here's my take on what you need:

From now until you retire you have until year "X" to save. Then from year "X" until your wife is 65, 27 years from now, in 2039 you will be living off your "early retirement fund." After (her) age 65 you'll be living off your post retirement fund and getting the pensions.

You can split this into 3 stages:

Stage 1 (Now through Year X) - saving for retirement - no income needs

Stage 2 (Year X through 2039) - early retirement - need 30000 EUR per year

Stage 3 (2039 through ???) - post retirement - need 18000 EUR per year to supplement pension.

Now, pick a year X, say 2019...

In Stage 2 you need 30000 EUR per year and it lasts 20 years (2039-2019) so you need 600000 EUR

You don't know how long Stage 3 will last. But if you assume 25 years that will give you a plan through your wife being 90. That would probably cover any reasonable mortality table but you'll need to decide what age to use. With that assumption, Stage 3 takes 450000 EUR.

Now, one major factor that has been ignored is inflation. You will need more actual euros in the future to cover your expenses. But since you've said you don't want to put your money at risk and you have the ability to save aggressively, you could essentially ignore inflation IF you invest your money in something protected from inflation. In the US we have something called TIPS - Treasury Inflation Protected Securities - that provide a meager return but also give a return equal to inflation. I do not know if anything like that exists in your country. If not, you might be able to find a mutual fund that provides inflation protection or you could consider medium term bank CDs or even high grade, intermediate term government bonds.

Normally stocks are the investment of choice to protect against inflation. But they fluctuate in price and that may not be something that is of interest to you.

Finally, you say you do not want to take risk. But you must understand that not taking risk exposes you to the greatest risk of all - running out of money. So, above all else I would encourage you to educate yourself a little about finance. Read a few basic investment books and that kind of thing so that you understand the various options available to you.

Good luck and congratulation on your success so far!