Yesterday, I reviewed the book How Much Money Do I Need to Retire? where I agreed with author Todd Tresidder on the value of a cash flow model of retirement. That spurred me to run the following exercise: figure out how income we'll have in retirement.
This is the scary and exciting part of the post that I mentioned at the top of the article. To come up with a number, I put together all the reasonable sources of retirement into one pile. For our family it includes the wife's potential military pension, rental income, web businesses, Social Security estimates, and drawing down from retirement accounts (my IRAs, wife's TSP, etc.) and regular taxable accounts like Lending Club.
Why is this scary? I'm afraid this will come off as being uppity or bragging. I realize that this is a tough economy for many people and very few find themselves in a similar situation. I'd love for those people to instead take this as inspiring hope. We are only 37 and have been earning money for 15 years, so a lot can be done in a little time (depending on your situation). I won't deny that we've had our share of good fortune. I believe that fortune likes to follow good planning and preparation. Putting the information in this post together is part of that planning and preparation.
Without further introduction, let's dig into the income:
Wife's Military Pension
My wife was up for a special military promotion this year. The long odds (1 in 33) didn't come through, but it is a sign that she'll reach the rank of O-6 in a year or two. That's important because it plays a role in figuring out her pension. In about 6 years she'll have 20 years of service and be eligible to retire with 50% of that base pay... or $4812.60 a month. I did a little math in a previous post and it could be much more than that if she decides to continue working a few more years. For example, if she stays in another 16 years she'll get 75% of that base pay which will be at higher salary (assuming no further promotions). Currently this would be 8,133.08 a month. There's a sliding scale in between, so it isn't all-or-nothing.
The income from this could realistically range from $57,750 to $97,600. It's possible, but extremely difficult, to get a second promotion and reaches O-7. The pension range would be between $72,250 and $111,000 a year.
Before writing this post, I had either forgotten or somehow didn't know it could be this much. What is even better is that this income adjusts with inflation. We don't have to worry about what $57,750 will buy in 2034. By that time the $57,750 pension will adjust to be more.
This piggybacks on the information in my necessary expenses. Currently our income from 3 investment properties is $4,000.00 a month ($48,000 a year). We are losing around $300 a month on them right now, but in around 14 years the mortgage and interest payments will disappear. At that point, we'll only have to pay condo fees, taxes, and insurance. I calculate we should be able to net the equivalent of $2,750.00 a month ($33,000 a year) in today's money.
However, there's going to be maintenance, vacancies, real estate agent fees. I'm going to be conservative here and presume this will bring in around $25,000 a year of income after that.
These calculation are in today's dollars for two reasons 1) it is easier 2) I presume rents will go up to match inflation of the expenses. These should balance out for the most part.
I haven't posted my website income in quite a long time. There are a few reasons. Compared to what I could make as a software engineer, it is depressing. For another the MLM
morons distributors who comment on my posts try to build a case that I'm just making up lies about company to line my pockets with riches. I explain that I never lie and make less than the average school teacher, but since they can't handle the truth they have to make me out to be the villain. The truth is that financial companies and ads from them pay a lot better than MLM juice ads. I divert much of my time away to helping the MLMers in the comments on an individual basis... time that I could spend earning more money. (Sorry, now to step off the soap box...)
The reason why I still do the website, is that it makes our lives work. With two very young children and a dog who demands ample walks, the ability to create my own hours and respond to the rental properties listed above is extremely helpful. Even with day care, I have no shortage of things to do even outside this work.
With all that said, I'm going to estimate retirement income from websites to $25,000. It's a complete crap shoot, as Lazy Man and Money may not exist in 20 years. Or maybe it is a huge income earner. Even without Lazy Man and Money, I could apply my software engineering skills and create websites for small business and/or consult on the side. There are a lot of options in retirement, but I'm counting on the fact that I'm going to be doing something that earns an income and I think it will be a decent one. I like to think this is a conservative number, again it is a crap shoot.
Retirement Account Income
If you read the book review I did yesterday or just know traditional retirement planning, you know there's a "big nest egg draw-down" theory that says you should have around 25 times what your expected expenses are in diversified investments. This is because some really smart people have done some really smart math that shows it is generally safe withdraw 4% of their nest egg in retirement to live on perpetually. (Other smart people have debated that 4% number suggesting that it is closer to 3.5%. Then there are those who say that 5% will work. The debate on this number is another topic for another post and another day.)
I've totaled up my wife and my retirement accounts in a very unscientific fashion. Some are Roth IRAs that we'd get the money tax-free and some are her TSP or my Rollover IRAs which we'd get taxed at ordinary income on. With that disclaimer out of the way, it looks like we can roughly count on $15,000 with the current size of our nest egg.
That said, there's a very good chance that it will grow a lot over the years and, just as importantly, we continue to add to it. Inflation will knock it down, but we are expecting the investment growth outpaces inflation by a significant amount as it historically has. We can afford to be more aggressive with our investments, because we might not need it at a specific time due to the investments above. In addition we may not be forced to take this income in a bear market which can deplete big nest eggs faster than anticipated. If investment growth outpaces inflation by 4% over 30 years, and we didn't add any new money, this nest egg will grow enough to yield around $50,000 a year.
Some of this will not be taxed (the Roth IRAs), so that's an extra bonus.
Many people say that those of us in the 30s can't depend on Social Security for anything. I'm okay with that thinking, because it makes sense to plan for the worst. However, realistically, Social Security will still have money coming in, meaning it will still be able to make payments out. The payments may very well be small, but wouldn't lilkely be zero.
Using Social Security's website you can look up an estimate of what your retirement benefit will be. I decided to use the age 70 withdrawal income estimate since we like to be optimistic about good health (in which case it pays to wait). Obviously, this is something that will have to be revisited as we get in our 60s. However, it looks like combined, my wife an I would get an estimated $5,000 a month... $60,000 a year.
That $60,000 is going to be in 2046 dollars though because we're assuming we are taking it so late. If I want to adjust it for today's dollars, I need to take off 33 years of inflation. Assuming the historical average 3% inflation that makes our Social Security estimated earnings to be $22,621.57 in today's dollars.
Let's factor in smaller payments in the future and knock it down to 75% of that estimate. That puts our expected Social Security income at roughly $17,000 a year.
I recently wrote about earning 7% Interest at Lending Club. I have around $3,700 in there and I haven't added any new money, but at this rate of growth, I should have a nest egg of a little over $12,000 in 30 years. Using the draw-down rule of 4% would give me would produce around $475 a year. That's definitely a small amount of money compared to the rest, but it is better than a poke in the eye. Maybe it covers my annual hovercraft license fees.
Total Retirement Income
I took all the most conservative estimates from above (in fact making some of them even more conservative) and added it up. It looks like we'll have $172,000 a year in income given those circumstances. That's also assuming my wife doesn't decide to do anything that earns an income after a military retirement at age 44. That $172,000 estimated income is in today's dollars, not dollars in 30 years from now where they might not buy as much.
I then took the best guess estimate of those numbers, which presumes my wife may work for a few more years and retire around age 50. I also projected that my online publishing makes as much as it makes today. I then presumed that Social Security pays what it estimates it will (the difference is not that much). Finally, I presumed that we draw down at 4% instead of the safer 3.5% that I used in the $172,000 calculation above. The result is that we'd have $236,500 in retirement income per year.
I averaged the two estimates together to come out with a conservative/best-guess average at around $212,000 a year. It seems so ridiculous that I have a hard time believing it. And in some ways, it isn't really believable.
I've glossed over the timing of this income. I projected the Social Security at age 70, which is obviously very, very different than having it at age 50. I projected the draw-down of the tax-advantaged nest egg to happen at age 67. If I do it before, it has less time to compound and won't give me the number per year that I am projecting. (Then again, we'll continuing adding to that nest-egg so it might be more.) Even the rental income won't kick in for another 14 years when the mortgage payments are finished.
It is far too early to plan when to take what money when. In fact, it may be dictated by circumstances largely outside of our control. Or we may choose to take significantly less money earlier so that we can enjoy it in our "relative" youth.
This is yet another reason to remind myself that retirement, especially at the age of 37, is a moving target. The only constant is change.
I expect there be a lot of focus on the military pension because that is huge ingredient in the recipe. However, there are a lot of other ingredients that I think are open to everyone. I hope that is what you'll take away from this exercise. However, if you are Lazy like me and would like to be spoon-fed, I'll spell out a number of lessons I have learned in tomorrow's article.
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