I'm doing something a little different with this article. If you like it, please leave a comment and/or share this article with a friend.
It's 2030 and my little man, Giles*, is now a big man. He's a month away from his 18th birthday. He's studied extremely hard and he's got a shot at Stanford next year (finger's crossed).
I'm continually amazed at all the things he's been able to fit in his head. However, this is about the one thing that isn't in there.
Giles doesn't know how to drive a car. Neither do any of his friends.
Since the government passed the new Manual Driver Requirements in 2028, none of them have even taken a driver's test. Why would they?
I couldn't be happier about how things have developed in the last 15 years. When I started this blog nearly 25 years ago in 2006, I had planned to spend thousands on transportation in retirement. Who would have thought that transportation has become a small income stream for me?
Did I lose You? Let me take a step back.
In late 2015, I realized that several technologies were converging to change the world.
My solar panels hadn't celebrated their first birthday, but they already had me thinking: "If only there were reasonably-priced electric SUVs, I could eliminate most of my gas bill. (I'd need something for longer trips.)"
Several months before that, Uber came my town. I've only used it a couple of times, but the idea of on-demand transportation is changing the way millions of people travel.
And the year before that, I was on "the 101" in Silicon Valley and next to me was a Google car without a driver.
A funny thing happens when you put autonomous cars, on-demand transportation, and "free"** solar power together. The cost of car transportation becomes very small.
So, roughly, 1/5 of the money goes to something that is used 1/25th of the time. That's terribly inefficient.
In a world of autonomous, on-demand cars, people pay for what they use. I choose to save money by riding at off-peak hours to run errands.
What about the cost of human drivers? In 2016, Uber had to pay hundreds of thousands of drivers. Autonomous cars is a huge, huge cost savings for them.
I don't mind one bit, because autonomous cars are great for riders like me as well. We can use our commuting time productively. The average commute to work appears to be about 24.5 minutes. We'll estimate that to be 50 minutes a day (round-trip). It appears that the average hourly wage is $20.43, meaning that the 50 minutes saves people around $17 a day on just their work commute. (This makes the dangerous and possibly false assumption that people would be as productive while in the car. If they aren't being productive, I humbly suggest that they have a higher quality of life.)
The autonomous cars drive much more efficiently. They merge perfectly because computer sensors direct everything. The same sensors help ensure that there are extremely few accidents. Commuting times are reduced which is allows people to have more time to do the things they want to do.
What about solar? How do I make money from Uber's gPods?
A few years ago, the last of the gas-powered auto companies announced they'd be switching to electric, just like everyone else. At the time of the announcement, I couldn't help but think of the last companies to make typewriters and VCRs.
Our family has always tried to be a little ahead of the curve. In 2015, We were the first house in the neighborhood to get solar power. So when Alphabet's Uber subsidiary announced their latest innovation a couple of years ago, we were quick to sign up.
We make a little money each day renting out a parking space in our driveway (and electricity) to Uber. Uber realized early on that by distributing cars throughout a neighborhood, people would always have fast access to a car. Location, location, location. It was much more efficient than having them in a central parking area. By tapping into the solar power that's already in most people's homes, Uber eliminated the need to "refuel" cars.
I imagine that Uber swaps out cars for maintenance, but it's hard for me to be sure. The cars look mostly the same. The come in any color you want as long as it is black. All I know is that we have size 1, 2, or 3 in our driveway at any given time.
Back in 2016, I was estimating that we'd pay more than $800 a month for our two cars in retirement. That's around $10,000 a year. This system is much, much cheaper. In fact, our car expenses are essentially zero when you factor in Uber's payment to us for the parking space.
We finished paying off our 15 year mortgage 3 years ago in 2027. With our electricity and transportation costs zero we are left few other expenses. I haven't figured out how to eliminate the cost of health care, food, taxes, insurance, and other utilities. For most people health care is one of their biggest expenses. We're very fortunate to have my wife's military coverage. Though it is much more expensive than in was in 2016, it's still a great deal compared to the other options out there.
Thank heavens that we've been able to reduce and/or eliminate all these expenses. This year Stanford is $150,000 a year. Giles' younger brother, Xander, is looking into MIT. That's not any cheaper.
Is it silly to reflect about saving $10,000 a year on transportation when you are spending $300,000 a year between two colleges?
* In traditional Lazy Man fashion, I have substituted real names with a character from Buffy the Vampire Slayer.
** Solar power isn't free, but the panels are very cheap and efficient in 2030. There's no incremental cost to power cars like there is with gasoline.
I would have never thought of that idea. That seems like an absurd amount of money for most people to retire on. It's almost like asking if anyone would want a million dollars... the answer is going to be "Of course!" I read everything that Joe writes at Retire by 40, but this title made me curious why he picked such a high number.
It's a very good article, but as Joe writes, "accumulating $5 Million isn't exactly normal." You typically need a high paying career (or two) and that typically comes with a lot of lifestyle inflation.
It reminds me of these stories of bankers barely getting by on a million dollars a year. Taxes cut the million to around $600,000, and mortgages in Manhattan and the Hamptons aren't cheap. Throw in private school for 3 kids at around $40,000 a year each and it's easy to see that money disappear.
That's an extreme example, but you get the idea. There comes a point when the question, at least for the 1% (or 0.1%) almost becomes legitimate.
But you (most likely) and I aren't those people. Joe recommends tracking your expenses (we both use Personal Capital) and using the Rule of 25. That means once you know what you spend in a year you can multiple it by 25 to figure out how much of a nest egg you need to retire. For Joe, the annual number is $55,000 which means he should have a nest egg of $1,375,000. (For math nerds and personal finance junkies this Rule of 25 is just flipping the Rule of 4% on it's head.)
Now this doesn't factor a variety of other factors. For example, if you have real estate property (which we do), it might be possible to generate $15,000 a year from that. Suddenly that $55,000 becomes $40,000 making for a more manageable nest egg of $1 million.
And while Joe says you probably shouldn't include your primary residence in the calculation, I think it's fair to calculate your expenses assuming your mortgage will be paid off. (You are going to have your mortgage paid off in retirement, right?) For many people, that's their biggest expense. There's still taxes, insurance, and maintenance on the home, but eliminating the mortgage payment is a big deal.
Personally, it's been a couple of years since I tried to calculate the numbers. When I eliminated expenses that should eventually go away in retirement (child care/college, mortgage payments, electricity (via paying off our solar panels)), I was surprised how little was left. The bulk of it was car ownership. And by that time, we'll probably have robot Uber drivers which could make owning a car unnecessary.
The calculation is almost flipped upside down for us as the rental property income should be enough to cover our retirement expenses. Of course those retirement expenses were based on necessary expenses and didn't include any cushion. They also didn't factor in any money for fun. That's why I say the calculation is "almost" flipped.
On the other hand, rental income is only one small part of our overall retirement income plan. If you have enough income coming in, you may not need to draw down on investments at all.
To close this out, the retire on $5 million question isn't a very good one for almost anyone reading this. Instead it is better to figure out what you can retire on. And while many people believe in getting a big nest egg and drawing down on it, keep an open mind towards other income streams that can continue in retirement.
I've mentioned in passing a few times in the last couple of months, but I'm crushing on Retire by 40. Joe does a tremendous job of covering early retirement and staying on track of the topic. I'm envious that he's able to do that... a large part of me wants to blog about the TV show Best Time Ever with Neil Patrick Harris last night.
I'm going to resist that temptation and write about something equally fun... Roth IRA Conversion Ladders!
What's that? I don't blame you for asking. I hadn't heard of them either. You'd think in years of reading Kiplingers and Money magazine it would come up multiple times. Maybe I just missed it.
The idea with Roth IRA Conversion Ladders is that you can minimize taxes if you are retiring early. I should note that this makes sense if you have a limited income. That "limit" isn't that low though.
Let's pretend that you've been reading Lazy Man and Money for years. You've read, "Maximize out your 401k plan!" a thousand times. If you took that advice over a lot of years, you may have hundreds of thousands of dollars in there. (I hope you do.)
The "problem" is that you saved that money tax-free and now you have to pay taxes on it. I put "problem" in quotes, because many people would be envious of the situation of paying taxes on a large sum of money.
If you are retiring early, you typically can't withdraw money from your 401K or traditional IRA without penalties. You are also going to pay taxes on it of whatever your current tax bracket is. It's not a particularly good plan.
However, if you are planning to retire early, you can convert the money to a Roth IRA. When you do, you'll pay taxes of your current tax bracket, but then be able to withdraw it tax-free in the future. If your income is low in early retirement, which it likely would be since you aren't working, you'll be in a low tax bracket. If you are married and filing jointly, this could be about 15% if your income (and the conversion) is under $74,900.
The idea is to convert some money while in this low tax bracket. You can do this for years while you are in a low tax bracket. You can't take the money out of the converted Roth IRA for 5 years, but after that you avoid withdrawal penalties.
I'm still learning about this strategy myself. I suggest reading the articles on Retire by 40 and Root of Good, which go into it in more details. Root of Good has a particularly thorough breakdown.
How does this factor into our potential early retirement? I'm not sure. Between the wife's potential military pension, our investment properties, and my side businesses, we may have too much income to make it work. At the same time, we might be able to limit the income of our investment properties by improving them and I'm sure I could offset income of the businesses by investing in growth that will hopefully pay off in the future.
I'm not quite sure how it shake out down the road, but it's comforting to know that there's a tool like this available if it is helpful.
I love reading articles where people reach financial freedom at an early age. A couple of weeks ago, I mentioned how Joe Udo is growing a dividend snowball to reach his financial freedom.
Today, I bring you the story of Mr. 1500 of 1500 Days. I first met him at last year's personal finance convention, FinCon. Quite honestly, I saw his small plastic dinosaurs show up on my Twitter feed and figured I had to stop by and say hello to them. Gimmicky, yes... but it worked.
How did it all happen? There was a mix of modest living, focusing on savings, investing, and letting compound interest do its thing. Two things caught my attention. The first was his very un-Lazy approach to everything. He openly says that he worked really hard when he was young. After an 80-hour work-week, he'd do the second thing that caught my attention...
The Live-In Home Flip
I'll defer to Mr. 1500's words:
"When I started at my first job post-college, along with paying off those loans, I signed up for the 401k immediately and began saving. I also bought my first home for $140,000. It was a starter house that wasn’t pretty, but had a great location. I made modest improvements like putting in tile and painting. With a strong real estate market at my back, I sold the home a couple years later and made $100,000 in profit. My wife and I looked at each other and said, 'Hey, let’s do that again!'"
And they did it again. It's not clear from the article how many times they did it. He makes a great point that they didn't have to pay capital gains on the profit, because they lived in the house for a couple of years (thanks IRS tax-code!). This money was reinvested in more property and stocks.
So flipping houses is the answer. Cue a short tune from my new favorite TV show:
(Did I mention that I have a 1 and 2 year old?)
But not so fast...
Mr. 1500 then tells of a setback where they bought a grand property just as the housing market collapsed. They put a lot of work and a lot of money into it. They broken-even on the money they put in, but not the work. It was a waste of valuable investing time and energy.
We've all seen the house flipping shows where everything turns out great at the end. I don't think I've ever seen them lose money. (Side Note: This unfortunately leads to those shady house flipping seminars that you hear on the radio.) Reality check: Flipping houses is difficult and requires a lot of specialized knowledge, especially if you are aiming to do it in 6 weeks like in the TV shows.
There was a sizable portion of luck. The real estate market giveth and it taketh away.
So which is it? Is it awesome, hard work, being smart, or just hoping to be lucky? Like everything in life it is a combination of all four.
Lady Luck can go either way. You are never going to control her, so you might as well just do her thing. Working hard and being smart almost always pay off. For Mr. 1500 the combination paid off in real money early on when Lady Luck was with him. When Lady Luck left, the combination helped prevent actual monetary losses.
So is the live-in flip awesome? I think it's great for many people. I'm not handy, so it isn't something I could seriously consider. If I have to outsource all the work, the chance of profiting is lower.
For me, the key would be to buy a real bargain. Mr. and Mrs. 1500 "sought out ugly houses in great neighborhoods. If a house had pink toilets and green appliances, [their] eyes lit up with joy." Maybe there's a chance at getting a deal in foreclosure. If you are able to buy low, there's less of a chance of market crash making it worth less.
I'd also minimize my risk by buying a place that I could live in myself for years in a worst case scenario. If that grand property was one they were comfortable living in, they could wait out a stock market crash.
I'd also consider the "rentability" of the property. A condo might be a good option. If it doesn't sell, you can rent it out and make some money while you are building equity. When the housing crash turned my wife and my condos upside down (not literally, "equity-ly"), being able to rent them was a savior. The downside is that when you rent a property it becomes an investment property. When you sell an investment property you might have to pay capital gains tax (consult your local tax advisor).
Finally, I'd keep in mind that the improvements are taking place over a couple of years. That should be a lot of time to do some of the basic upgrades. You aren't "on the clock" like the professional house flippers in TV shows.
If you are able to minimize the downside risk, and capitalize on the sweat-equity of fixing up a home, maybe you too can make a six figures on a flip. Do this a few times at a young age like Mr. 1500 and maybe you'll be able to retire early too.
Last year I wrote an article, Take Social Security Early or Late? which came to the conclusion that you should take Social Security as early as possible and invest it until you need it.
The theory is that you'll do as well as if you waited, but if you happen to die early, that's money that goes to your estate rather than forfeited.
This is a good time to caution readers that, at the age of 39, I haven't put a lot of research into the area of Social Security. Every time I try to wrap my head around it, there are about 3.4 million minor details that change the equation completely. With everyone's specific situation different, one-size-fits-all advice is difficult.
Back to the theory that you should take Social Security early. Soon after posting the article a pointed me to this great article where a speaker had this great line:
"They're [the federal government is] hoping you're gonna wait. And they're hoping you're gonna die.
So why rehash all this now? Philip Moeller has an article in the May 2015 issue of Money Magazine suggesting that people wait to take their Social Security benefits. I wish I could find it online, but sometimes it takes awhile for Money to make them available.
The interesting thing is that he covers the idea of taking your Social Security right away and investing it:
"Roughly calculated, the typical breakeven age is about 80.5. Until then, you'll get more money by taking benefits early. If you don't spend those benefits but invest them instead, the breakeven age can be even higher."
Of course it is going to be much higher if you've been investing the money for an extra 8 years between age 62 and 70. Maybe someone here can do the math, but I'd venture that 80.5 age goes up to more than 85, perhaps even 90. Theoretically, if you invested the money until age 70 and didn't use it, it would be the same as if you just waited until age 70 anyway. Or at least by my math which was in the aforementioned article it comes out to the same.
Moeller makes the argument that breakeven analysis "feels wrong to him." The reason is that it treats Social Security as an investment where you want to earn the highest return. Instead he argues that it is an insurance policy that protects you from outliving your money.
"If your home never burns down, is the money you spent on insurance premiums a loss? No. You pay for protection, not profits. That's true for Social Security also."
I say, to-MAY-to, to-MAH-to.
Whether you take it early or late, Social Security is going to act as insurance. That doesn't go away. You aren't going to live to 120 and have nothing. It's just a question of how much insurance you'll be getting each month. If you take the insurance money early and invest it (i.e. you don't have a need for the insurance because your house didn't burn down) you'll be just as well off as if you waited with that cushion of 8 years of payments and investment growth.
I personally view Social Security as a part of the income streams that I'm developing. Those include this business, my wife's military pension, income from our income properties, and tapping into our 401ks/Roth IRAs. We've taken steps to reduce our cost of living in retirement by opting for a 15-year mortgage and getting solar power installed.
A whole lot can go wrong in 30 years, but I'm not currently of the view that when to take Social Security is going to be an insurance policy that we'll lean on.
For us, it still seems like breakeven analysis is the way to go. However, I wouldn't fault anyone for thinking about protecting themselves against a scenario where they ensure they have a good income for decades if they need it. Perhaps it is even helpful to not have the temptation of getting it early and spending it.
Today, I'd like to look at the other side of the equation, what I'll spend in retirement. This is something that very few people sit down and try to calculate. The most diligent financial people I know usually use a rule of thumb of 75% of what you are spending now.
Rules of thumb can be helpful when you have to make a quick estimate. I've got nearly 30 years before I reach age 65, so why not carve an hour out to do some of the most important calculations in my life. Also, neither me nor you are a rule of thumb.
My attempt here is not to say this is the right way to do it. I don't think I've seen anyone else even attempt it, so it is uncharted territory as far as I can tell. I'd love any feedback you provide in the comments below.
I'm going to just throw my table at you. Then I'll make like Lucy and do some 'splainin'.
Real Estate (Residence)
Gas + Maintanence
Gas + Maintanence
Real Estate (Investments)
Total Personal Expenses
Profit from real estate
after personal expenses
There's a lot going on up in the table.
These expense numbers are monthly. That's because our bills tend to be monthly ones. This is in contrast to the annual income.
The numbers are in today's dollars. It's just easier to understand it that way rather than projecting out 30 years of inflation. That projection could introduce errors if I choose an inaccurate rate of inflation.
You might notice weird retirement items such as day care with no money besides it. I create this table by taking what I spend money on today and pairing it down. It seemed like the best place to start, because I already have that data.
The obvious problem with taking today's expenses and pairing them down is that it doesn't factor in any new expenses. Just looking this over quickly, I realize that health care didn't make my chart.
We are fortunate in that we'll have the military's TriCare for Life. That covers a lot of health care. When eligible for Medicare Part B we'll have to pay those costs which is the $272/mo. (which is based on being in a high income bracket). This area in particular will probably have a billion and a half changes in the next 30 years. The only thing we can count on is that it will be a crap shoot. We can also guess that we might be better off than most because of the TriCare for Life program.
You'll notice a section at the bottom of real estate investments. This is a result of it being a both an expense and an income. It wouldn't be fair to leave it off the expenses, because we do have to pay it. At the same time, it wouldn't be fair to characterize a profitable asset in the same way as a car loan. Missing from this is the maintenance of the properties, but it does include our condo fees.
For fun at the end, I decided to subtract the profit from the rental properties from our expenses and was pleasantly surprised to learn that real estate investment alone will pay off most of our expenses.
I've amortized the costs of some of the items such as car loans. The cars we have now are on 5-year (60-month) loans at 0% and 1.99%. I've taken the payment and divided it half to represent the 5 years we intend to drive the cars afterward with no car payment. We intend to drive cars longer than that, but 10 years is a good average for most people.
You may notice that I have nothing for electricity. The big change this year is that we are going to solar power. The panels are rated at 25 years, so when we get to retirement age, we may have to spend on electricity again. The panels we are getting now, should still be 80% as efficient then. That might be enough, but if it is not, we should be able to supplement them with the latest 2045 solar technology.
In the effort of saving some time, I used some of the numbers from last year. The cost of car insurance didn't go up that much in a year. If it did, the cost of gas has gone down enough to balance it off.
These are just necessary expenses. It doesn't include entertainment, dining out, any kind of fun travel, or really anything else.
Will this be accurate some 30 years in the future? Of course not. However, it is a very good start. If I take the personal expenses and add in the health insurance that didn't make the table, our annual expenses come to around $29,120. It's always wise to throw some padding in, so let's call it $40,000 a year.
With that projected nearly $200,000 in income, it looks like we'll be able to budget a good deal of travel in. Maybe I can even convince the wife that we can splurge on a LG 65" 4k OLED television or whatever is the equivalent in 2040.
As you get closer to retirement, you get a better understanding of where you'll be. I like to think of it as being on a basketball court. You have a better chance at hitting the shot the closer you are. There are fewer paths for the ball to go off-course. (That's a relative term as there are still millions of them.) For better or worse, each of us move a little closer to the hoop every year.
This year we had no major catastrophes or windfalls. Our movement to the hoop was slow and steady. With it comes an increased clarity of what our retirement income will look like. I think this is a helpful exercise for all readers to do. I can't encourage readers strongly enough to take the time and evaluate their future retirement income this way.
In what I hope becomes a regular annual feature, I'll update the numbers from last year.
Wife's Military Pension
With 15 years of service she's only 5 years away from qualifying for a pension of 50% of her base pay. She's currently an O-5, but will be up for promotion to O-6 next year. I feel confident that she'll get it within the next five years. Using this year's pay charts, that would entitle her to $4,860.75 a month.
It is indexed to inflation, thus we can think of it as $4,860.75 in today's dollars and not think about it buying less in the future.
Last year, I had estimated this as $57,750. The pay charts were indexed for inflation (which seems to have been 1%) and this year the number comes in at $58,329. I didn't realize this before, but since the numbers are going up before she retires this number should be at least $61,304 in five years. That's assuming 1% inflation. We'll stick with the $58,329 number for now.
And if she decides to work a few more years the pension could be worth much more than that. If she were to stay another ten years, it would be worth $98,571.60 a year in pension income. That blows my mind, so I'll pretend that doesn't really exist for now.
I'm going to go with the same numbers as last year. Currently our income from 3 investment properties is $4,050.00 a month ($48,600 a year). In 12 years the mortgages on them will be paid off. We'll still 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.
There's going to be cost to maintenance the properties. We found out this year a new kitchen and new HVAC units aren't cheap. Fortunately you don't have to do them very often. I'm going to put $8,000 aside each year in a maintenance fund, which leaves the three properties bringing in $25,000 in positive cash flow.
Last year, I didn't go into this very much, because I wanted to focus on the cash flow method of building retirement. This is having multiple streams of income such as businesses, rental properties, etc. This year I thought I'd dig a little deeper.
We have a shade under $500,000 in Roth IRAs and 401K, and TSPs (a government 401K). It's hard to say what this is worth in retirement, because no specific age where we say, "We are retired!"
The number that everyone attaches to retirement is 65, so I'll pick that number as well. That gives us 27 years to grow this retirement nest egg. I presume a 4% growth over inflation to keep the numbers in today's dollars. I'll also use the rule of 4%. Thus the calculation for the amount we can annually expect would be: (500000)*((1.04^27)*.04).
The net result of that is $57,483 in annual income. Yes, boys and girls, this is why financial experts suggest that you invest in your retirement accounts early. We continue to put more money in it every year so this nest egg continues to grow. Last year this calculation came to around $52,000.
(That sound you are hearing is me knocking on wood that the market continues to do well.)
I have two things to note:
1) It is important to mention that there's a huge difference in taxes in Roth IRAs and 401Ks. I should treat the accounts separately. What would be interesting is that because the Roth IRA money would be tax free, I could assume it equivalent to a larger pre-tax number. This would keep all the numbers here pre-tax as I've done for this exercise. On the flip side, I could try to calculate taxes on all these numbers and come up with a post-tax number in which I'd add the Roth IRAs straight to that total.
In those scenarios maybe the title becomes something like $300,000 pre-tax or $200,000 after-tax... however the math comes out.
I made one big change for this year (see the timeline below), so I'm going to leave these two things exercises for next year.
This year looks a lot like last year. Here's what I said:
"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."
It may look like I'm not pulling my financial weight here. That would be fair criticism. My response to that is that the flexibility of my work allows for substantial savings in the costs of child care for our two young boys. Also, it saves money from a dog walker. The flexibility allows me to respond timely to tenants, which makes the rental income work.
I routinely find deals that stretch our dollar. Some of my time went to getting us set up for solar power this year. It's going to cost us some money upfront, but pay us back nearly $2000 a year. It will break even in year 6 or 7 and be gravy after that.
Lastly, I'm expecting to grow the website income. I'm not going to assume growth for this estimate. However, I continue to work on Be Better Now. If you like this kind of analysis, you'll LOVE that website. I'm optimistic, that I'll be able to grow website income much more, but I'll stick with this conservative number for another year.
Last year, I made the assumption that we'd wait until 70 to take Social Security payments. The theory is that we are relatively healthy and experts suggest that you should wait in that scenario. It's not that we are less healthy this year, but I realize how ridiculous it is to project health more than 30 years away. It's easy for me at 38 years old to say, "I'm healthy." Unless I'm the first person on Earth with some magic gene, the 68-year-old me probably won't feel the same.
I'm not super strong in my convictions about when to take Social Security, but last year I tackled the question: Take Social Security Early or Late? What I learned was that if you take your Social Security benefits early and invest them at 8%, it is the same thing as delaying taking them. The benefit is that if you die at age 68, your estate has at least been getting 6 years of payments.
This year, I'm not going to assume taking it at age 70 and instead going to assume the other end of the spectrum, taking it at 62.
Now for the numbers. Our Social Security benefits didn't change that much from last year, so it is just the calculation. By taking them early, at age 62, we'll only get 56% of what we estimated last year. Last year, I projected $5000 a month in 2046 for an income of $60,000 (or $22,620 in last year's dollars).
This year, I project my wife and I get a combined $2800 a month (56% of $5000) in 2038's dollars. That's an income of $33,600 at that time or $17,024 in today's dollars.
I have had some some money in Lending Club for years. I'm more focused in other investing, but I continue to let this money compound. It seems to compound very nicely too.
I have an account value of a little over $4000. Using the same math and assumptions for the retirement account income above (assuming age 65), it should bring in $479 of income a year. That's today's dollars, so maybe it pays a utility bill or two.
Retirement Income Timeline
Last year, I just added up the numbers and let the chips fall where they may. This lead to some calculations that were... well I'll be blunt... poor. I kept Social Security in 2046 income dollars, but reported rental income in 2014 dollars. This is another good reason to revisit the numbers annually. You just might find that you did something nonsensical the previous year.
The other thing thing that I thought was important was when the income stream come into effect. It would be great if we had that rental income now, but we have to pay off mortgages. As we found above, there's a big difference between getting Social Security at age 62 vs. age 70. If all the income came in at age 90, I don't think I'd find it as useful as if it came in at 56.
So this year, I'm adding a timeline for when each income comes in and running total:
Websites (Online Businesses)
2020 (Age 44)
2027 (Age 51)
2038 (Age 62)
2041 (Age 65)
2041 (Age 65)
The focus for me is that number in the lower right in bold. That's the total annual income we can expect from the sources. It is all passive except for my websites (which is fun for me) and rental income. The rental income is relatively passive as long as the apartments are in good shape and we have good tenants. We could get a property manager as well.
All this also assumes that my wife spends her time in retirement to make our two boys the next great boy band and it fails horribly. In other words, there's no expected income from my wife here after the next 5 years. That's probably unrealistically conservative.
If you read the title and that table, you should (rightfully) be asking, where is the $200,000 in annual income? It does indeed fall a little shy of it. A majority of that was due to taking the Social Security earlier. I could add adjustments to the military pension (such as using the $61,000 number) or be slightly less conservative in some areas.
There is nothing particularly magical about the $200,000. The exercise is to plan and think about where the future is going financially. When I did the timeline, I realized that when we choose to take the income is the biggest factor. If we take money later, it will continue to grow. If we take it earlier, we'll be able to enjoy for a longer period of time.
The lesson I hope you take away is not the numbers of my specific situation, but the value in running the numbers yourself. Also, I hope you'll look at different ways to create income and how they can all play a part in ensuring a solid retirement plan.
The foundation for a secure future is proper retirement planning today. Unfortunately, too many people avoid retirement planning. In fact, according to the recent Retirement Confidence Survey from the Employee Benefit Research Institute, less than half of American workers have performed a retirement needs assessment. This means that most people don't even understand how much they need to retire -- much less have a clear idea of where their retirement income will come from.
As you prepare your retirement plan, you need to figure out what you need to retire comfortably, but you also need to consider where that money will come from. You need to figure out your sources of retirement income, and determine how they will work together to provide you with exactly what you need to improve your overall situation.
Sources of Retirement Income
Most people, when they think of retirement, consider employer-sponsored plans like 401(k)s, or they think of IRAs. However, these aren't the only sources of income available to you. While a good portion of your retirement income will come from these types of accounts, you need to look beyond figuring out your withdrawal rate, and trying to build a nest egg big enough to handle your retirement needs.
Income diversity is a big deal in retirement, since there are a lot of things that can change between now and when you retire. Just relying on a single source of retirement income isn't any better than putting all of your income eggs in one basket during your working years. It's vital that you think about where else you will get income from in your golden years.
Some sources of retirement income to consider include:
Social Security: In spite of all the scary, scary rhetoric, Social Security isn't out for the count completely. While you might have to moderate your expectations in terms of when you can expect to start taking Social Security, and while you might need to prepare for cuts in benefits, the reality is that you will still likely be able to draw -- at least to some degree -- on these promised benefits.
Real Estate Income: While real estate investing isn't really my thing, I know a lot of people who do well at it. If you can build your real estate empire, you can create a source of retirement income that doesn't go away when the stock market drops. Even if you end up having to hire property management to help you run your real estate, you can still do well, and get a regular income from this.
Some Sort of Earned Income: Many people like working part-time in retirement. You might also work on your business, or start a side business during retirement. Doing some sort of work during retirement is smart, since it can keep you engaged, fulfilled, and provide you with a bit of an income stream.
Investment Income: This can include the income that you receive as a result of withdrawing money from your tax-advantaged retirement accounts. You might also have other investments, held in taxable accounts, or assets in other places, that generate income for you.
In general, the more sources of income you have, the better off you'll be in retirement. Your retirement plan should include ideas for cultivating multiple sources of income now, so that when you retire, you aren't dependent on just one revenue stream to keep you in comfort.
A new company by the name Money Tips had an idea to survey 500 "successful" retirees to get an idea of what works. Like any survey, the results are a pile of statistics. I love statistics... enough so that I've been in baseball fantasy leagues of fake computer generated players playing with statistics. If that sounds weird, it is because it is weird.
So when I Money Tips contacted me about this I heard, "Stats, Stats, stats..." A couple of emails later later and it seems that I agreed to write an article on a book that I haven't read. No matter. I've got the goods... all those juicy stats.
The last time I wrote about a pile of statistics it was in college after reading a book on poverty and how to fight. The 11th page of the paper that had to be 20 pages was some form of the following, "I beg for mercy, Mr. [Whatever His Name Was]. As a computer science major, I simply don't write 20 page papers. I know we discussed that this book on statistics would fit my mathematical mindset, but there's only so much one can write about statistics before it doesn't make sense to stretch it any further."
In truth it probably wasn't that coherent of an plea, as it was 16 years ago when my writing skills were in the class as Tarzan's.
My point? Let's hope I can do a better with more time, an informal publishing place, and in a quantity that is around 20,000 fewer words. And if I fail, I hope you won't hold it against the author. You can download up the Ebook for free here until September 30th and make your own decision.
Here are some interesting statistics of the 500 people surveyed and my insight into them:
Age - 86% of the people were between the ages of 60-80. That seems like a sweet-spot for retirement. Nothing surprising here
Education - 93% have more than a high school degree with almost half (46%) having a graduate degree. That's a lot more than I expected for either number. There's much talk of whether college still has value nowadays. It's tempting to use this data to say, "This proves it!" I want to pump the breaks on that thinking since a vast majority likely earned their education and money decades ago.
Net Worth - A quarter of the people fell in the range of 500K - 1M. The survey grouped people who earned over 1M with people who earned less than 5M. I was surprised, because that's a huge range. Using the rule of 4%, this is a group that could spend between 40K and 200K a year indefinitely in retirement. Perhaps it is not surprising that 29% of people fell into this huge group.
Annual Income - Though there were 8 income ranges that people could specify, 92% of them were in the 3 groups ranging from 25K to 250K of annual income. Surprised? Not really. Some 40% earn between 50K and 100K with close to 25% on either side of that, those earning between 25K and 50K and those earning between 100K and 250K. There a few more people on that higher end, which may be expected because it is a pretty large range.
Spending - 65% said they live comfortably and 35% said they live frugally. I honestly don't know how I would answer this question myself. I would probably write in, "I live comfortably by living frugally." That is to say that I save money in so many areas of my life that I can afford many comforts.
Financial Concerns - Half those people surveyed have financial concerns. Those concerns were mostly outliving their savings and current standards of living. Healthcare costs were the single highest concern.
Careers - Most everyone were employed by someone, with large companies beating out small companies significantly (35% to 14%). Surprising to me was that only 14% were self-employed (me) and 2% were military (my wife).
Do They Budget? - 62% stuck to a budget, while 38% did not. Most everyone's budget was a monthly one, not a daily, weekly or annual one.
How Much Did they Save for Retirement - I'll just cover the most popular options. In their 20s and 30s, 51% did not save for retirement. In their 40s, 34% of people saved 6-10%. In their 50s, 58% saved 6-20%. In their 60s, 42% did not save for retirement. If I were to take a message away from this, it seems like it is never too late to start to save for retirement. To make it personal, I still have 2 years before I have to start to save 6-10% of my money for retirement.
Investment Advice - 76% of people frequently or primarily made their own investment decisions. 62% consulted professionals some of the time.
Big Risk, Big Reward (Part 1) - Stocks were cited as the best performing asset class by the retirees, but they were also the most-cited regret. Why? Looking into the regrets timing played a role... such as getting out of the market after a crash and not investing more.
Big Risk, Big Reward (Part 2) - Real estate seemed next on the list after stocks. The mistakes went both ways. Some stated that they bought too much house. Others said they should have invested more in real estate. Foreclosures were mentioned as well as selling inexpensive properties with rental potential
There's a lot to digest here. As much as I love information, I don't come away from this thinking, "Well now I am a whole lot smarter."
The timing of stock buying and selling is not a surprise. The real estate regrets are common as well. It is notable that mistakes, even foreclosures doesn't doom your financial well-being forever.
It is also notable that many people don't seem to save nearly as much as I thought they did and seem to be relatively okay. I'm nervous about spreading that kind of message though... seems dangerous and irresponsible. Thus I'll balance it by saying, "Save. Save. Save." That should do it.
Finally, practice responsible spending and get the best education you can. It seems that these are two of the biggest takeaways.
For more than a decade now, it's almost been a foregone conclusion amongst the young people in the United States that Social Security will not exist for them. A more thorough analysis shows that even if the reserves were to run out, there would still be money coming into the system and hence there would be money to pay out.
The question then becomes: How much money would there be to pull out?
For a long time, I considered it one of those nebulous questions that can't really be answered such as, "When can I retire?" In many ways it is, as many factors come into play. I'm nearly 30 years away from when I get to the average age of collecting, so I'm expecting a lot to change between now and then.
Like answering the retirement question, just because it is nebulous doesn't mean that it isn't worth doing a little planning.
I stumbled across this Daily Finance article, which proved helpful in calculating my Social Security benefit.
As a little primer, the eligibility age to start taking Social Security is age 62. If you opt to take it earlier, you'll get penalized. If you take it after age 66 you receive a bonus. It is typically around 7% in each direction around that key age 66 average. Opting to get around 72% of your benefit vs. waiting to get 128% of your benefit is a big deal, but so are those 8 years between taking Social Security at age 62 and taking it at age 70. This is why it is always worth considering whether it is better to take Social Security early or late.
The interesting thing about the Daily Finance article is that details the moving back of the age 66 keystone:
"But beginning for those born in 1955, who will be eligible to apply for benefits as early as 2017, the full retirement age will start going up. For today's 59-year-olds, the official full retirement age will be 66 and two months, and for every year after that, the age will go up by another two months until it hits 67 for those born in 1960 and later.
Having been born in 1976, it looks like the keystone will be 67 for me... but I fully expect that to change just as it is changing for those born between 1955 and 1960. It will probably go up at least as fast, two months per year.
Let's make the assumption that the increase in the keystone age is going to increase by the same amount. In that scenario, I'm born 16 years after the 1960 date when it's at 67. Those 16 years means pushing back the age 67 date 32 months.. or another 2 years 8 months. Because I think the increase may even be faster, I'm going to round that up to 3 years.
Thus by the time I'm ready to retire, I expect the keystone age to be 70. If true, I'd be eligible to take money at age 66 at the penalty or could wait until age 74 to get a bonus. That seems to be a very important thing to take into account when it comes to retirement planning. On the positive side, it would be certainly good news for those who expected to get no benefit at all.
I don't know about you, but thinking about all this made me want to go for a run. Being healthy seems like the best way to beat the system, right?
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