Last year, I wrote What Does an Annual $200,000 in Retirement Income Look Like which described our projected (you guessed it) retirement income.
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. The cash flow model is about 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.
2) The rule of 4% appears to not be relevant anymore according to all those articles. It seems like 3.5% is a better choice.
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:
|2015||Websites (Online Businesses)||$25,000||$25,000|
|2020 (Age 44)||Military||$58,329||$83,329|
|2027 (Age 51)||Rental Income||$25,000||$108,329|
|2038 (Age 62)||Social Security|| $17,024||$125,353|
|2041 (Age 65)||Retirement Accounts||$57,483 ||$182,836|
|2041 (Age 65)||Lending Club|| $479||$183,315|
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.