Personal Finance Topic #265 – Job Loss and Retirement – Part 7

Job Loss and Retirement – Part 7

Retirement Math Analysis - Spending Phase Example

Example of how a couple would spend their retirement fund

John and Mary want to retire at age 62, and want live comfortably until they reach their graves at 84 and 91, respectively. (Note: I purposely made their income and assets high to show that more money does not guarantee long term comfortable retirement. It is better to work longer with smaller needs than to have more assets and higher expenses.)

• They plan on not having any debt in their retirement, and staying healthy.
• They want to maintain a $50K emergency fund in today’s dollars to overcome any major financial or medical setback.
• They also plan on distributing any remaining assets to their surviving children after their death.
• Their expected annual retirement expense is 70% of maximum annual income ($135K).
• Smiths want to buy a car ($40K in today’s dollars) in retirement every 7 years, paying cash
• They want to travel in their retirement years, which will cost them $5K a year in today’s dollars.
• They plan to start Social Security at age 62 for both.
• John will receive Social Security of $1,225 and Mary will receive $935 at 62, in today's dollars.
• They hope that their investments will grow by an average of 6% a year.

Assumptions: John and Mary will have accumulated about $1 million in their nest egg at 62. Their annual expense at that time is $95K + $8.5K in travel budget. Mary plans to work until 62, but she would prefer to quit when John retires.  Income tax has been included in this analysis. Neither experiences high medical or nursing home care bills.  Nothing is indexed to inflation, but if the calculations included inflation adjustment, outcome would be worse than stated.

Goal: John and Mary want to retire at age 62, and want live comfortably until they reach their graves at 84 and 91, respectively.

Will they succeed?

• Scenario 1: Baseline result: With John and Mary both retiring and starting Social Security at their retirement at 62, their nest egg would last until they are 76 and 71, respectively. This is a failure because Mary will live for another 20 years only with Social Security benefit! So they must make some changes to their requirements:
  • Failed Plan!
• Scenario 2: Drop annual expenses from 70% to 60% - Result: Their money would last until they are 80 and 75, respectively. Mary will live for 16 years with no money.
  • Failed Plan!
• Scenario 3: Do Scenario 2 and buy a cheaper car ($30K in today’s dollars) every 7 years - Result: Their nest egg would last until they are 81 and 76, respectively, but Mary will live for another 15 years.
  • Failed Plan!
• Scenario 4: Do Scenario 2 and 3 and travel ($5K in today’s dollars) every 2 years -Result: Their nest egg would last until they are 82 and 77, respectively, but Mary will live for another 14 years.
  • Failed Plan!
• Scenario 5: Do Scenario 4 and John retires at 67 instead of 62 and Mary retires at age 65 instead of 62 - Result: Their nest egg will grow to about $1.7 million at Mary’s retirement, and would continue to grow. At Mary’s death, about $900K would remain to be divided between her two children.
  • Good Outcome!
• Scenario 6: Do Scenario 4 and both retire at 67 instead of 62 - Result: Their nest egg will grow to about $1.8 million at Mary’s retirement, and would continue to grow. At Mary’s death, about $1.6 million would remain to be divided between her two children.
  • Good Outcome!

Next post: Social Security Taxation