We (my firm) also leans towards 7%. Better safe than sorry, I guess.
As an aside: setting an agreeable rate of return is one of the hardest parts of the job. The OP's response to saving $24k is pretty typical when confronted with a number like that, but the numbers don't lie. However, even the slightest change in the assumptions can play a big role. Frex, change that 7% to an 8.5% and the amount needed to save drastically drops to a more managable number. 8.5% isn't "playing it safe" but it's not historically unreasonable either. Finding that balance is often one of the biggest hurdles to overcome.
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Just curious here, so this is truly gently meant query (to learn!): How big an advocate of the 4% rule are you, and why? That $24k figure you helpfully offered was based on the
4% drawdown-never exhaust one's portfolio guide, right? (It's also based on something like 10% returns... )
Trying to refine ideas here, not slam your calculation. The assumptions in all these calculations are all large but I still maintain they all get a person in the ballpark. E.g. saving $1k a year just will not do. But $6k a year might be okay. $12k a year is way better. $24k a year is fat city. At least the OP can probably manage something between $6k and $24k.
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No ill intent received! To answer your question, my use of the 4% rule is largely confined to the groups and informal social events. It's a generality AT BEST. The reason: Due to lack of time, information, and fiscal incentive, a generality is often the best that can be provided in those situations. I concur that the assumed returns are a bit high, but "the rule" also entails perpetuity. For many, 25-35 years is the goal. So 10 may be too high, but forever might also be too long.
Amongst my clients, the 4% rule is totally unacceptable. I am paid to advise them, can dedicate more time to their lives, and know much more about their finances. I feel that NO rule of thumb is an acceptable answer when I have the information and resources to give them personalized and specific answers. As we all know from personal experience, life is more than just working towards retirement. It's grandkids, and unexpected house guests, and boats, and wanting to tour the country in an RV, and lawyers for your kid's divorce, and disability, etc, etc... My clients have asked me to go both car and TV shopping with them before. Our lives are just too unique for rules of thumb.
By the way, that $24k-$26k I provided above was the amount needed to be able to withdraw 70% of today's salary, minus $20k SS, beginning at age 62, adjusted annually for 3% inflation, with a $205k beginning nest egg, at a 7% return.
Agreed totally. My aside was, at least partially, a commentary on the psychology of investors. I imagine the OPs jaw dropped when he saw the amount he needs to save. His (and many other's) response was "it's just not possible". But as you say above, $1k just ain't gonna cut it, and sometimes people need that reality check. Hopefully, the OP will save the $12k-$16k that he needs and maybe he'll get lucky enough to have "The Return Gods" help him along the way.
Lastly, one last thought I've been tossing around lately. I'm all for getting you money in as early as possible. That's where the power of compounding plays such a huge role. But I do have a problem with linear savings in a non-linear environment. The $24k the OP needs to save today is worth a lot more than the $24k he'll need to save when he's 61. Perhaps the OP should start below $24k and increase his savings annually. That way he may only be saving $16k today, but $32k when he's 61. He may find that he made that $24k average target afterall. [The math isn't perfect, it's just a concept].
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I hated to snip anything from your fine post. I agree 100% with almost all points made, and maybe 90% with just a few points.
Car and TV shopping? This is sure comprehensive! I can certainly imagine how learning how to carefully select such items goes toward instilling a mindset of budgeting and so financial planning.
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I was just glad they respected my opinion enough to ask for it. In my usual attempt to impress, I now know more than I should every need to know about DLP, LCD, and plasma TVs :-)
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It seems like there is a lot of opportunity to rationalize yourself into trouble. "I can't save 24K a year, so I'll assume 8.5% return." At best, this commits you to accepting a lot of volatility.
You need iron nerve to avoid bailing out of the market at low points. I've seen studies that show, while the market averages 10%, the typical investor actually gets 3% because of really bad market timing.
-- Doug
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My bad, I believe I forgot to scroll, maybe my browser was stuck.
Fair enough. Given all the variables, I view it as a moving target. First, for 80% replacement, one needs 20X their income at the moment they retire, no? If one found himself in this position at 45 or 50, they could make the decision to quit. The 12.5X was making the assumption that the thread's OP is counting on social security, and using the figures available now. But it's 12.5X his final year's pay.
Joe
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I think we agree. That is, I continue to like these "what it takes to retire /right now/" calculations, elaborating with the usual caveats, and gosh willing with conciseness and good "editors" in follow up posts. Like kastnna suggested, it is instructive and there's also a bit of needed shock value to it for some folks.
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It's difficult to be precise since it depends on what rate of return one can get on investments and whether those investments are tax sheltered.
Working people get additional benefits by working that isn't included in simple income such as medical insurance, pension contributions and SS contributions.
If a person looks at the worst case situation where one could end up in a nursing home, income needs would probably be as much as $100,000/ year.
There is the added problem that immediate annuities don't pay much for people under normal retirement age (wait until age 70).
-- Ron
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