Five Ways to Know You Have Enough

first published at iwasretired.medium.com on January 26, 2022

If you are suddenly retired, sooner than you expected, you should pause to assess your financial situation. Are you retired early, or will you need to find a new job for a few more years? How do you figure out if you have saved enough? I’m going to share five ways you can run your numbers through simple online tools to give you an estimate.

I would recommend you go through at least one detailed financial plan with a trusted advisor, whether that is a fee-only planner or not. But these online tools will give you a start.

Here are the links I’ll review:

1. https://ffcalcs.com/how_long

2. https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

3. https://www.mutualofomaha.com/advice/calculator/how-long-will-my-money-last

4. https://engaging-data.com/will-money-last-retire-early/

5. https://calculator.ficalc.app

For each of these online engines, let’s use a hypothetical 60-year-old male, who has $1.5 million in savings when he begins his retirement. His bottom-up budget says he needs about $95,000 a year in spending. He will get a $25,000 a year pension when he reaches 65 and plans to take Social Security when he reaches 67. His Full Retirement Age monthly benefit is $3,000, or $36,000 a year. He could take Social Security early at 62, but the monthly benefit would be $2,100. In each of the scenarios, we will use assumed inflation rate of 3 percent and an average investment return of 4 percent, if asked.

Our first online model is the FFCalcs calculator from Financial Finesse, a leading independent provider of workplace financial wellness benefits. This model requires monthly figures, so divide annual estimates by 12, or monthly expenses of $7,917. But how do we enter in future income benefits, that won’t start for five or seven years? In reality, our early retiree will need to withdraw from accumulated savings in early years to make up for income he is not yet taking. But that will give a wrong number in this calculation. So, let’s enter the present value of the future monthly income amounts. The Social Security is seven years away. Assuming the 3 percent inflation rate, let’s see what those dollars are worth now:

PV(0.03÷12,7 years ×12,0,$3,000,,) = $2,432.39.

The pension is only five years away, and its monthly rate will be $2,083.33.

PV(0.03÷12, 5 years x 12,0,$2,083.33,,) = $1,793.19.

So we’ll enter the total of those two numbers or $4,225.58 for the present value of the future income streams.

With this fudging of future income, this shows our retiree has enough money to last 41 years. That will get him to 100 years old. Here are some quick reactions to this engine: Pros, a simple interface, quick read. Cons, no flexibility in annual rate of returns or changes in income over time.

Let’s try the Vanguard Retirement Nest Egg Calculator.

Let’s begin by saying the retirement must last the same 41 years. We will enter the same $1.5 million in retirement savings, and the same $95,000 in annual expenses.

Vanguard’s approach also asks how your money will be invested. Let’s assume our retiree has about a 50/50 asset allocation, with three years of expenses in cash, so stocks at 50 percent, bonds are 30 percent, and cash is 20 percent. Run the simulation and it says our retiree has a 27 percent chance of lasting for 41 years. What? What are we forgetting?

Well, this model has no way to enter those future income sources from pension and Social Security. So let’s adjust the expenses to subtract the present value of those future income streams. Rather than $95,000, let’s use $45,000. Now there is a 95 percent chance of success. My reaction? Pros, ability to add asset allocations. Cons, still no flexibility on future income sources or expenses.

Let’s try Mutual of Omaha’s simple online calculator next.

I’ll enter the same $1.5 million, earning 4 percent a year. Assuming that I’ll have some fixed income from pension and Social Security, let’s say I’ll withdraw $95,000 a year, which may increase with inflation.

Assuming 22% tax bracket, it says the retirement savings will last 16 years. But if we adjust for future pension and Social Security again and lower the withdrawals to $45,000, this engine says the retirement savings will last at least 30 years, the maximum for this engine. Reactions? Pros, a simple interface that adds taxes into the picture. Cons, no asset allocation and no way to add in future income proactively.

Here’s a different approach to the question of how much is enough. The website, engaging-data.com, shows you are more likely to be dead than red as you go through your retirement! That is, the odds of dying will eventually outweigh the odds you will run out of money.

I’ll use the same hypothetical 60-year-old male, who has about $1.5 million in savings. I’ll use the same $95,000 a year in spending. This model has a lot more bells and whistles, so let’s say our retiree is in great health. And I’ll use the same asset allocation in earlier models. 50 percent in stocks, 30 percent in bonds, and 20 percent in cash.

We’ll use the same 22 percent average tax rate in retirement. This model has a lot more dials, so I will enter investment fees of 0.25 percent, since our retiree uses mostly index funds. This online tool has the ability to add specific fixed income sources, such as pension and Social Security. I will add our small pension beginning at 65 and Social Security beginning at 67. It even allows me to put an asterisk after the pension to say that it will not receive cost of living adjustments. You put the figures in the Extra Income box, separated by semi-colons and then enter the starting ages of 65 and 67, again separated by semi-colons. I’ll use 100 years for lifespan to track with our earlier models.

While this is showing inflation-adjusted, we are not sure how much of an adjustment that is making. Is it 3 percent inflation or something closer to the Federal Reserve’s target of 2.2 percent? That is not clear in this model.

Then this cranks out a chart, assuming an overall withdrawal rate, and a static asset allocation. It gives you an 34 percent chance of success. It also shows that by the time you are 85, you have a 45 percent chance of being dead, and only 20 percent chance you will go broke.

Let’s assume our retiree has a pension that receives a cost of living adjustment, so we remove the asterisk. Let’s also add another $300,000 in total retirement savings to account for home equity, to be tapped later in retirement. That changes the picture. Now you have a 93 percent chance of success; you still have a 45 percent chance of being dead at age 85, but zero chance of going broke.

Engaging Data clearly has a lot more built in. Reactions? Pros, more variables. Cons: no clear indication of average market returns or inflation data being used.

Now let’s try one more online engine, FICalc. I first saw this in a Boglehead video demonstrated by its developer James Please. He designed it as a web app that can run on a mobile phone, but I used the laptop to test it out with our scenario. There are a lot more bells and whistles, including a baker’s dozen of withdrawal strategies that you can use. Fortunately, the app comes with a guide to walk you through the options.

But even in that scenario, our retiree would have lasted 39 years, rather than the targeted 40 years. Reactions to this online app? Pros, very detailed scenarios; in fact, it teaches about all the nuances of retirement planning just by trying to use it! Cons, it is only backtesting on historical data, rather than a Monte Carlo scenario that randomizes results.

How do you know you have enough? All of these models are based on underlying assumptions. In the end, they are educated guesses. Use them as second opinions on a detailed retirement plan. Yet, there are many things that cannot be known. How long will you live? How high will taxes be in the future? Will investment returns and inflation follow historical patterns or some random walk that we cannot predict? All you can do is make your best guess and plan accordingly.