Tag Archives: early retirement

saving for, and spending in, retirement

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As I move deeper into my 50s, the idea of retirement starts to feel less theoretical and more real. Now, I can’t picture myself going “cold turkey”, at a desk full time one day and on a golf course full time the next day. For one thing, I have never golfed. I could take it up, but I’m not sure it is the first thing I would take up if I had more leisure time. I picture myself more fading out of the full time work force, working part time or taking on work-like projects and hobbies whether paid or unpaid, and gradually exploring different ways I could be spending my dwindling mortal time until I figure out how I actually want to spend it. (You would think I might know that, but I don’t, and people who do are lucky. Then again, maybe it is more of a journey than a destination for most people, and the best I can do is mindfully be on that journey rather than die at a desk.)

Anyway, enough philosophy. One study that gets mentioned a lot is the Trinity Study, which is where the idea of a “safe withdawal rate” of about 4% of your savings each year comes from. It’s a starting point, but a few issues as I understand them are that (1) the study assumed you drop dead 30 years after retiring, which most people don’t actually want to do, (2) it didn’t consider inflation, and (3) it didn’t consider that you might want to leave money to a spouse or heirs. So it’s better to project your savings and spending out to the end of your life (which you might want to take an optimistic view of, because that is the conservative choice in this particular context, because technology is improving, and because it is the only life you have), set objectives (like no more than 10% chance of running out of money and leaving $XYZ to a spouse), project it out probabilistically (using DIY methods if you really know what you are doing, a professional if you don’t, or my favorite, DIY without really knowing what I am doing and an independent opinion from an expert), and make decisions from there. The good thing is that if you make decisions and/or the external world changes, and you don’t like how that changes the projection, you can adjust your decisions any time. Anyway, here is one blogger who goes into extreme detail on all this. I am sure he is one of many professionals and amateurs out there and I can’t vouch for him, but he appears to have credentials, cites evidence, and the articles are interesting.

annuities

Annuities – I admit they sound like a boring topic. But what is not boring us thinking about you might want to do with your relatively short life of earth, and thinking outside the box about the tools available to you. Annuities are one of those tools.

Fixed SPIAs make retirement planning easier in exactly the same way that traditional pensions do: They’re predictable. If you know that you need $X of income each year in retirement, you can go to an online annuity quote provider, put in $X as the payout, check “yes” for inflation adjustments, and you’ll get an answer: “For $Y, you can purchase an annuity that will pay you $X per year, adjusted for inflation, for the rest of your life — no matter how long you might live.”

Pretty easy, right? You now have a specific figure for the minimum amount of savings necessary to retire safely. With a traditional stock and bond portfolio, retirement planning is more of a guessing game.

Fixed SPIAs are also helpful because they allow you to retire on less money than you would need with a typical stock/bond portfolio.

You could work hard and live frugally while you are young, then turn over your savings to an insurance company at some point and continue to live without working hard. People typically do this at retirement age (i.e. when they are old), but you could do it at a younger age and continue to live frugally without working hard, or you could work part time and pursue a passion part time, or you could spend more time with young children than hard working middle aged parents typically do, or you could take the risk of starting a business knowing that failure wouldn’t ruin you. You could turn over part of your savings, continue to work somewhat hard, and pursue some combination of any of the things on my list above. You could make gradual transitions from one mix of activities to another.

Now, do I really practice what I am preaching here? No. I work like a dog to support a family. I’m a conservative person, and I particularly worry about my ability to meet the costs of health care and education in the future. But I also ask myself each day what choices I am making right now that I might regret when I am looking back some day.