<p>Faraway places, you make a very good point. I also think that sjmom's point about the size that a retirement fund must be to generate a given income is not well known. In fact, I believe that her 5% figure is a bit generous; the number I've heard is 3-4%. Another issue is disability insurance; while most people are aware of the need for life insurance, not many realize that there is a higher probability of disability than death during the working years.</p>
<p>and when you buy long term ins make sure that your family knows where your policy is.
My grandmother had long term ins- however by the time she needed care- she was having mulitple small strokes and we couldn't find out where her safe deposit box was that contained her policies.</p>
<p>farawayplaces "The nicest nursing homes will not take many Medicaid patients." >>>></p>
<p>What sometimes happens here is that the children end up "buying" the parents way in, the parent's assets eventually get depleted and then Medicaid takes over. This can be an unexpected expense for people who haven't anticipated it.</p>
<p>Although this isn't the point of this thread, I have yet to figure out the age and income level where long term care insurance makes sense. The salesmen of this product don't appear to know, so obviously can't explain it. It's on my "to-do" list to figure out. </p>
<p>As for college, we lucked into good jobs and saved sufficient funds to cover any option, but never became convinced of the cost/benefit of high priced choices. Growing up poor, we tend to be value shoppers. I know many posters believe such value exists, but both H and I loved our large in-state school alma mater's so have never leaned toward the benefits of a small LAC. In fact, I have had bad experiences with my interns and new hires from small LACs versus those from the large state schools. (Perhaps, just bad luck; I need people who have highly developed work ethic, Excel, and accounting skills, in that order.)</p>
<p>Nevertheless, we instructed S1 to make his choice without regard to cost. But, the acorn doesn't fall far from the tree. He was horrified at the cost of high priced schools and wouldn't even consider applying. He will attend our state flagship next year and appears delighted. </p>
<p>As a side note, in terms of big school/little school, S1 did no soul searching. He just assumed big school because both parents went to a big school and we believe he would thrive in such an environment. However, our state flagship is frankly kind of a little school in comparison and that was one of its negatives. Oh well.</p>
<p>If the state flagship is UVA good for him - great school and lucky for you to be instate. :)</p>
<p>I guess that's another example of luck. If you happen to have parents who live in a state with a very good public college like Michigan, Virginia, North Carolina and California you get a great education for little money and it's easier to get in. Maybe public colleges should be federalized. Like that's going to happen. But good for your son Analyst!</p>
<p>NYMomof2, I've also heard of 4% as opposed to 5%. The rationale is that if your retirement fund remains invested in equities (you haven't converted it to an annuity with a guaranteed annual payout), then even if the average return on that investment is 5% or more, there is going to be variation in that rate of return from year to year. And you don't want to find that you're committed to spending 5% from a fund that may not provide that level of return in certain years. So it's better to only plan to take out 4%, and/or to assume therefore that you will need to accumulate a retirement fund that is 25X that takeout rather than 20X that takeout to be safe. Thus, to use sjmom's example, if you want an income of $120K/year, you'd need a fund of $3 million rather than $2.4 million assuming that you would draw 4% per year.</p>
<p>(These examples assume that you are trying to preserve the overall sum -- perhaps to pass down to your heirs. You could, in principle, draw more out of the sum accumulated on retirement day if you knew how long you're going to live, as well as all your "closing costs." Not too many people have that information at hand when they retire!)</p>
<p>I think 4 % is used (don't know exactly where I've seen it but in more than one place) and it assumes that after 30 years or so you will have almost nothing left. This is because of taxes and inflation. If you look at the performance of the market lately - last year you would have gotten zero return, and interest rates, I don't think you can count on more than 4 % return. Maybe 1 % would be eaten up by taxes and if you wanted to preserve your capital, you'd have to reinvest about 1 % for inflation. For years, every bit of investment advice used 10% return on stocks as a given and things have suddenly changed and people are left without enough savings. But can you save 2 or 3 million dollars on a middle-class salary anyway?</p>
<p>Do you need $120k per year in retirement? It is assumed that your house will have been paid for; that you will not have some of the expenses connected with work, etc... </p>
<p>I don't have 2-3 million dollars in retirement savings but I don't think H and I will need $120k per year, either.</p>
<p>For anyone who has relocated several times, the odds of paying off a 30 year mortgage before retirement are not that high. If you are able to stay in the same house for a number of years, then that's a wonderful deal. And if you've ever moved from a low-cost area to a high-cost of housing area, you know that it's not always possible to just spend the same on a house as the one left behind -- thus the difficulty in paying off a mortgage before retirement. Of course, with all of the loans we're taking for our kids' college education, maybe it will be 30 more years before we can retire!</p>
<p>With even moderate inflation of 3% per year, $120K will go about as far in 2045 as $40K does now. Considering taxes, cost of supplemental medical insurance and copays for doctors and drugs, that may not leave a whole lot for things like utility bills and food.</p>
<p>I'm a real voice of gloom and doom. I just skimmed a book at the library which says that when the boomers start to retire in droves, consumption is going to go down and everyone will be chasing interest - i.e. investing in bonds, not stocks, so interest rates will stay low. I always thought interest rates had to go up because of all the deficits but who knows.</p>
<p>And sadly the news tells us that a lot of Americans have been using their home equity like a piggy bank so I don't know if these figures assume that your house will be paid off.</p>
<p>Bassdad:</p>
<p>This is what I don't understand. Is the quoted $120k in today's dollars or in 2045 dollars?</p>
<p>Marite, I'll jump in since I brought up the $120K initially. It's in today's dollars -- at 5% return on investment, it takes $2.4M to provide income of $120K per year in today's dollars. The arithmetic is simple -- it's the assumptions that cause problems. So, you just have to forcast what income you need in 2045 to determine how much to save, if that's the expected date of retirement. But my initial numbers were intended primarily for someone about 10-15 years away from retirement. The issue that I think Bassdad is bringing up is that inflation will reduce the purchasing power of a current income of $120K per year. </p>
<p>I'm not a financial planner, but isn't that why a return of 4-5% is suggested, as opposed to a traditional expected return of about 10% for a stock portfolio? The 4-5% reurn could allow for inflation of 4-5% per year. It would also depend on the portfolio -- more bonds and fixed income instruments reduce return but improve the risk profile. Of course, the point of the discussion is to explain why even people with a decent income can't spend every dime on kids' education, if it means not saving for retirement.</p>
<p>The return of 4-5% is suggested (and could still be optimistic) because although the average rate of return on stocks over the last hundred or so years has been 8 - 10 % those days are over. Because we had a huge runup in the 80's and 90's, stocks are now overvalued by traditional standards and no one expects anyone to get 8 - 10 % for the forseeable future. Stock values could actually decline over the next decade.</p>
<p>Realistically, you do have to plan for inflation and you have to make some assumption about both the starting point and end point. Some people prefer the certainty of an annunity (which can be constructed with an inflation protector in it) to one where they have funds invested in the stock market after retirement. But that may reduce your actual income levels each year, in return for the "certainty" of the income.</p>
<p>We've also left out social security from these calculations. If you and your spouse have both earned it -- and IF there will be some substantial payout in future -- then that might add say $40-$50K per year. That's equivalent to reducing your retirement savings need by $1 million to $1.25 million.</p>
<p>As for the question whether a middle class person can accumulate a couple of million in retirement savings, well assuming that you include home equity and you "borrow" on it in one way or the other upon retirement (e.g., by selling down and putting cash into retirement), and assuming you start your retirement fund in your 20's or early 30's, and assuming you are very disciplined about it (and assuming a whole lotta other things about the market, esp. in the years near to your retirement date), then the answer is "maybe." </p>
<p>I know that we will have paid off our mortgage next year, but the total value of our "starter" house in the town where we live isn't going to generate a lot of bonus capital when we retire. So if we move to a higher cost area, we're likely to have mortgage payments to make in our new location after retirement.</p>
<p>I think people here have been talking about a fairly simple model where each year you withdraw a fixed percentage of whatever principal you had when you retired. In that case, it is $120K in today's dollars if you start with $3M and plan to take 4% per annum.</p>
<p>The math gets slightly more complicated if you want to index your withdrawals for inflation over the years, but it is fairly easy to run different scenarios on a spreadsheet.</p>
<p>And yes, I am being somewhat pessimistic assuming that return on investment will be more in the 4% to 6% range than in the 8% to 10% range we have seen in recent years. Since I am on the trailing edge of the baby boom, I am not willing to count on anything at all from Social Security. I would rather take a pessimistic outlook now and be pleasantly surprised later than find I am outliving my savings.</p>
<p>Thanks all. I was not assuming that H and I would need as much as $120k per year in retirement, but perhaps I am naive.</p>
<p>You're right, BassDad. I can make such calculations using tools in my own retirement fund. For me, a lot depends on what happens to my capital between now and retirement. If the market stays with it's long-run average growth -- wish, wish -- then I'll be in decent shape. But I'm not terribly optimistic in part because the net sum in that fund now is about where it was 5 years ago (I was way too irratioinally exuberant back in the late 1990's). But I will adjust my planned spending level accordingly when I do retire and I think I will make it unless there's a continuous down market. The starting date (age at retirement) can also matter quite a lot, so that's also a variable.</p>
<p>Re social security, I'm on the early end of the Baby Boom, so seem likely to be "protected" at least in substantial part unless they change all the rules.</p>
<p>Another change in rules that would help a lot -- though I haven't heard it proposed -- would be to give a more favorable tax treatment to the accumulated savings in 401K plans. If income from these were not taxed as ordinary earned income, then the annuity earnings would go a lot farther. I'm waiting for some of those middle-Boomers to make that argument effectively. To embellish that last point a bit: about 60% of my accumulated retirement funds are based on investment returns over the years, and about 40% is from the money deposited by me and my employer over the years (both pretax). If the 60% were given a more favorable tax rate than the "earned" amounts -- then the tax liability on payouts would be quite a bit lower.</p>
<p>I'm not sure what to think about Social Security. The system itself is, theoretically, in great shape, thanks to the decision that was made under Reagan (I believe) to increase the SS payroll tax rate to form a "trust fund" to cover the anticipated retirement of the baby boomers. Under very pessimistic assumptions, the system will be able to cover its obligations for many years to come (until 2040 or so). Under more realistic assumptions, it will be fully funded for the foreseeable future. </p>
<p>The big question is the availability of the trust fund, which has been invested in the traditionally most secure instrument, US Treasuries. The size of the trust fund is currently almost $2 trillion. The problem is that investing in US Treasuries means lending money to the US gov't for it to spend on current needs. The money is being fully spent each year on the general budget, and the trust fund exists only on paper. At some point, when SS payout starts to exceed SS receipts (this could be in 10 years), taxpayers will have to foot the bill. The alternative is for the US to default on these Treasuries.</p>
<p>Remember everyone laughing at Gore when he advocated putting the SS trust fund in a "lockbox"?</p>