Retirement Planning

So you are young, with a good income, and you would like to retire as early as you can ? This scenario can be a Financial Planners dream. The following cases are presented to illustrate when young savers could possibly retire.

CASE 1

The year is 1998. Bill and Sally are both 25 years old, they just bought a $200,000 house in sunny Colorado, and they want to retire at age 48. They both have jobs making $50k/yr. They are really good savers. Due to their desire to retire so young, they will have to incur the expense for their own medical insurance estimated at $12k/yr adjusted annually by inflation. They assume in their planning that there will be NO social security. They do not plan to have children.

As of today, they each have $30k in their company 401k plans, as well as $20k saved in taxable mutual funds. They plan to contribute their max of 16% in their 401k's, whereby, their companies match 30% on the first 6% contributed.

Their estimated 1999 living expenses are $26,174, plus $14,371 for their home mortgage. They pay $26,548 in taxes and put $36,267 in savings which includes their 401k contributions as well as their dollar cost averaging into taxable mutual funds. These savings amounts (as well as their annual salaries) increase annually by their 3.5% estimated inflation rate (except for their annual home mortgage which stays constant for 30 years).

They use a projected mutual fund return of 8.5%/yr before retirement, with 7% taxable return and 8% non-taxable fund returns after retirement.

Sally projects a life expectancy of 99, with Bill at 93.

Can Bill and Sally retire at age 48 ????????

All indications are that they can in fact retire at age 48. At retirement in the year 2021, they have $3.9M in savings. Poor Sally dies at age 99 with a whopping net worth of $40M !!!!!!!!!!!!! In fact, Bill and Sally could even afford to retire before age 45, but then poor ole Sally would die with only under $20M. They will most likely NOT be able to retire at age 40.

CASE 2

Kent and Monica are also both 25 years old, and they also want to retire at age 48. They each also make $50k/year in 1998. They just bought a $300,000 house in Connecticut where they want to spend the rest of their life. They each have only $2k in their 401k plans, plus $2k in taxable savings. They do not plan to have children.

All other assumptions for Kent and Monica are the same as for CASE 1, except for the higher mortgage, and the amount that is saved annually. Since Kent and Monica realized that they should invest, and found that they had $18k/yr left over to do so, they did start saving. Their total annual savings in 1999 was a bit over $26k spread between their 401k contributions and their dollar cost averaging into mutual funds.

Can Kent and Monica retire at age 48 like Bill and Sally could ????????

If  Kent and Monica plan to stay in their house until they die, all indications are that they CAN NOT retire at age 48. At retirement, their savings are $2.96M. They will run out of money sometime around the year 2058. However, based on a 3.5% inflation rate, their home will be worth an estimated $2.3M in 2058, and it will be worth about $650k when they would like to retire in 2021.

OK, well lets try to help out ole Kent and Monica. Lets get them to sell their house when they retire for $650k, and buy a ($200k in current dollars) house just like the one Bill and Sally live in in CASE 1. Well surely they can retire at age 48 now.
Nope !!!!!!!  Now they run out of money in 2053 !!!!! But up until then, oh what a glorious life they had. Now, they had better learn how to say "SPARE CHANGE ?".

We really don't want to throw quarters at Kent and Monica in 2053, do we ? Lets see if we can help them today. Lets bump up their company 401k contributions to 16% each.

Now can Kent and Monica retire at age 48 ?

NOPE !!!!! They run out of money in 2060 in Bill and Sally's old house.

But all is not totally lost for Kent and Monica. If they work one more year, max out their 401k plans, they can retire at age 49. But poor Monica will die broke at age 99 (with Kent buried in the back yard of Bill and Sally's old house). Now its time to re-read CASE 1.