Retirement Planning

So you are middle aged, you have worked hard and saved hard all of your career. You are totally burned out and you want to retire now.

CASE 1

Reinhold and Sonya are both 45 years old. For years they have invested in the stock market, and they have amassed large portfolios of individual stocks and some mutual funds. They constantly watch CNBC, MSNBC, and their Friday night is not complete without watching their favorite PBS sitcom hosted by that Wall Street version of a George Washington look-alike. They have no children. Their favorite sports team is the Dow Jones Bulls. The year is 1998, and the have consistently pulled annual gains out of the markets of 20-50% for at least the last 5 years.

At present, their total portfolio value is $1M evenly distributed between taxable and pre-tax investments. They live in a $200 house which they have owned for 2 years. They desire to live in their house for the duration of their lives.

Their total annual 1999 expenses are projected to be $56,852 which includes living expenses, taxes, mortgage, and misc expenses. This also includes health insurance costs since if they retire now, they will have no pension or company paid health care. Their expenses increase over time for projected increases in medical coverage, and they throw in a good used car to purchase about every 10 years. There expenses are also slated to increase annually by their projected 3.5% inflation rate. They assume there will be no social security. Except for their mortgage, they are virtually debt free.

Due to their astute financial savvy, they project they will make a conservative return in the markets of 10% over the next 5 years, with a conservative 8-8.5% thereafter. They plan to stay in their house in sunny Colorado until death (age 99 for Sonya and age 93 for Reinhold).

Can Sonya and Reinhold retire now at age 45 ???????

Chances are that they CAN NOT retire now. Based on these assumptions, they will run out of money in 2040 at age 87.

Well what may need to happen for poor ole burned out Sonya and Reinhold to retire now ?

Due to their extensive investment knowledge, perhaps we could try the unthinkable just to see what happens. Lets bump up their projected market return from 10% to 12% over the next 5 years. Viola ! Now Reinhold and Sonya could retire now but Sonya would virtually die broke (Sonya would die with about $1.5M in 2052).

Lets try something else. Lets give Reinhold and Sonya a whole year off, then send them back to work bagging groceries for 3 years at $20k/yr each. Face it, A WHOLE YEAR OFF then all you gotta do is bag groceries for 3 years ! Even the most burned out people should be able to handle that ! Well, viola ! It works. Sonya dies with roughly $2.5M in savings in 2052. Since they have no heirs, there house, now valued at $1.1M is donated to Greenpeace as specified in their will.

CASE 2

Waldo is 50 and has just retired. Debbie is 35 and still working. Waldo and Debbie have a 3 year old son Billy. Debbie wants to retire at age 50. It is now 1998. They plan to stay in their home in Connecticut until death.

Waldo has saved $10k in taxable mutual funds, and has $450k in his IRA. Debbie has $25k in taxable investments, and $100k in her current 401k plan. Billy, a rather bright 3 year old, has expressed his desire to go to the University of Colorado in Boulder for 4 years starting at age 18. The total current value cost of his education will be $43k. A 5% inflation rate is assumed for future college costs.

Debbie's current salary is $80k/yr. She contributes 10% to her 401k plan, whereby, the company provides a 30% match on the first 6% contributed. Debbie and Waldo bought their home in 1992 at a cost of $300k. Their original loan balance was $240k at the time they purchased their home, at a 7% interest rate.

They assume they can make a return of 7.5% on their investments averaged over the duration of their lives. Waldo has little interest in investing, as he wishes to one day be an Olympic Curler. Debbie has no time for investing with her job and son.

Their total 1999 expenses are about $72.5k, which includes living expenses,  mortgage, and taxes. In 1999, they were projected to save $11.5k between 401k contributions and dollar cost averaging into investments with excess cash.

It is assumed that Waldo will be covered by Debbie's company health insurance plan until she retires. At that time, it is estimated that the cost of health insurance will be about $15k annually in today's dollars.

Can Debbie retire at age 50 ?????????

Its gonna be close. When Debbie reaches age 50, they will have about $2.4M saved. At her death, her portfolio will only be worth $1.6M, with the house worth about $2.4M. So Billy inherits a whopping $4M. Billy is still in Boulder where he owns a tattoo and piercing parlor....the inheritance comes in handy.

What could Waldo and Debbie do to improve their situation ? By spending more time on investing and simply increasing their return projection from 7.5% to 8.0%, Debbie dies with a $10.1M portfolio. In this case, if Debbie decides to retire 2 years sooner, at age 48, she will die with a $1.8M portfolio. Little Billy just changed the channel to CNBC and sent in that Wall Street Journal subscription !!!!!