This new item recently showed up in my 401k Dashboard:
The default settings assumed a retirement age of 65 and that I would need $11,343 per month at 100% income replacement. My bonus was not included in salary assumptions nor were my other investment and savings accounts. I took a minute to refine the entries to better reflect my actual financial position.
This was when the traditional retirement bias came into clear view. The earliest retirement age I could enter was 62. My income replacement goal could not be lower than 50%. Currently, our household rarely exceeds monthly expenses of $4,000 and kill me now if I have to work until 62.
Is this some sort of scam to keep you working and consuming? Methinks yes.
When I changed my planned retirement age to 62 and my income replacement goal to 50%, plus entered the balances for my other accounts, my “results” changed drastically, but the calculation remained pretty useless. There is not enough flexibility in this “planner” to get a realistic view of a projected early retirement progress.
Contributions made outside our 401k are approximately $52,250 per year and includes Tradtional IRA, HSA, after-tax brokerage investments, but we will only be contributing this amount for the next four years not twenty years.
I also included assumed “additional” income from an annual bonus and profits from the art business.
If you have been a reader of this blog for any length of time, you know that we are not planning a “traditional” retirement. Instead we plan to retire by 45 by spending less than we earn and investing the rest in low-cost index funds. We save >65% of our net income every month. As a result, we live a low expense life. As of this writing, we spend an average of $45,000 per year. By retirement, we expect that amount to decrease to between $35,000 and $40,000. When our house is paid off, our expenses will drop an additional $12,000.
Personal Capital (not an affiliate link) offers a retirement planner that I find a little more useful.
Note: This is a service that I personally use to see all my accounts in one place. Although not perfect, I have found their service to be flexible enough to my retirement planning needs.
The Retirement Planner allows you to specify your desired retirement age, contributions until retirement, social security income and expected retirement spending. In my case, I entered $35,000 per year or a desired spend of $2,917 per month. I can enter spending goals like Little Miss TJL’s college expenses (see little orange dot around age 52). At my current savings rate, I have a good chance of meeting my retirement goals and will likely maintain above $1MM throughout retirement.
The 10th Percentile (darker sub graph), assumes that I would retire at age 45 with $678,000 instead of my goal of $932,000. Obviously, this plan would have a greater likelihood of failure but I would never retire with this little in the bank. What this graph really shows is if the markets perform extremely poorly over the next few years, I will not reach my retirement goals and therefore will not retire at 45.
Given my expected retirement spending, my plan has a good chance of success, especially considering we also have alternate income (rental property and art business) to cushion the retirement accounts.
Do It Yourself
Even though the retirement planner through Personal Capital gives an adequate overview of how your funds might perform. I suggest creating your own worksheet with a more conservative annual return based on your asset allocation and increased withdrawals due to inflation.
I use an assumed earnings growth of 7% up to age 59 since I am heavily invested in stocks. I have also assumed an annual inflation rate of 2%.
After age 59, I change my growth assumptions to 5% to project a more conservative growth in later retirement when I might change my asset allocation.
Here is a snapshot of my working spreadsheet (don’t hold me to it, it is constantly in flux!)
Notice in the “Balance Start of Year” column, only $282,022 is available for use in my taxable account at age 46. This amount will be used to fund the first phase of retirement. After age 59, the balance jumps to reflect the total available retirement funds (including 401k and IRA funds) in the second phase of retirement.
I can define specific amounts for asset draw or other income or timing for company pensions and social security benefits.
Creating you own financial projection worksheet is not perfect but it will give you the flexibility you need to refine your plan as you approach early retirement.
Even though your employer’s 401k plan might offer an in-house retirement planner, it might be better to explore alternative planners to fit to your specific retirement plan.