Ultimate Retirement Guide Part 9: When to Retire Sumarized

It’s about time again for another post in my Ultimate Retirement Guide Series. As a refresher, the goal of this series will be to provide an in-depth answer to this question: “what do I need to do to retire?” As well as any questions that could stem from that initial question. The goal is to have this cover all of the information I’ve looked at since I started really becoming interested in retirement saving, both early or traditional. I hope to mostly focus on items that have been relevant to me in my own experience and where I am in my journey at the time of writing. Throughout, I will try to present as unbiased a position as possible, but I’m sure that I will not be perfect.

  • So far, we’ve laid out the following five large steps needed to retire:
  • Determine when to retire.
    • Determine the amount needed to retire.
  • Save that amount.
  • Prepare to transition from working to retirement.
  • Retire.

Currently we’ve been working through step 2 by breaking it into the following subsections.

  • The 4% rule of thumb
  • Other withdrawal rates
  • Other withdrawal strategies
  • Length of retirement (and sequence of return risk)
  • Inflation
  • Asset Allocation
  • Different types of investment strategies (rentals, stocks, ect.)
  • Other expenses
  • Visualizing retirement

Last time we, although I did not realize it at the time I wrote this (insert link) post, we talked about Visualizing Retirement. This time I thought we would summarize the entire section of considerations on when and how much you need to retire. This will be more of an opinion peice

Disclaimer

As with most things on this site, I am not a financial advisor nor another form of expert. Everything below should be taken as opinion. Always consult with your financial advisor before making changes.

When to Retire

The first step of this process is when you want to retire. If you’re like me, that would be next week. But that isn’t realistic for me, so I have to adjust my goals. This number will change as your life changes, be it goals for what to do in retirement change or something else. So taking a wide swing that feels realistic.

When I first started working towards FIRE, 30 was my goal. I’ve since adjusted that up to 35 due to a variety of reasons. For you, it may be 29 or it could be 80. Part of it depends on what you mean when you say retired.

How do you figure out How much you need to Retire?

We talked a lot about different retirement withdrawal strategies, from some kind of guardrails strategy to a more constant withdrawal strategy using a fixed rate.

When early on in planning, about a decade or more from retirement, it makes sense to take something like a constant withdrawal rate (4% rule, 3.5% rule, etc.). This lets you get a ballpark of what you need. 

For instance I use 3.5% for my planning right now. So for my goal of having $48,000/yr in spending, I can quickly calculate how much I need (48,000/0.035) at around $1,372,000. I usually round this up to $1,500,000 just to keep it a round number. Maybe that will handle inflation too.

As I get closer to this number, I can start considering other strategies such as a guardrail strategy or variable withdrawal rate strategy. Depending on how lean my retirement is going to be, these different strategies may be more or less appropriate for you as an individual.

Length of Retirement

Part of the question on how much you need is how long you’ll be retired for. My advice for someone taking a 60 year retirement versus a 10 year retirement are radically different.

There are a lot of ways you can estimate your retirement length. I usually just use an actuary table to get a ballpark. For me that comes in somewhere in my mid-to-late 80s. I then add some adjustments for family history, lifestyle, and unknowns such as medical improvements. For me I usually adjust this up to around 95. So it I retire at 35 and live to 95 that means I need my money to last for 60 years.

The longer your retirement, the more conservative I encourage one’s approach to be. Your investments have to do a lot more heavy lifting to do. The 4% rule has a 95% chance of survival over a 30 year period. This begins to drop off as time increases. Using cfiresim (link) it comes in at around a 79% success rate (with some variation depending on asset allocation) over 60 years with just a straight withdrawal rate.

For some a 79% chance of success is perfectly acceptable. That’s fine, for me it’s not. So I adjust down closer to a 3.5% withdrawal rate with has a 98% success rate per cfiresim. A little higher than I’d probably use, but with some rounding I come in around that value. For someone else they may want to push it even lower, although we could never have a truly 100% success rate. Of course part of this can be due to your asset allocation as well.

Another thing we talked about in this section was the sequence of returns risk. In short, sequence of returns risk is that an extended or severe enough downturn early enough in retirement could strain a retirees portfolio too much, causing them to not be sustainable long-term. We also discussed some ways to avoid sequence of returns risk as well as when we talked about different withdrawal strategies.

All About Investments

Now that you have a goal amount you also need to consider what vehicles this money is in. If you keep a pile of $1,000,000 in your house, you will run out before you die. It needs to be invested in some way so that it makes money for you.

There are many ways one could choose to invest their savings.

Often this takes the form of stocks and bonds. Commonly in the form of index funds.

If one does go the stock market route, there are a variety of different strategies one could use. Ranging from 100% stocks (a 100/0 portfolio) to 100% bonds (0/100 portfolio) and everything in between.

The higher the stock allocation in a portfolio the higher expected returns. But this higher return is offset by risk. This allocation can also change over time. If you have the appetite for it, you can have 100% stocks while saving for retirement and then shift that to a 60/40 portfolio (or something else) as you approach retirement.

What your asset allocation is can also affect your planning withdrawal rate or other strategies. For instance the numbers I pulled from cfiresim earlier on the 4% and 3.5% withdrawal rates used a 75/25 allocation. The probabilities would be different and that may affect your other strategies such as the guardrails you may employ if you go that route.

Visualizing

The last part of this is visualizing retirement.

This can take a handful of different methods from the seasons of life approach, which is one I appreciate.

In short you lay out what you want to do in retirement (or before) and try and figure out when is best to do it. For instance, it’s easier to backpack across Europe sleeping in hostels when you’re in your 20s than in your 50s. I like this approach since you’re not just laying out a typical day or something like that. You’re also laying out at what point in your life that you’re doing that thing.

Once you’ve done that, you can ballpark the expenses a bit and compare it to what you have earlier for an FI number. You can then adjust your goals, such as retirement age or spending. Then run through these steps again. Retiring to something is the goal we should strive for after all. I run through this from time to time to see if I need to tweak my spending in retirement some.

Wrapping Up

That’s kind of a summary of the last few posts in this series. The most important part being that it creates a framework around several goals: when to retire, how much you need to save, what vehicles it needs to be in, and how that balances with the other goals in your life.

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