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The New Math Of Saving For Retirement May Boil Down To This One, Absurdly Simple Rule
FYI: “Eventually, I’ll stop working.” Most of us think that and know it will happen, but millions of us worry whether we’re saving enough to live on once we do. We want to know: How much of my earnings should I set aside? What’s the magic number? 3%? 5%? 10%? More?
Retirement planning is a challenge because it is complex with many uncertainties. One absurdly simple rule is a dream; it just isn't so.
Given the complexity and uncertainties is a situation that almost demands a Monte Carlo simulation approach to provide some outcome ranges and probabilities. The industry has recognized this and has responded with many such codes that do the job. The best of these codes are easy to use and yield quick and informative predictions.
One such code is provided by Vanguard. Here is the Link:
Please give it a try. Other codes can be located by simply searching for retirement Monte Carlo simulators. Answers will vary. That is the nature of projecting future outcomes. Portfolio survival is always the target goal. Vary parameters to explore their impact on portfolio survival odds. You can improve those odds and these codes give you a rough roadmap. Good luck to everyone.
Best Regards
I provided the Vanguard reference because of its simple input requirements. Here is yet another Link to a Monte Carlo code provided by Portfolio Visualizer that has a more complete set of input demands:
You might give this tool a few tests. Yes results vary, but the trends are your friends when exploring possible outcomes. Indeed, good luck is a major part of the equation.
The rule given, to save 10% (including employer contributions) for retirement, is a bit simplistic, as even the writer acknowledges:
Of course, there will be times when you’re between jobs or you need your money for a pre-retirement-age emergency. In those cases, ...
Of course, everyone’s situation is and will be different, so 10% is a guideline, not a guarantee. (Furthermore, if you start later in life, 10% won’t be nearly enough.)
Still, one had better have a single number in mind. Otherwise, your employer is going to pick one for you when it automatically enrolls you in its 401(k). How do the tools you suggested help a 25 year old determine how much to set aside for retirement?
The column references an EBRI model that "estimates the risk of running out of money after retirement by taking into account many more factors than the usual online calculator: contributions, market changes, Social Security benefits and salary growth, as well as a range of health outcomes and longevity prospects."
It's a little ironic, criticizing the idea of identifying a target savings rate number as too simplistic, while praising a tool for its simplicity that essentially says: for this asset allocation and retirement spending rate, here's the magic dollar number you need to survive.
As I've said before, simulation tools (regardless of the underlying technology or simplicity) are better than a stick in the eye. By the same token, so is the suggested 10% savings rate guideline.
The Monte Carlo simulators that I referenced allows a user to examine the sensitivity of possible outcomes to various assumptions and portfolio strategies. They permit a user to play what-if scenarios quickly by doing thousands and thousands of restricted scenarios. Some portfolio adjustments strongly influence final results while others are merely noise. These tools provide estimates and identify what is significant and what is not. Please use them to help your long range planning.
The article isn't too bad, as far as facts and figures. Perhaps it will cause a few readers who stumble across such a write to be more involved with their financial future.
So, before folks run to a "SIMULATOR" to determine the yet unknown they first must have a "STIMULATOR". Without a stimulator to help with motivation to save, there will be no need for the simulators.
So, let us count the ways. I've been pushing folks for 40 years to invest some of their wages; including the current campaign of setting up minor ROTH IRAs. The "stimulator" has been in place with simple facts and figures. The results have always been disappointing.
Boomers always seemed to want other stuff for "today's wants". Their children were not much different. In both of these groups, at least most were married and dual income households. But, the remaining free monies for investments (401k, 403b, simple IRA and then Roth IRA) were few. The overwhelming response was the "markets" were too complex and they were not willing to use small pieces of their time to learn. More recently, being since the market melt; finds remaining damage to household finances and problems finding jobs that pay a decent wage. This current period also contains those who do not trust market investments.
So, there are those households who have the monetary ability to invest; but still do not take any actions.
Ten percent of base pay seems are reasonable and easy path with which to begin; but I still don't see enough takers among educated and well paid 50 year old folk today. Pretty sad and frustrating to and for me.
I wish something like a “10% Rule” was common knowledge when I started working in the 1970s. Nobody talked about saving for retirement then, and the stock market was considered a risky gamble. You could earn 12% interest from a money market account and my friends were more concerned about buying a car or house before prices went up again.
I didn’t start saving for retirement until my mid-30s when my employer started a 401k Plan. I contributed the amount that my employer would match, probably about 3% of my salary. I invested it all in cash and bonds because— again— stocks seemed like gambling. My employer provided no guidance or education about investment options, diversification, etc. Fortunately bonds did well during that period and even money markets paid 5-6%.
I finally got educated about investing when I left that job and rolled over my 401k and pension to an IRA. I was about 40 by then and immersed myself in financial literature. I invested the bulk of my savings in a diversified collection of stock funds, with a few bonds for safety, and never looked back. I increased my savings to about 10% of my salary including the employer match, and it all turned out OK in the end. For the last 20 years of my career, my employer had a pension but I kept contributing to a 401k, so my savings were closer to 15-20% of my salary— through my own ignorance because I didn’t realize that the pension was equivalent to saving about 10%.
Bottom line, for young workers or older ones who aren’t saving yet for retirement, the 10% Rule is a pretty good guideline for getting someone started in investing.
From a slightly different perspective: You can’t determine how much to set aside until you figure out where you’re heading after retiring. I agree in playing with different simulators as an educational experience. I sure did in the last 2 or 3 years before jumping ship and retiring, and also for 2 or 3 years after retiring as things were still falling into place. I did a lot of experiments with compound interest calculators and with the numerous suggested allocation models that existed online back than. Most fund companies had one of their own or had access to one. American Century’s proved especially helpful to me. Surprisingly, back than suggested allocations for those in or near retirement differed quite markedly from model to model. So in the end, a lot was left to the individual to work out. One suggestion for those facing retirement in the near future is to “look under the hood” at some of the “funds of funds” (like at T. Rowe) and observe how their managers allocate various assets for different life scenarios (generally expressed in a range of options from conservative investor to aggressive investor).
The simulators mentioned by both the article and @MJG and others all sound very useful in this regard. After you’ve been retired for several years you should have a good handle on how you’re faring, so I think simulators become somewhat unimportant. Rule #1 - Don’t quit a good paying and relatively secure job to transition into retirement unless you’ve run some simulations and are confident you have “all your ducks lined up”. Generally it’s better to err on the side of working longer and spending less in retirement than the other way around.
There’s much you cannot simulate ahead of time: Will you still be healthily enough or feel like working part time during retirement? What will taxes be? Will you or your spouse encounter unexpected health expenses? What will the inflation rate be? What type of returns will bonds and equities be yielding during retirement? What will your equity stake in your home be worth? How high will interest rates be if planning to use some of your home equity? What standard of living will you be comfortable with? And the “granddaddy” of all - How long will you live? Still, the unknowns persist. Few could have foreseen the financial collapse of ‘07-‘09 and the long term consequences for financial markets and investors. And how many models work with both the Traditional IRA and the Roth IRA (as well as a combination of both) during retirement to anticipate your outcomes? There’s a big difference between the two in how your standard of living eventually evolves.
I think a lot of simulators are “bottom up” in approach. They look at what your needs will be and than attempt to arrive at an investment strategy during retirement. I tend to focus more on a “top down” approach. With that approach one pays close attention to shaping an all-weather portfolio and financial plan that has a good chance of keeping pace with or outrunning inflation. That means that if inflation is running at only 1-2% during certain retirement years, you’ll be earning less on your investments. However, should it run at 7, 8 or even 10% your investments will by and large keep pace and protect you as much as possible. Caveat: Don’t trust the greatly understated government inflation numbers. It’s yourinflation (as actually experienced) that counts. Not theirs.
@MJG - you were once known for rather verbose submissions. I assure you I’ve greatly outdistanced anything you ever achieved in that regard with this rambling (possibly nonsensical) one.
For some here, posting any comment in Standard English with more than one paragraph is a major challenge. They tend to be a bit envious of some others.
In no way was my closing remark intended to criticize or embarrass @MJG. I find him to be exceptionally literate. He’s able to convey more thought in a single sentence than some others do in a whole paragraph (should they attempt to compose one). I respect his commitment to thoughtful dialogue and his emphasis on fact and reason - though we may disagree on substance.
In recognition that some who hang out here appear to be encumbered by very limited attention spans, I’ll attempt to incorporate fewer words and more videos and music into my posts.
@MFO Members: "I’ll attempt to incorporate fewer words and more videos and music into my posts" I see this lower tier MFO Member is finally getting religion ! Amen !!! Regards, Ted
@MFO Members: "I’ll attempt to incorporate fewer words and more videos and music into my posts" I see this lower tier MFO Member is finally getting religion ! Amen !!! Regards, Ted
For you @Ted. California wine from Senoma County. Hope you comprehend.
Comments
Retirement planning is a challenge because it is complex with many uncertainties. One absurdly simple rule is a dream; it just isn't so.
Given the complexity and uncertainties is a situation that almost demands a Monte Carlo simulation approach to provide some outcome ranges and probabilities. The industry has recognized this and has responded with many such codes that do the job. The best of these codes are easy to use and yield quick and informative predictions.
One such code is provided by Vanguard. Here is the Link:
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
Please give it a try. Other codes can be located by simply searching for retirement Monte Carlo simulators. Answers will vary. That is the nature of projecting future outcomes. Portfolio survival is always the target goal. Vary parameters to explore their impact on portfolio survival odds. You can improve those odds and these codes give you a rough roadmap. Good luck to everyone.
Best Regards
I provided the Vanguard reference because of its simple input requirements. Here is yet another Link to a Monte Carlo code provided by Portfolio Visualizer that has a more complete set of input demands:
https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
You might give this tool a few tests. Yes results vary, but the trends are your friends when exploring possible outcomes. Indeed, good luck is a major part of the equation.
The column references an EBRI model that "estimates the risk of running out of money after retirement by taking into account many more factors than the usual online calculator: contributions, market changes, Social Security benefits and salary growth, as well as a range of health outcomes and longevity prospects."
It's a little ironic, criticizing the idea of identifying a target savings rate number as too simplistic, while praising a tool for its simplicity that essentially says: for this asset allocation and retirement spending rate, here's the magic dollar number you need to survive.
As I've said before, simulation tools (regardless of the underlying technology or simplicity) are better than a stick in the eye. By the same token, so is the suggested 10% savings rate guideline.
The harder part is what does one do with that "10% set-aside". Just leaving it molder in a savings account isn't going to help much.
The Monte Carlo simulators that I referenced allows a user to examine the sensitivity of possible outcomes to various assumptions and portfolio strategies. They permit a user to play what-if scenarios quickly by doing thousands and thousands of restricted scenarios. Some portfolio adjustments strongly influence final results while others are merely noise. These tools provide estimates and identify what is significant and what is not. Please use them to help your long range planning.
Thank you all for your insightful inputs.
Best Wishes
So, before folks run to a "SIMULATOR" to determine the yet unknown they first must have a "STIMULATOR". Without a stimulator to help with motivation to save, there will be no need for the simulators.
So, let us count the ways. I've been pushing folks for 40 years to invest some of their wages; including the current campaign of setting up minor ROTH IRAs.
The "stimulator" has been in place with simple facts and figures.
The results have always been disappointing.
Boomers always seemed to want other stuff for "today's wants". Their children were not much different. In both of these groups, at least most were married and dual income households. But, the remaining free monies for investments (401k, 403b, simple IRA and then Roth IRA) were few.
The overwhelming response was the "markets" were too complex and they were not willing to use small pieces of their time to learn.
More recently, being since the market melt; finds remaining damage to household finances and problems finding jobs that pay a decent wage. This current period also contains those who do not trust market investments.
So, there are those households who have the monetary ability to invest; but still do not take any actions.
Ten percent of base pay seems are reasonable and easy path with which to begin; but I still don't see enough takers among educated and well paid 50 year old folk today.
Pretty sad and frustrating to and for me.
Good evening,
Catch
I didn’t start saving for retirement until my mid-30s when my employer started a 401k Plan. I contributed the amount that my employer would match, probably about 3% of my salary. I invested it all in cash and bonds because— again— stocks seemed like gambling. My employer provided no guidance or education about investment options, diversification, etc. Fortunately bonds did well during that period and even money markets paid 5-6%.
I finally got educated about investing when I left that job and rolled over my 401k and pension to an IRA. I was about 40 by then and immersed myself in financial literature. I invested the bulk of my savings in a diversified collection of stock funds, with a few bonds for safety, and never looked back. I increased my savings to about 10% of my salary including the employer match, and it all turned out OK in the end. For the last 20 years of my career, my employer had a pension but I kept contributing to a 401k, so my savings were closer to 15-20% of my salary— through my own ignorance because I didn’t realize that the pension was equivalent to saving about 10%.
Bottom line, for young workers or older ones who aren’t saving yet for retirement, the 10% Rule is a pretty good guideline for getting someone started in investing.
The simulators mentioned by both the article and @MJG and others all sound very useful in this regard. After you’ve been retired for several years you should have a good handle on how you’re faring, so I think simulators become somewhat unimportant. Rule #1 - Don’t quit a good paying and relatively secure job to transition into retirement unless you’ve run some simulations and are confident you have “all your ducks lined up”. Generally it’s better to err on the side of working longer and spending less in retirement than the other way around.
There’s much you cannot simulate ahead of time: Will you still be healthily enough or feel like working part time during retirement? What will taxes be? Will you or your spouse encounter unexpected health expenses? What will the inflation rate be? What type of returns will bonds and equities be yielding during retirement? What will your equity stake in your home be worth? How high will interest rates be if planning to use some of your home equity? What standard of living will you be comfortable with? And the “granddaddy” of all - How long will you live? Still, the unknowns persist. Few could have foreseen the financial collapse of ‘07-‘09 and the long term consequences for financial markets and investors. And how many models work with both the Traditional IRA and the Roth IRA (as well as a combination of both) during retirement to anticipate your outcomes? There’s a big difference between the two in how your standard of living eventually evolves.
I think a lot of simulators are “bottom up” in approach. They look at what your needs will be and than attempt to arrive at an investment strategy during retirement. I tend to focus more on a “top down” approach. With that approach one pays close attention to shaping an all-weather portfolio and financial plan that has a good chance of keeping pace with or outrunning inflation. That means that if inflation is running at only 1-2% during certain retirement years, you’ll be earning less on your investments. However, should it run at 7, 8 or even 10% your investments will by and large keep pace and protect you as much as possible. Caveat: Don’t trust the greatly understated government inflation numbers. It’s your inflation (as actually experienced) that counts. Not theirs.
@MJG - you were once known for rather verbose submissions. I assure you I’ve greatly outdistanced anything you ever achieved in that regard with this rambling (possibly nonsensical) one.
Mistakes happen. I do slowly learn over time. Thank you for your succinct submission.
Best Wishes
Regards,
Ted
In recognition that some who hang out here appear to be encumbered by very limited attention spans, I’ll attempt to incorporate fewer words and more videos and music into my posts.
Regards,
Ted
Regards,
Ted
Sorry I didn’t have time this morning to edit my post down. Realize it was too long. Regards