FYI: It's hard to plan for retirement, and one of the trickiest questions is: How much should I save?
The honest answer is: It depends. "The best-laid plans can be undone by a messy divorce, a disabling disease, or a stock market crash," Jonathan Skinner, a professor of economics at Dartmouth College, wrote in a study on the topic. Your future health-care expenses are almost impossible to predict, for example, especially as Congress considers big changes to the system.
Regards,
Ted
https://www.bloomberg.com/news/articles/2017-06-14/how-much-should-you-save-for-retirement
Comments
If nothing else, I'll remain consistent when savings and retirement withdrawal rate issues are discussed.
Please you Monte Carlo simulations to explore what-if scenarios and to inform a decision.
No decision is forever final because of all the uncertainties. Uncertainties are exactly what Monte Carlo simulations were designed to address. Many Monte Carlo codes are available on the Internet. One of the more flexible that I use is from Portfolio Visualizer. Here is the Link to it:
https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Give it a try. Before retirement, explore the potential end wealth during the savings segment of retirement planning. After retirement, numerous planning options can be also explored using a second set of what-if possibilities. The end wealth simulator provides a portfolio survival probability. The composite of all these simulations allow for a better informed and wiser planning decision.
Whatever the results, repeated calculations will likely be needed as the situation matures and changes. And change it will!
The Monte Carlo tool was specifically formulated to explore any range of uncertainties. I do not apologize for being so committed to the decision making utility of this tool. I have greatly benefitted from using it. Like most anything else, the more you use it, the more comfortable you will become with its outputs.
Best Wishes
https://www.forbes.com/sites/andrewbiggs/2016/07/21/how-much-retirement/#7500aa4a4d28
I am a big believer in cheap debt in retirement, but that is a minority take to many, and in any case we have been over this umpteen times. It's chiefly a sleep-at-night variable. If I at 70 could refi again at low rate for 40y, I would.
@davidrmoran Why can't you?
Might well be. It's already the second longest (in case you measure greatness by age), and as of March is closing in on the second highest gain. Likely even greater in real terms since we've had low inflation for many years (though I haven't computed real gains).
Graphic: Post WWII bull markets, duration and gain
http://datawrapper.dwcdn.net/7HDT2/2/
You'll find other sources that state the bull markets ran longer (see graphic below), but they tend to ignore "minor" intervening blips like the 19.90% S&P 500 drop from July to October 1990, or the Aug 1956 to Nov 1957 22% drop.
Using Monte Carlo, at least the tools that you've been referred to, would seem to ignore this not insignificant fact that we're in nearly uncharted territory. In addition to disregarding the run up in equities, they would also seem to discount the the 35 year bull market in bonds. A multi-decade bond run is not a singular event, but unique when one considers how fast/far bond prices have risen, or alternatively how much rates have fallen:
The tools don't address your question because they don't seem to allow for the setting of preconditions; verily they are built on the premise that performance in one time period is independent of what came before.
Even if they did incorporate preconditions, there doesn't seem to be sufficient historical data to provide meaningful input for current conditions. The preceding eight years have been part of the same bull market. That's only happened twice before: 1998 when the 1990-2000 bull also hit the eight year mark, and 1999 when it hit its 9th birthday.
Monte Carlo tools strike me as better suited to playing with hypothetical long range outcomes than ascertaining real world (context sensitive) possibilities.
As to the question at hand, your guess is as good as mine. If you're looking long term, the rule of thumb is that there's no better time than now to invest, though in bonds I'd be more conservative. Best case for principal protection is that rates don't rise (currently 2.16% 10 year), and the risk isn't worth the 80 basis points over cash. Worst case, rates rise and you lose principal.
Personally, I've never been fond of real estate as an investment. Historic returns have been lower than for US equities, though real estate could help meet your objective of diversification.
Note the huge differences in estimated percentage saving requirements from even the experts quoted in the Forbes reference that Davidrmoran provided. Those estimates reflect the uncertainties embedded in any and all such projections. Making any projection is extremely hazardous duty.
That's precisely why Monte Carlo codes are so useful. Thousands and thousands of individual scenarios can be quickly examined for any number of alternate assumptions. Since these assumptions are somewhat arbitrary, no definitive answer is ever really possible. What is generated is a feeling for the retirement survival sensitivity to the various postulates. Some will greatly impact survival rates; others will only weakly influence outcomes. That's good to know.
A flexible Monte Carlo code allows a user to explore uncertainties easily and quickly. The Monte Carlo code that I referenced earlier offers much flexibility with its numerous input options in terms of drawdown schedules and potential income returns based on a portfolio's asset allocations. All these are easily changed.
No simple rule of thumb reliably exists for drawdowns. The problem has far too many variables and return uncertainties that are timeframe and user specific.
I again encourage those interested in exploring retirement withdrawal rates and survival odds to consider using a Monte Carlo tool. You'll know much more after that experience.
In my case, I decided that a 95 % portfolio survival probability would be acceptable for a slightly conservative returns likelihood based on historical market records. I achieved my target goal after a few simulation what-ifs. Further Monte Carlo simulations provided me even more comfort when I discovered that rather modest reductions in my drawdowns after two negative return years would greatly improve my portfolio survival odds. It's always good to be flexible.
Best Wishes
A couple things. I think your impulse to “cap” your contributions, and squirrel away surplus savings elsewhere is WISE. Employer plans are “captive” with the plan administrator and often limit your options.
You mentioned investing in rentals. I’ve not the ‘skill-set’ or interest to invest in real-estate directly. However, for those who do – meaning you invest sweat-equity along with your cash – I believe it can be very lucrative. A caveat: investing in real estate directly is like opening your business (real estate rentals IS a business!) So really acquaint yourselves with common problems – so you can avoid them. You may wish to consider joining a real-estate mentoring group to get a taste of what the possible pitfalls (and opportunities) are out there. A local group in my area is “lifestyles unlimited”, though I am certain there are many other such groups.
Even if you choose to NOT go the rental-investment route, I think it make sense to have tax-diversification for one’s savings if possible. That means have some in tax-deferred vehicles (401k, IRA), some in tax-free (Roth) and some in taxable. Taxable accounts, while taxable, have advantages:
- The Feds don’t penalize you for removing monies from taxable accounts. So, unlike IRAs and qualified plans, you are free to do with your money what you will, without “Uncle” putting roadblocks in your way. And for anyone with a moderate-or-higher amount of assets, it’s prudent to ‘self-custody’ some portion of one’s assets (IMO).
- Uncle Sam is agreeable to subsidizing investment losses which you realize (when the Bear returns) in taxable accounts. Not so in deferred accounts.
- I believe too, that there may be estate-planning considerations, especially involving trusts, which may make it attractive to have some of your assets outside a qualified plan. Estate-planning issues seem trivial at age 30; but as one gets older, they will grow in importance (assuming one has amassed a large estate).
- As you approach/enter retirement, (again, a long ways away for you) having monies in a taxable account (meaning you have already paid the taxes for all realized gains) provides one with ‘optionality’ of timing, as to when/where you will draw down your deferred accounts (which will be FULLY TAXABLE at the then-prevailing tax rate).
WOW! – Am running way long. But, bottom line, I think it’s a good idea to balance qualified-plan contributions with savings in taxable accounts. JMO. Good luck.