Pre retirement savings

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Pre retirement savings

Post by Guest » Sat Sep 06, 2008 6:13 am

I think I am the person who sent the emails "Problems running the planner with older version of MAC OS". I did run into problems with my old computer when I first tried to use FRP, but have recently replaced it with a newer one. Now that I have the current version of Mac OS, the problem has disappeared.

My question is, how do I take into account the ceiling on annual contributions to my tax-deferred retirement savings plan and Roth IRA. The ceiling is a dollar amount and does not necessarily increase every year with inflation. How do I input a savings amount in actual dollars rather than today's dollars, in the years leading up to retirement?

Thanks for creating this tool!

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Pre retirement savings

Post by jimr » Sat Sep 06, 2008 10:01 am

Hello and thanks for posting.

Unfortunately, the planner doesn't provide an easy way to accomplish what you'd like to do.

The only approach that I can suggest would be to use "additional inputs" and break the contributions into several 5 year periods. Set it up so the contributions get smaller (by the inflation rate compounded over 5 years) in each subsequent 5 year period. This would be less precise than an annually reduced real contribution, but should get you in the ballpark.

Hope that helps somewhat.

Jim

kyounge1956
Posts: 6
Joined: Sat Sep 06, 2008 5:49 am

Re: Pre retirement savings

Post by kyounge1956 » Sat Sep 06, 2008 5:18 pm

Thanks.

Just to make sure I understand what I am seeing on the screen, does the thin black line in the graph represent the number of portfolios that were exhausted in a given year? I am viewing the results as "show failures (number of times money ran out)".

Also, I have another unusual factor to take into account in my inputs. My employer's pension plan has a 1.5% per year adjustment with a guarantee that it will never fall below 65% of its original purchasing power. I calculate that with 3% annual inflation, it will be at 65% of the original purchasing power after 29 years of retirement. I can put in the original pension as an additional amount with no COLA, starting at retirement and continuing for 29 years, which will slightly understate the actual amount. I don't mind erring a bit on the conservative side, but if there is a way to reflect this 1.5% annual adjustment, I'd like to know it. Once the pension is fully "shrunk", how do I adjust the amount in year 30 & up to reflect the 65% guarantee? Suppose (for easy calculation) the original amount was $10,000 a year. Would I put in an additional amount of $6,500, *with* COLA, starting in year 30 and continuing to the end of the plan?

Thanks

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Pre retirement savings

Post by jimr » Sat Sep 06, 2008 10:43 pm

kyounge1956 wrote: Just to make sure I understand what I am seeing on the screen, does the thin black line in the graph represent the number of portfolios that were exhausted in a given year? I am viewing the results as "show failures (number of times money ran out)".
That's correct. You can also see this in numeric form on the "detailed view" tab in the last column. The number of times the simulation ran out of money in each year is shown in parenthesis in the probability of success column. This number is the number of failures out of 10,000 simulation runs.
Once the pension is fully "shrunk", how do I adjust the amount in year 30 & up to reflect the 65% guarantee? Suppose (for easy calculation) the original amount was $10,000 a year. Would I put in an additional amount of $6,500, *with* COLA, starting in year 30 and continuing to the end of the plan?
That makes sense to me. You'd put in an income of $10,000 without cola for the first 30 years of retirement. That stops and is replaced by the $6,500 income (with cola) starting in year 30 of retirement.

Jim

kyounge1956
Posts: 6
Joined: Sat Sep 06, 2008 5:49 am

Re: Pre retirement savings

Post by kyounge1956 » Tue Sep 09, 2008 2:49 am

I get confused converting everything to today's dollars :? I was going to ask if the amounts (for contributions to my tax-deferred plan and my Roth) should get larger or smaller, but I see you have answered that above. But if you're taking requests for future versions, how about "no COLA" versions of tax-deferred and tax-free savings? It would be really handy if the Planner could accept inputs consistent with the fact that, once you have reached the maximum allowable annual amount, Uncle Sam does not let you increase your contributions to keep even with inflation.

One more question, when entering Social Security income, is the amount shown on the estimate mailed out every year the number I will see on my check when I start to receive benefits, or should I consider that a "purchasing power" number and assume that my future check will buy the same amount in the future as the dollar amount on the estimate will buy now?

Thanks

P.S. Do you know where I can find out what the maximum contribution to a 457 plan (gov't employees' equivalent of a 401K) will be next year?

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Pre retirement savings

Post by jimr » Tue Sep 09, 2008 9:45 am

Hello,

I agree that additional no-cola options would be good to have and they are on the list for a future version of the planner.

I did a quick google search for retirement plan contribution limits and I found this site. I can't vouch for the accuracy of their information, but they provide a nice set of tables for each plan type (ira, 401k, 403b, 457). For people over 50, the limits generally are indexed for inflation, at least for the time being.

Jim

kyounge1956
Posts: 6
Joined: Sat Sep 06, 2008 5:49 am

Re: Pre retirement savings

Post by kyounge1956 » Wed Sep 10, 2008 11:56 pm

I think I am still doing something wrong. Here is the general picture. My employer has a defined benefit pension (described above). I am currently saving in both a tax deferred plan at work and a Roth IRA. When I retire, I plan to sell my current residence, move somewhere less expensive, and add the difference in house costs to my retirement nest egg. I also plan to work part time from retirement date until age 70 (unless my portfolio does so well I don't need to).

I have been running some scenarios based on retiring 7 years from now and getting about the same percentage of success as a financial planner I consulted recently—at least as close as could be expected from two different programs—within 5 percentage points or so. Today, just for fun I ran a scenario based on retiring in 3 years, and my probability of success came out much higher than the ones where I retire in 7 years, which surprised me tremendously. I've thought of a couple of reasons that this result might actually be correct (the money I plan to keep from sale of my house has longer to grow the earlier I retire and the pension keeps up with inflation for the last 15 years of the scenario instead of only the last 12). But it seems too good to be true that I would come out better by retiring sooner, with a considerably smaller pension, than by working for another several years.

Where I think I went wrong is my budget number. I did an estimate of how much money I would need for basic living expenses after retirement, based on what I actually spent in 2004. To calculate how many of today's dollars would be required for equal purchasing power, I need to multiply it by (1 + inflation rate) to the fourth power—so if I needed $10,000 in 2004, I now need $11,475.20 (assuming 3.5% inflation).

My question is, do I use this same number ($11,475.20) for my income requirement when I'm retired, regardless of my retirement date?

Thanks!

P.P.S. I called up the IRS and the 2009 maximum contributions to tax deferred plans and IRAs are not available yet. The person I talked to said to start looking at irs.gov around the middle of next month and there should be draft versions of the relevant publications available.

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Pre retirement savings

Post by jimr » Mon Sep 15, 2008 11:39 am

Hello again,

The general methodology that you've described for how you "inflated" your 2004 expenses sounds reasonable to me. In general, you should put all values into the planner in "today's value" dollars, so as you indicated, you'd put the same value in for expenses whether you retire in three years or seven years.

It's hard to tell what might be causing the unexpected results you're seeing. If you email me at info@flexibleRetirementPlanner.com with some screenshots of the main input page and the additional input page, I'd be glad to take a look. I'd suggest you alter some of the input values (the same for both cases) for privacy reasons.

To do a screenshot on windows, you can press the keys Alt + PrtSc at the same time. Then you can paste the image into an email, or start up Paint and paste it into there. If you use paint, save the file as a jpeg so it's smaller and easier to email as an attachment.

Jim

kyounge1956
Posts: 6
Joined: Sat Sep 06, 2008 5:49 am

Re: Pre retirement savings

Post by kyounge1956 » Fri Jul 24, 2009 12:42 pm

jimr wrote:Hello again,

The general methodology that you've described for how you "inflated" your 2004 expenses sounds reasonable to me. In general, you should put all values into the planner in "today's value" dollars, so as you indicated, you'd put the same value in for expenses whether you retire in three years or seven years.

It's hard to tell what might be causing the unexpected results you're seeing. (snip)

Jim
I don't remember now what I put in when I ran those scenarios, but I think probably I didn't use the same number for expenses, which would probably explain the results. Since then I've thought of a workaround to cope with my confusion about how to convert inputs to today's dollars.

I've been trying to figure out my "magic number" (how much I need saved to retire at age X). So I input my proposed retirement age as my current age, my expenses converted from 2004 dollars to today's, and then used "Additional inputs" to add the face value of my pension (including COLA and no COLA portions as above), part time income, a lump sum to be added to savings from sale of my house at the time of retirement etc. Then I tried different values for a tax-deferred portfolio until I got a satisfactory percentage of successes.

Using this method tells me I need a lot less saved to retire at 59 than at 56, which I expected because my pension will be larger and the portfolio won't have to last quite as long. Is there any reason that use of this fake-out would produce inaccurate results?

Thanks!

P.S. Sorry if this is a duplicate, I thought I had sent the question but it didn't appear so I'm sending it again.

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