Monday, July 10, 2006

Retirement financing

As my net worth, including my retirement "nestegg", had shriveled down to less than nothing over the past six years, I had cringed at even the thought of thinking about financing of my retirement. In fact, a few months ago I was resigned to the expectation that a meager monthly social security check was about all I had to look forward to. Since I have contributed enough in FICA over the years to be eligible for a payout, the Social Security Administration sends me an annual letter that says what my monthly check would amount to if I retired at age 62, 66, and 70. The amounts aren't very comforting, but they're not nothing either.

Now that I have a decent-paying full-time job and am putting a fair amount of money away in my Roth 401(k) retirement plan and other savings, it is actually sensible for me to realistically plan for the financing of my retirement. My preconceived notion was that this would be a hopeless task and that even at a maximal rate of savings I wouldn't be able to put away a big enough nestegg over the next 14 years to fund much more than a meager addition to my monthly social security check, but I was wrong. I worked up a detailed spreadsheet that shows that even with a meager annual investment return of 5% (i.e., T-bills), I would have enough saved by age 66 to last me until age 110. That once again assumes a meager annual investment yield of 5% and eating into principle just enough to sustain a payout that combined with social security would be enough to live in a modestly comfortfortable, but not extravagent lifestyle.

My model needs some enhancements, but at least shows that a semi-comfortable retirement is not entirely out of the question.

The additional factors I need to consider are:

  • Rate of inflation - real return verus nominal yield
  • Potential for raises and bonuses
  • Potential changes in Social Security benefit calculations
  • Reductions in SS benefits due to higher retirement distributions and investment income
  • Life expectancy in the face of progress in medical research
  • Potential for lower average investment yield due to any periods of low economic growth or deflation
  • The future of housing - how to project my current apartment rent and basic living expenses far into the future
  • The future of medical care funding and expenses
  • A budget that reflects my likely expenses and how they might differ from my current expenses (e.g., travel and entertainment)
  • Modeling of relaistic investment return, until retirement and during retirement
  • Whether to model to zero net worth at age 110 or to target a buffer amount of at least five years or target zero net worth at age 115.

My suspicion is that a lot of these factors will simply "net out" and that my current model is about as reasonable an approximation of a future expectation as any mere mortal could hope to achieve.

-- Jack Krupansky


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