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When Can You Actually Retire?


Every $50,000 in investments allows you to retire an extra year earlier.

This past week some comments by AIG (AIG) CEO Robert Benmosche went viral as he said he expects the average retirement age to jump to age 80. This just added fuel to the fire of fear that many in their 50s and 60s already have. Case in point: More than half of all baby boomers fear running out of money in retirement more than they fear death. This is according to a study from Allianz Life. Yet nearly 36% of these same people do not know how long their funds will last once they do retire.

So when can the typical person actually retire comfortably today? Let's take a look at an example couple. I ran several scenarios in our retirement planner to figure out when this couple can retire without running out of money until they are 95 years old. Here were my assumptions:

Inflation (CPI) 3.0%
Current Age of Both People 50
Social Security at age 67 (combined) $35,000 per year
Average Savings Rate 4% on Income of $100,000
Total Investment Balance Today (all in IRAs) $500,000
Recurring Annual Expenses in Retirement $40,000
Investment Mix 50% Equities 50% Treasuries
Return Assumption Equities 6% per year
Return Assumption Treasuries 1% per year

I found that in order for this couple to not run out of money until they are 95 years old, they would have to keep working until they are 66. At this point they would have $634,000 (in today's dollars) saved for retirement. But what happens if we decrease the amount they have saved already? I ran multiple scenarios changing the amount they have today and solved for when they could retire given these amounts. The results are presented below in a grid.

Value Of Investments Today Age When Couple Can Retire
(Without Running Out
Of Money Until 95)
$500,000 66
$450,000 67
$400,000 68
$350,000 69
$300,000 70
$250,000 71
$200,000 72

The results show a nice linear relationship between the value of investments held today and when this couple can retire. For every $50,000 we reduce the value of their investments today, they need to retire one year later.

Some may have noticed that 50% of this couple's portfolio is invested in treasuries earning a return well below the rate of inflation. As I pointed out recently here, inflation can simply ruin a portfolio's value over time. It is incredibly important to at least break even with inflation. So I moved the 50% of Treasury funds they own into a 50/50 combination of Treasury-Inflation Protected Securities (TIPs) and a portfolio of solid dividend paying stocks with a history of consistent dividend growth, such as Johnson & Johnson (JNJ), Procter & Gamble (PG), Coca-Cola (KO), and Wal-Mart (WMT). I assumed no increase in the prices of these dividend payers, but I did assume they would continue to increase their dividends at their five year growth rate.

Here is the new grid showing when this couple can retire:

Value Of Investments Today Age When Couple Can Retire
(Without Running Out
Of Money Until 95)
$500,000 64
$450,000 65
$400,000 66
$350,000 67
$300,000 68
$250,000 69
$200,000 70

Again we see a nice linear relationship between the value of their investments and when they can retire. It's no surprise that this couple can retire two years earlier if they simply move funds out of low yielding Treasuries and simply beat inflation by a small margin.

There are many ways to push out funds in retirement, especially if the person or couple has at least a decade before they retire. Beating inflation should be one of the first goals people have when planning for retirement. After that they can look at pushing out the age when they retire, cutting back on expenses, and optimizing Social Security payments by delaying when their first payment occurs.

Instead of listening to people like Robert Benmosche and other talking heads, it is of utmost importance to at least have an idea of when your money will run out. That way you can have a more accurate picture of when you can retire and what you should do today to change the situation.

Editor's Note: Douglas Carey is a regular contributor to Minyanville's blog.
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