How To Retire In 10 Years With A Million

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Let’s say you just have 10 years to retire. Maybe you just turned 50 and planned to retire by the time you are 60. Even if you like to work longer, let’s face it, it is not always possible. Life is full of surprises. At times, it could be a voluntary retirement offer that is difficult to refuse, while for some others it can be a forced early retirement. Whatever the scenario, even if you end up working much longer say until 65, it never hurts to plan for early retirement. Either way, if you are 50 or older and have not planned for retirement, it is not a good situation to be in. It’s probably the high time to work out a plan and put it into practice.

While thinking of retirement, there are two questions that need to be answered before you can even proceed. Both of these questions are inter-dependent to some extent and often are the most intriguing questions for most people who are not yet retired but plan to retire not too distant in the future.

  1. The first question that comes to mind is how much savings would be enough that could last comfortably for 30-40 years. Most people are living longer, but it also means that you need to plan for at least 30-40 years of retirement. It is better to plan for longer than running out of money in your 90s.
  2. The second question is about a good estimate of your expenses in retirement. One way that has been suggested over the years that you should plan for about 80% of your pre-retirement expenses. We think it is too high a target and actual expenses in retirement could be much lower. Obviously, one size does not fit all. The answer could vary from person to person; their spending habits and personal goals as well as financial means.

As we always do, we would use our hypothetical couple – John and Lisa – to illustrate the planning process. Let’s assume both John and Lisa are 50 years of age and wish to retire in 10 years at 60. It is always possible that they would change their mind in the future and may opt to work longer, but at least they want to be prepared. Their current savings are modest at $300,000 and mostly invested in 401K, and/or IRAs. Their current household gross income is $140,000 a year. They recognize that their current savings are not enough and they need to do some serious planning and make some tough choices if they hope to have a comfortable retirement starting 10 years.

John and Lisa currently carry a mortgage on their house and have 15 more years to repay in full. They have one child in college whom they are supporting. The first thing they do is to recognize the fact that the status quo will not be sufficient and they will have to make some sacrifices and cut down some of their discretionary spendings.

  • They decide that they will make some extra payment each month on the mortgage, so that they are able to pay off the house in 10 years instead of 15, by the time they retire. They will pay $300 extra every month to pay off the loan early.
  • They decide that they will not carry any car loans or credit card debt into retirement. They currently have one new car on the 5-year term loan. They will continue to make existing payments on this car. However, they will put away $200 a month for a future car so that they would not need to finance another car.
  • They also decide that they both will increase their current 401K contributions to 16% of their earnings until they retire. This will help boost their savings significantly and also reduce their current taxes.

John & Lisa‘s New Budget vs. Old

New Budget

(annual)

Old Budget

(annual)

1

House Mortgage

18,000

14,400

2

Prop. Tax & house expenses

12,000

12,000

3

401K contributions

22,400

8,400

4

Other payroll deductions

6,000

6,000

5

Income Tax (estimated**)

11,000

14,000

6

SS/Medicare

10,700

10,700

7

College Tuition

14,000

14,000

8

Car payment

4,800

4,800

9

Savings for future car

2,400

0

10

Food, groceries, and household

12,000

12,000

11

Total

113,300

96,300

12

Left for Misc. and discretionary expenses (140,000 – LineItem 11)

26,700

43,700

** The author is not a tax expert/consultant, this estimate is just to give a broad idea for the purpose of demonstration; the actual amounts could vary.

How Much Savings Are Enough?

John and Lisa want to tackle the first question first. However, to know the total savings requirement, they will need to know the answer to the second question on their expenses in retirement.

Estimation of Expenses in Retirement:

There are several ways to work out an estimation of expenses in retirement. However, we must keep in mind that we are talking about estimation and one must plan for 10-20% variation from year to year.

  • The simplest method is to make a list and add the likely expenses in retirement; however, one is likely to underestimate or overestimate some expenses. Furthermore, there is the possibility that you may forget to list some of the likely expenses entirely.
  • The second method may be to multiply your current gross income by some percentage like 70% or 80%. This is something many of the financial planners suggest. However, it is prone to overestimation (or underestimation in some cases).
  • Another method that may be more appropriate is to take the current household income and subtract all the current expenses that you will “not” incur in retirement. Also, add any additional expenses that you may have in retirement that you do not have currently; for example, there may be an increase in medical premiums/costs. Then, adjust this remaining amount for inflation for the number of years that are left prior to retirement. It basically means to figure out how much of the money currently goes into items that will no longer be needed. This method will ensure that you are able to maintain your current lifestyle into retirement.

This is what John and Lisa come up with:

  • They will no longer need to put 16% savings contributions into their 401K or retirement funds.
  • Their tax bracket may change to lower slab, so will need to account for that reduction.
  • They will not be putting any more money into Social Security/Medicare deductions, as they would not have any earned income.
  • Besides they will not have work-related expenses, like commuting, new clothing, dry-cleaning expenses, etc.
  • They should be done with kid’s college education which will cut down another $10,000 – $14,000 a year.
  • They will not have the house mortgage payments anymore (monthly mortgage $1,200 or $14,400 yearly).
  • They will not have the current medical premiums that get deducted from their paychecks; however, they will need to earmark higher medical premiums since they will not be eligible for Medicare until 65. It may be an option for one of them to work part-time until 65 so that they could get affordable and cheaper medical insurance plans thru’ the employment.

Total current gross earnings

Minus (-)

Current 401/IRA contributions

Social security/Medicare deductions

Reduction in Taxes, if any

Medical premium deductions

Any work-related expenses

Kid’s college expenses

Home Mortgage payments

Car payment

Plus (+)

Extra costs or premium for Medical Insurance.

John and Lisa use a Google spreadsheet (prepared by Financially Free Investor, available here) to run the numbers and come to a conclusion that nearly 60% of their current gross income goes to expense-items that they will no longer have or need in retirement. That means they would only require roughly 40% of their current income to support their existing lifestyle. Based on their current gross income of $140,000, it comes to $56,000 a year in today’s prices. However, due to inflation in the next 10 years (assuming an average 2% a year), they will require $66,000 a year. In addition, they plan to earmark an additional $800 a month (or $10,000 a year) for medical premiums/costs. So, they figure out that they will need roughly $76,000 a year to be able to sustain their current living standards. They round it off to $75,000 a year.

40% of the current Income:

Inflation-adjusted Amount (10 years later):

Plus Additional Medical Premiums in retirement:

$56,000

$66,000

$10,000

Total:

$76,000 a year

Rounded off

~= 75,000 a year

Revisit – How Much Savings Are Needed?

Once they have answered the question on their yearly expenses, John and Lisa could easily determine how much of the total savings they would need.

Looking at their income needs of $75,000 a year, on a conservative estimate of 4% withdrawal, they would need to save $1.9 million. This definitely looks like a very tall target considering their current savings of $300,000. However, they will have social security payments which should reduce their savings requirements. In fact, they have many options to consider:

Option 1: Both John and Lisa would delay taking the social security benefits until the full eligibility age of 66 years and 10 months. They both could work part-time (or one of them works full-time) for another 2 years until 62. They withdraw 6-7% income from their portfolios from 62-67 until they start taking the social security benefits, after which their withdrawal rate will drop significantly.

Option 2: One of them to work part-time until 65, which will help them reduce their medical premium/expenses significantly as well as bring some extra income. John withdraws SS benefits at 62, but Lisa delays it until she reaches the full retirement age of 66 and 10 months. From age 62-67, they could withdraw the rest of the income from their portfolios to supplement other income.

Option 3: John would withdraw Social security benefits at 62 but delay Lisa’s benefits until she reaches age 70. One of them would also work part-time until they get to 65. By doing this, they will be able to balance out the income needs along with compounding Lisa’s social security benefits to the highest payout possible. Besides part-time work income and SS payments, the rest of the income needs (may be roughly 3-4%) could be met from the portfolios.

Option 4: None of them works after 60. John would withdraw Social security benefits at 62 but delay Lisa’s benefits until she reaches age 70. They reserve 2-years expenses in cash to spend in the first two years of retirement. They withdraw 5-6% income from their portfolios from age 62-70. After that, the second SS benefits will kick in, and they will need to withdraw less than 4%.

Option-4 appears to be most challenging since they both will be fully retired at 60. At least, John and Lisa want to be prepared for this option. They would reserve two years of expenses in cash and withdraw roughly 6% from their portfolio from 62-70 years of age. Some folks will argue that 6% income is too high to withdraw. However, as it is demonstrated in a later section, it is for a limited window of 8 years, after which the withdrawal rate would fall to less than 3%.

Let’s consider Option-4 in more details:

Both John and Lisa retire at 60. They do not opt for part-time work (or it is not available). John will take SS benefits starting age 62. The approximate benefits are assumed to be $1,500 per month or $18,000 per year. Lisa will wait to withdraw SS benefits until 70. Due to delayed withdrawal, her benefits will be approximately $3,000 a month or $36,000 a year. They will reserve two years expenses (2*75 = 150K) in cash from their retirement portfolio.

By doing some reverse calculation, here is what they would need:

Annual Income need from age 62

$75,000

Less SS benefits (John):

-$18,000

Net income needed

57,000 (75,000-18,000)

Assumed income withdrawal

6%

Portfolio size needed

$950,000 (57,000/0.06)

Plus 2-years cash reserve for (60-62)

$150,000 (2*$75,000)

Total Portfolio size needed at age 60

$1,100,000

So, this couple will need $1.1 million at the time of their retirement at 60 years of age. They only have $300,000 today. But the good thing is that they are still working and have at least 10 years of working career. They have already decided to increase their 401K pre-tax contributions to 16% of their income, and along with the employer’s matching, they will likely be able to achieve the target. Any further rise in their income would also be put away to ROTH IRA accounts.

Investment Returns Simulations:

John and Lisa get to the task of planning how they could get to the target of $1.1 million in 10 years. In the first example, they assume that their investments would grow at a very steady rate of 8% a year for the next 10 years, while they contributed 16% of income every year along with employer’s matching (assuming 80% on first 6%). Also, assume that their salary grows an average of 2% every year.

Table-1:

Rate of growth

Growth

Contributions of 16% of Income

Year-End TOTAL

Year 0

Starting Capital ===============>

300,000

1

8%

24,000

29,120

353,120

2

8%

28,250

29,568

410,938

3

8%

32,875

30,025

473,838

4

8%

37,907

30,491

542,236

5

8%

43,379

30,966

616,581

6

8%

49,326

31,451

697,359

7

8%

55,789

31,946

785,094

8

8%

62,807

32,451

880,352

9

8%

70,428

32,965

983,745

10

8%

78,700

33,490

1,095,935

Ending Capital after 10 years =====>

1,095,935

With 8% steady growth rate, they almost hit their target of $1.1 million. However, the big question mark is 8% steady growth over 10 years. The above assumption of 8% growth every year would be just fine over 2 or 3 decades, but over 10 years it may or may not materialize. The market’s ups and downs from year to year can change the outcome. If history is any guide, it can vary greatly depending on how the markets do in the next few years. Let’s run some numbers for John and Lisa, from the past for historical perspective to see what is realistic.

We will consider every 10-year rolling period, starting from the year 1999; for example, 10-year rolling periods such as 1999-2008, 2000-2009, 2001-2010 and so on. We will assume the following three different scenarios:

  • The first case would be as if we had invested simply in S&P500.
  • The second scenario is if we had invested in a conservative mix of 70% in stocks, and 30% in Treasuries and bonds.
  • The third scenario is if we had invested in a conservative Risk-Adjusted Rotational portfolio.

Table-2: 100% Invested in S&P500

Starting Year at age 50

Ending Year at age 60

Starting Capital

Contribution to 401K each subsequent year

Ending Capital at the end of 10 years

1999

2008

300000

29120

500452

2000

2009

300000

29120

579899

2001

2010

300000

29120

696433

2002

2011

300000

29120

746867

2003

2012

300000

29120

965543

2004

2013

300000

29120

1075832

2005

2014

300000

29120

1122346

2006

2015

300000

29120

944800

2007

2016

300000

29120

1004970

2008

2017

300000

29120

1541616

2009

2018

300000

29120

1299805

Table-3: Invested 70% in S&P500, 30% in VUSTX (Long-term Treasuries)

Starting Year at age 50

Ending Year at age 60

Starting Capital

Contribution to 401K each subsequent year

Ending Capital at the end of 10 years

1999

2008

300000

29120

614519

2000

2009

300000

29120

641656

2001

2010

300000

29120

739870

2002

2011

300000

29120

833155

2003

2012

300000

29120

984861

2004

2013

300000

29120

1021231

2005

2014

300000

29120

1092509

2006

2015

300000

29120

922598

2007

2016

300000

29120

954069

2008

2017

300000

29120

1281363

2009

2018

300000

29120

1148683

As you can see from the above two tables if they had started their 10-year plan anytime between the years 1999 and 2002, they would be much behind their intended target. The 10-year rolling periods of 1999-2008, 2000-2009 and 2001-2010 were most undesirable as they had to bear two full-blown recessions/corrections and did not have enough time to recover from 2008 debacle. It is clear if John and Lisa had started the plan anytime between 1999 and 2002, there was no way they could have retired at the end of 10 years with the level of spending expenses they had planned. The only option would have been either to postpone the retirement for a few years until the markets recovered or to cut down on their lifestyle significantly.

The third scenario is if we had decided to invest in a “Rotational Risk-Adjusted” portfolio. Below are the results based on back-tested numbers for one of such strategies. This portfolio would rotate between S&P 500 fund and the treasury/bond funds. When the market is relatively strong and less volatile, the more funds get invested in the market; however, when the market starts declining and gets more volatile, more of the funds get switched to treasuries and bonds. In the example below, we are using “reverse volatility” to adjust allocation to S&P 500 and Treasuries. Higher the volatility, we will allocate less to stocks and more to Treasuries and so on. Such a portfolio would generally underperform the broader market during strong bull markets, but protect the capital during major corrections or recessions. There can be many such strategies or variations that could be adopted, and we have written many articles on such strategies. Another example of a risk-adjusted portfolio is presented (bucket-3), which you may read here.

Author’s Note: The above Risk-Adjusted Rotation portfolio is part of FFI’s Marketplace service “High Income DIY Portfolios.”

Table-4: Invested in a “Rotational Risk-Adjusted” Strategy

Starting Year at age 50

Ending Year at age 60

Starting Capital

Contribution to 401K each subsequent year

Ending Capital at the end of 10 years

1999

2008

300000

29120

848131

2000

2009

300000

29120

828458

2001

2010

300000

29120

910264

2002

2011

300000

29120

1084645

2003

2012

300000

29120

1255221

2004

2013

300000

29120

1335076

2005

2014

300000

29120

1390480

2006

2015

300000

29120

1113755

2007

2016

300000

29120

1186252

2008

2017

300000

29120

1390395

2009

2018

300000

29120

1367493

Summary and Comparison of 3 Investment Scenarios:

Initial Capital = $300,000

Additional Annual Contribution= 16% of salary contributed to 401K for 10 years.

Table-5: Comparative Performance of 3 Portfolio Strategies

Period Starting Year – Ending Year

Ending Capital from 100% S&P500 Portfolio

Ending Capital from 70:30 (Stocks/Bonds) Portfolio

Ending Capital from “Rotational Risk-Adjusted” Portfolio

1999-2008

$500,452

$614,519

$848,131

2000-2009

$579,899

$641,656

$828,458

2001-2010

$696,433

$739,870

$910,264

2002-2011

$746,867

$833,155

$1,084,645

2003-2012

$965,543

$984,861

$1,255,221

2004-2013

$1,075,832

$1,021,231

$1,335,076

2005-2014

$1,122,346

$1,092,509

$1,390,480

2006-2015

$944,800

$922,598

$1,113,755

2007-2016

$1,004,970

$954,069

$1,186,252

2008-2017

$1,541,616

$1,281,363

$1,390,395

It is clearly apparent that the third option of using the Risk-Adjusted Rotational portfolio had the best results in most 10-year rolling periods, except for 2008-2017, a period of a strong bull market.

However, irrespective of the investment strategy they finally choose, for the sake of simplicity, we will assume, John and Lisa would get a constant return of 8% over 10 years, which is not overly optimistic, especially with a conservative Rotational strategy. With this rate of growth, their savings and contributions over 10 years will accumulate to $1.1 million.

The Final Numbers – Calculation of Growth and Drawdown from Age 60-80:

For John and Lisa, their final strategy looks something like below. If everything works out according to the plan, they should never run out of money. In fact, as you would see below, at 80 years of age, their portfolio would be roughly double of what they started with at 60, while withdrawing and spending a substantial amount of income. That leaves plenty of scope for margin of error:

  • They reserve 2 years of expenses in cash from the total capital, a total of $150,000 @ $75,000 per year, leaving the savings capital to $950,000.
  • Also, they had already decided that John will start withdrawing social-security at the earlier eligible age of 62. Due to early withdrawal, he will only receive about 75% of the full benefits. We will assume that SS-1 to be $1,500 a month and grow at a very conservative rate of 1% per annum due to COLA (Cost Of Living Adjustments).
  • This will allow Lisa to wait until the age of 70 years to collect and let the social-security benefits be compounded to a much higher amount. We will assume that the SS-2 will be $3,000 per month, starting at 70 years and grow at 1% per annum by COLA adjustments.
  • However, at age 70, due to inflation (from age 60-70 years), their expenses would go up as well, and they would need roughly $94,000 to keep the same purchasing power as of $75,000 (when they were 60).
  • They assume that investments of $950,000 ($1.1 million – 150K reserve) will grow at a conservative rate of @8%.

COLA: Cost Of Living Adjustment – For Social Security Payments.

Below is the table that simulates the income and withdrawals from the age of 60-80 years.

Explanation and assumptions:

  • Column A shows the age in years.
  • Column B shows the starting capital at the beginning of the year.
  • Column C shows the needed income each year. For the first two years, they need a fixed amount of $75,000 each year. After that, we will add 2.5% each year for inflation.
  • Column D shows the social security payments for John, the first earner, assuming he starts withdrawing at 62 years of age (the earliest eligible date). We will assume that social security payment increases at an average rate of 1.0% (Cola adjustment).
  • Column E shows the social security payments for Lisa, the second earner, assuming she starts withdrawing at 70 years of age (the late withdrawal date), so as to get higher payments. We will assume that she gets $3,000 per month starting at age 70 years. Also, social security payment increases at an average rate of 1.0% (Cola adjustment) after that. Column F is the actual cash withdrawn from the invested capital.
  • Column F = Column C – Column D – Column E Column G shows the percentage of cash withdrawn.
  • Column G shows the percentage of cash withdrawn. Column G = Column F / Column B.
  • Column H is the net investible amount after taking out the needed income.
  • Column I: Rate of return on the invested capital = 8% per annum.
  • Column K is the total balance amount at the end of each year, after accounting for withdrawals and the growth of the capital.

Table-6: Calculation of growth and drawdown from age 60-80

A

B

C

D

E

F

G

H

I

K

Age (year)

Total Yr-Begin Capital

Minimum Income Needed

Social Security (1)

Social Security (2)

Actual Cash Withdrawn

%age Cash W/drawn

Net Inv. Capital

Return on Inv. Capital

Total Yr-end Capital

60

1,100,000

75000

0

0

150,000

13.64%

950,000

8%

1,026,000

61

1,026,000

75000

0

0

0

0.00%

1,026,000

8%

1,108,080

62

1,108,080

76875

18000

0

58,875

5.31%

1,049,205

8%

1,133,141

63

1,133,141

78797

18180

0

60,617

5.35%

1,072,525

8%

1,158,326

64

1,158,326

80767

18362

0

62,405

5.39%

1,095,921

8%

1,183,595

65

1,183,595

82786

18545

0

64,241

5.43%

1,119,355

8%

1,208,903

66

1,208,903

84856

18731

0

66,125

5.47%

1,142,778

8%

1,234,201

67

1,234,201

86977

18918

0

68,059

5.51%

1,166,142

8%

1,259,433

68

1,259,433

89151

19107

0

70,044

5.56%

1,189,389

8%

1,284,540

69

1,284,540

91380

19298

0

72,082

5.61%

1,212,458

8%

1,309,455

70

1,309,455

93665

19491

36000

38,173

2.92%

1,271,282

8%

1,372,984

71

1,372,984

96006

19686

36360

39,960

2.91%

1,333,024

8%

1,439,666

72

1,439,666

98406

19883

36724

41,800

2.90%

1,397,866

8%

1,509,696

73

1,509,696

100867

20082

37091

43,694

2.89%

1,466,002

8%

1,583,282

74

1,583,282

103388

20283

37462

45,644

2.88%

1,537,638

8%

1,660,649

75

1,660,649

105973

20486

37836

47,651

2.87%

1,612,998

8%

1,742,038

76

1,742,038

108622

20691

38215

49,717

2.85%

1,692,321

8%

1,827,707

77

1,827,707

111338

20897

38597

51,844

2.84%

1,775,863

8%

1,917,932

78

1,917,932

114121

21106

38983

54,032

2.82%

1,863,900

8%

2,013,012

79

2,013,012

116974

21317

39373

56,284

2.80%

1,956,728

8%

2,113,266

80

2,113,266

119899

21531

39766

58,602

2.77%

2,054,665

8%

2,219,038

Now, there is no guarantee that the future returns will be at 8%. It can be less or more. It may depend on their investment choices and market conditions. A lot can depend on what the average rate of return is from the investments. The above examples show that with 8% they have plenty of margins. So, even if they are able to get a 7% average return, they should be fine. However, if they get anything less than 6% rate of return, they will probably see declining balances in later years. If that were to occur, they should modify their lifestyle and reduce spending accordingly. However, if they were to get an average rate of 8%, which is quite realistic to achieve, they would have nothing to worry as their net balance at 80 years would be 100% higher than when they started, in addition to the consistent income withdrawn. Anything more than 8% would, of course, be icing on the cake.

Conclusion:

Purpose of this entire exercise to demonstrate how important is planning for retirement and sooner you do it better it is. If you are already 50 years or older, it becomes even more important to run your numbers and consider various options to see how you can reach your goals in a realistic manner. Of course, it can always be done prior to getting to 50, but your numbers may have a little higher margin of error. It is always prudent to start saving from an early age, but as John and Lisa’s example shows, it is never too late. Even if you have modest savings by the time you turn 50, there is still ample time to make a plan, ramp up the savings/contributions to retirement accounts and compound the savings. However, more you delay it, harder will be the choices.

Full Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, HCP, HTA, O, OHI, VTR, NNN, STAG, WPC, MAIN, NLY, ARCC, DNP, GOF, PCI, PDI, PFF, RFI, RNP, STK, UTF, EVT, FFC, HQH, KYN, NMZ, NBB, JPS, JPC, TLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.