The key is to save as much as you can using a spending plan each month and also enjoy your life somewhere while you are saving. This is the kicker for most, finding a balance of saving and life. The 4% rule is the key is a good rule of thumb but even better is Ray Lucias “Buckets of Money” plan which is by far the best and almost bullet proof. I have looked at all plans out there and none come close. So your Annuity would be one piece of the puzzle but you need a simple Buckets of Money stategy for true success in retirement.

Caleb
http://www.mefinanciallyfree.blogspot.com

Is the current life expectancy or the life expectancy for people who are currently 20 and won’t hit 77 for another 50+ years? Do we have a link for this?

Even if we change the model to 80 years (let’s give medical science a little credit), that still leaves us with 45 years of working to 35 years of not working. That leaves us with 45 people working for 35 people not working.

Imagine that you’re living in a (global) village with 80 people. 45 of those people do all of the hunting / gathering / farming / house-building. The other 35 people are either non-productive children or old people who sit around smoking pipes and eating food brought in by the other 45 people.

Either way.

If you save 10% / year for 45 years, and receive no effective pay raise between 20 & 65 (i.e.: pay raise = inflation). Then you would need ~3.25% real returns (that’s returns above inflation) for basically the entire 45 years to meet the goal of having 10x your annual income. That doesn’t sound like much, but here’s some perspective.

Right now TIPS bonds are offering 0.7% real returns (they were offering 0.0% returns just a few months ago). Real Stock market returns over the last decade are into the negative. If you earn 0% real returns one year you have to make 7.5%+ real returns the next, just to make it up, that’s not easy.

What’s more, you’re subject to a very critical period. At year 30 you have about 5x of your 10x. From year 30 to 45, you’re only going to save 1.5x (putting you at 6.5x), which means that you’re relying on 15 years of solid returns to make up that other 3.5x. If you have a 5 or 10-year drought, you could end up way short. And a 5 or 10-year drought is going to happen somewhere in those 45 years.

Finally, we made the very unsafe assumption that your “real income” doesn’t change. Realistically, your income increases over time.

According to the 10/10/4 model: “…by the time you are 65, you will need 10x your income immediately prior to retirement to retire at the level you want..”

So you need 10x your final income, not your starting or even your average income.

Let’s say you’re 20 and making 30k today. Your “10x” number is 300k. You save 10% for 10 years and save just over 1 year’s worth of income (say 31k). At the end of 10 years you make the big switch and find a new job earning 45k (again, no inflation). Awesome for you!

However, now your “10x” number is 450k, but you only have 31k in the bank. You’re behind, right? You’re at year 10, you should have at least 10% of your target number, but you only have 6.8%. So what if you continue to plow along for another 10 years and then get another pay raise to 60k? Now your 10x number is at 600k, you’re 20 years in to the plan but you’re way behind the curve. You should have saved 120k (+ interest), but you’re nowhere close to that number.

And then you have to account for medical. If you’re earning 60k but receiving 10k in medical benefits (may be low-balling in the US), you now need 700k in savings (not 600k).

You can see where I’m going with this. If you follow the 10% savings route and you also follow a normal pattern of increasing income throughout your career, the 10x goal is very difficult.
– Your increasing income makes previous savings insufficient.
– High medical expenses inflate your “10x” number.
– You need consistent returns well above inflation and you need them at the right times.

Don’t get me wrong, I’m a savings advocate. I save 10% and then some in tax-advantaged accounts.

But I make no pretenses of making it to 10x without saving more, getting lucky or making some savvy investments.

Again, the model presented above is very broken. Readers can follow this at their own risk.

Just a quick note, the life expectancy in the US is only 77 years according the the CDC. This would shave almost 20 years off your retirement estimations. The average person will die 12 years after their retirement at 65. The average black male will die in their sixties, a few years after retirement. So I don’t really think it’s the case that half of us are leeching off the other half.

Also, money invested in a portfolio is still doing work even though it may not be as productive as your own human labor. If you really want your money to produce no productive work, then stuff it under your mattress.

Unfortunately, the model you provide is fundamentally broken and will not work for the populace at large.

My proof is simple.

Let us assume that everyone under the age of 30 began this process and that all of them set their target date to 65. Let us also assume that the average person will not begin to achieve any significant amount of investable income until age 20.

So basically everybody is in school until age 20. From age 20 to 65 they work and then retire until they die at age 90 (current life expectancy). This basically fits your suggestions above.

This now means that the average person spends:
- 45 years of their life working
- 45 years of their life not working

So at any given time only one of two people in the world are doing productive work that would generate energy for the entirety of the world. So basically half of the population is leeching off the other half of the population, ad infinitum. And even that is based on the shaky assumption that we could educate people by 20 in world where our problems require an ever more extensive amount of education. That’s a pretty clear case of “doesn’t scale”.

Doesn’t this sound crazy?

Speaking of crazy: Therefore if you retire at age 65, and have 60% in equity and 40% in bonds (a moderate investment allocation) This is hardly a moderate allocation for someone who plans on never working again. The only way this would be close to “moderate” was if all of the equity stocks were dividend-bearing and didn’t need to be cashed out for an extended period.

I mean really, at some point shouldn’t you just be taking out an inflation-indexed annuity rather than sitting around waiting for “the markets to recover” so that you can stop working? 60/40 at retirement? Vanguard’s Target Retirement Income Fund is much closer to a 25 / 75.

Yeah, I know that most great proofs don’t end with “Doesn’t that sound crazy”, but what are you going to do?

Jim, what type of formal research actually support this 10/10/4 theory? What type of growth numbers are you estimating to arrive at the final assumptions?

If you save 10% of your income for 45 years you’ve saved 4.5 years worth of “average annualized salary” (not even 4.5 years of your ending annual salary, just your average). Somehow, after inflation you’re planning to more than double this number and you’re planning for this to work consistently for everyone?