I define the Retirement Feasibility Timeline as a method to depict the transition between the working years (accumulation) and the retirement years (decumulation). You can visually see year by year (age by age) when retirement may be feasible without any changes to what you’re presently doing, and what meaningful changes may alter that outcome to something you may desire more.
The goal of the exercise is to more completely understand where you stand towards retirement feasibility so you can make more informed decisions early enough so they make a difference with only small adjustments.
It uses your Standard of Individual Living (SOIL) as the baseline measurement with the goal of sustaining your present day SOIL, or lifestyle, to and through retirement. This is a form of consumption smoothing with a key difference, you don’t know your future level of consumption, or SOIL, but you do know today’s. Should your SOIL increase through promotions, pay raises, career advancement etc., (or the opposite), this is a method to directly connect tomorrow’s needs to today’s SOIL. It is also a method to measure and monitor Lifestyle Creep, where spending begins to outstrip saving, to keep both saving and spending in balance. This also develops healthy habits that then carry over into the retirement years of again, balancing saving and spending so money isn’t spent too fast where you may outlive your resources.
Most retirement income planning software today performs a “hunt and peck” approach to “optimizing” when you may retire, arguably an inefficient method of coming up with an answer by doing many iterations one by one, especially when one doesn’t know what other alternatives might look like that may be more desirable than the sought out “optimum.” And there’s actually a subtle nuance that is also ignored that I’ll discuss towards the end too.
Why doesn’t software simply display a timeline, say between the ages of 62 and 70 that are most common due to the range of Social Security claiming ages, and expand on either end of those ages if earlier, or later, retirement is desired or necessary?
I’ve programmed excel to do a feasibility timeline for those not-yet-retired so they may first see when retirement is in the cards if they don’t change anything. And then at the very same time, show what retirement may look like at other ages around that initial feasible age, also without any changes. Changes, or alternatives, comes in later once you can see when (what age) retirement is feasible in the first place!
The Retirement Feasibility Timeline Dashboard
Let me describe what this dashboard (key information displayed for easy view and comparison between those key items) contains and how it works to make retirement planning easier to visualize and make useful decisions.
Along the top row is the age spectrum being evaluated, say age 62 to 70 or other ages described above. A second row is the corresponding age of a spouse if applicable. A third row is the corresponding years, example 2030 for that age (age combination for couples) when they reach the age spectrum under evaluation (e.g., ages 62 to 70).
The next set of rows show both when, and how Social Security changes across corresponding ages evaluated, for both spouses. Another set of rows shows how pensions may change over an applicable range of ages where pensions may be claimed, if applicable.
So now, each age column can add the sum of Social Security and/or pension benefits by age, year by year across the age spectrum evaluated. This provides a year by year, age by age, total of benefits that come from non-portfolio-based sources such as Social Security and/or a pension if applicable, which I’ll refer to that total as “fixed income” adopting nomenclature common in the planning profession for these sources that tend to be more stable without impact from market or economy changes. It becomes clear, looking at this series of summed fixed income benefits, how those benefits increase each year and thus providing more fixed income as one ages, if benefits can be delayed.
Later we’ll see how these yearly totals interact with savings requirements of a portfolio to sum to a total combination of GROSS income that supports the desired Retirement Standard of Individual Living (SOIL). I call it individual because your level of spending is unique to you and what your expenses are, are also unique to you as to how you combine everything into your gross total (gross includes taxes, something most people forget about when they think about how much they spend each month). SOIL is a specific calculation unique to you, as opposed to using some rule of thumb spending reduction, say 80%, which are subject to the “Flaw of Averages” (described quite well in the book by the same name by Dr Sam Savage) when everyone is thrown into a statistical pot of spending.
What is one’s SOIL? It is how much you spend to support your lifestyle or standard of living today, and then adjusted by subtracting expenses you won’t have in retirement such as 1) paying Social Security payroll taxes (but NOT subtracting Medicare payroll taxes in order to force an extra lump sum savings need that supports a portfolio source of income for health care costs to a degree, that it too may be increased or decreased as desired); or 2) savings put aside in IRAs, Roths, or other retirement focused savings, that were initially income, but instead of spending were saved, thus lowering the living SOIL through that action.
Thus far, we have calculated year by year fixed income totals. We have also calculated the Retirement SOIL. The difference between desired income that I call the Retirement SOIL, and the fixed income total is commonly called “the income gap.”
The question then becomes, “How much do I need to save for my total retirement savings (the sum of all accounts you’ll use for supporting supplemental income) to fill that income gap?”
Recall above, that I mentioned that the fixed income total goes up with age, between ages 62 and 70 for Social Security, and if applicable between various pension claiming ages as well. This means that the gap goes DOWN as age goes UP over those years where the fixed income components change with age.
Thus, the total that is required to save, in total for a retirement portfolio, also goes down with age.* No surprise here, as this is commonly known, but now one can see how those totals change with age side by side to each other.
How’s filling the gap work:
Applying a simple formula for portfolio drawdown rates to supplement income, to determine the required total retirement savings (portfolio balance), to fill this gap, using a simple formula here where:
$PB = Dollars Portfolio Balance;
$PI = Dollars Portfolio Income (in other words, the income gap total age by age);
and %DR = Percent Drawdown Rate.
Deriving the formula to determine the required total portfolio balance you need to save to fill that income gap:
$PI = $PB times %DR (remember, $PI is the unfilled income gap)
So, the total retirement savings required to fill that income gap ($PB), age by age, is simply:
$PB = $PI divided by %DR.
The value, age by age, for %DR changes slightly. %DR increases, and thus $PB slowly goes down too because of longevity; because longevity also changes (reduces) slowly age by age. There’s a dynamic interrelationship between all the formula components that change with age.
Thus, each age has its’ own Monte Carlo run using the iteration failure rate as the fixed control variable to that each solution is comparable over all ages. One can evaluate different portfolio allocations to also see how allocation differences changes the outcomes age by age as well.
The general result is that the combination of delaying retirement to a later age, with the fact that the total retirement savings need ($PB) also goes down, and longevity being shorter for those later ages, means the total monthly amount one needs to save to accumulate the desired total ($PB) also goes down.
So at this point, one can see when everything comes together and see, without changing anything, to what age one needs to work so that your savings for retirement grow to fill that income gap.
Now the question becomes, “What if I don’t want to work that long to reach that later age?”
Obviously then, you need to save more so that you can accumulate the greater total amount saved to retirement at an earlier age. Again, this is well known as the behavior change needed, but now you know by how much you need to change and to what age that change would take you – instantly on the dashboard right in front of you.
But here’s where conventional wisdom fails to adjust to one more fact … the fact that you’re saving more! Saving more means that you have adjusted your SOIL DOWN by the same amount. You’re saving it – not spending it!
What does this mean? It means that you have also, dynamically without realizing it, lowered your target SOIL. You’ve reduced the gap the portfolio needs to fill. This ripple effect continues to mean you need to save less than you originally thought and/or may be able to retire earlier than originally thought! Calculators and software don’t make this dynamic adjustment that I recognize and do as part of a retirement feasibility timeline assessment.
Moral of the story:
Having numerous retirement calculations done and displayed on a timeline side by side, age by age, via a dashboard facilitates seeing instantly what you need to do to reach your desired retirement age. It also allows for quick comparison of results when you make meaningful changes such as saving more (but as mentioned above, actually a little less than originally thought), or allocation changes (presumably for greater returns, or less).
PS. I toyed with the thought of putting a dashboard example in this post, but decided not to since experience shows me that people try to interpret that example to their specific situation, which obviously won’t work because each person’s situation is different from others. In other words, dashboards are specific and unique to your numbers and situation and are not comparable to those of others.
PPS. Most people imagine having a steady standard of living in retirement. The Bureau of Labor Statistics’ Consumer Expenditure Surveys show that this is not true. You’ve probably observed this yourself – the older a person gets, the less they tend to spend (they’re not traveling as much anymore), and then expenditures bottom out and begin to rise again for health care related reasons. In truth, even while working, your income isn’t as steady as you’d think! Please see “The Illusion of Steady Income?”
*And the total retirement sum you need as you continue to age in retirement continues to go down with age. Why? Because you have fewer and fewer years that need funding as you age. Maintaining your original principal should be redefined as “how much principal do you need to fund the years ahead of you?” You don’t need to fund the years behind you anymore!
Photo by Pexels.