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Dallas, Texas, United States

Tuesday, August 30, 2016

Forever Retirement

I had a chance to take my son Thomas sailing on a friend's boat recently as part of a Dallas Brights Family Meetup event.  I would like buy my own sailboat soon but I am reluctant to lock myself into boat slip rental fees at the marina, especially after we just recently managed to rid ourselves of the monthly expense of a rented storage unit.  If I could buy a waterfront house with a slip out back, I would consider it an investment but there are not many opportunities for that here in land-locked Dallas.

Thinking about buying a boat has incentivized me to review my retirement savings plan.  One of the variables you can play with in the online retirement calculators is when you start drawing Social Security.  Do you start claiming payments at the earliest possible age or defer just a few more years so that you can get higher payments for the remainder of your life?

The calculations look very rosy if you wait until age seventy to retire but how realistic is that?  My father and uncle both retired at age sixty-two, the earliest you can claim Social Security.  Another uncle of mine died at age sixty.

So now when I run the calculations, I assume an early retirement instead of late under the assumption that by the time I get to that age I will want to have that option.  This means putting more of my current income into retirement savings and less into a boat.  Disappointing.

With early retirement comes the risk of running out of money before you and your spouse pass away.  Ideally you would have enough in savings to live indefinitely entirely on just your interest earnings plus Social Security without having to dip into the principal.  Better than that would be to have your retirement funds growing exponentially over time due to the miracle of compound interest.

I got curious about this forever retirement possibility so I ran multiple scenarios through my preferred retirement calculator.  Assuming retirement at age sixty-two, a reasonable retirement income, and a given rate of return on invested retirement savings, I figured out in present day dollars how much one would need to have saved by retirement age to live to one hundred or one thousand without ever running out of money.  Since this value is right at the threshold, saving just a few dollars less than this means that eventually you would run out, most likely after your life expectancy, while just a few dollars more means that your savings could grow without bounds, assuming you lived long enough.

So, small boat now or big boat later?