Retirement Savings Checkpoints

One of the most common questions that I wonder about is what sorts of savings ‘checkpoints’ people should be aiming for, especially early on in their careers.

The Inspiration

I was recently pointed in the direction of the J.P. Morgan Guide to Retirement, which I found to be a thoroughly enjoyable, if not always actionable read. It includes a slide with the same name as the title of this post.

Page 15 looks like this (and do visit the entire page at the above link):

Retirement Checkpoints

I found this to be very practicable (if it is a truly useful approximation). If a 30 year old makes $100,000, and wants to retire at age 65 that same standard of living they should have saved $130,000 by now.

The Assumptions

This obviously opens the door to questions about what the other assumptions are:

  • Retire when?
  • Portfolio returns?
  • Inflation?
  • Retirement age?
  • Years of retirement?
  • Future contributions rate?

J.P. Morgan kindly provides us with some of those as well (though I have no idea what confidence level “80%” means).

Retirement Checkpoint Assumptions

They also include data on the assumed income replacement rates (if you make $200,000 and pay $100,000 in taxes, you have to replace only $100,000 (50%) of your income to live the same lifestyle in retirement (actually, $100,000 minus annual savings). If you make $30,000 and pay $3,000 in taxes, you have to find a way to replace 90% of your income. They also factor in social security (which has the opposite effect, as it replaces a much higher % of lower earners’ income).

Building My Own

Like any red-blooded nerd, I realized that if I wanted to play with the model I would need to rebuild it, make it stronger.

Pretty quickly it became apparent that even if I take the other assumptions at face value, the question of tax assumptions looms large, especially:

  • Are all contributions being made to retirement accounts?
  • Is there a static or dynamic tax assumption (at withdrawal or other)?

Another small question, are contributions inflation-adjusted? E.g., does a 5% contribution go up by 2.25% and mean a 5.1125% contribution the next year? Equivalent to 5% on an income that increased with inflation.

So, as close as I can figure (without doing anything smart like actually asking the authors [stay tuned]), basically eyeballing the data here, assuming the below is a pretty reasonable start:

  • Yes, contributions are increased to keep up with inflation, and;
  • All contributions are made to retirement accounts, and;
  • All distributions are taxed at 28%

(Click for side-by-side)


New Scenarios

So now that I have my own model that works under some reasonable conditions, I can start playing with the inputs.

First, I like the flexibility, but prefer to keep returns equal pre and post-retirement. I think 6.5% is still reasonable. Then, what about retiring at 55 instead of 65? And what if my annual contribution rate is actually 15%?

New Scenario

New checkpoints! Now, there is not a linear relationship here, because of the higher savings rate, the earlier checkpoints are more forgiving, while by 55, they are much higher. Since we changed multiple inputs at once, it is hard to see from the table how much of the change came from the extra 1.5% return in retirement versus the (opposite) forces of earlier retirement and a higher contribution rate.

We also run into a problem with the income replacement rate — because J.P. Morgan was assuming age 65, Medicare was in play for all of retirement, and they assumed that social security was being taken as well. For someone retiring at 55, we need to go back and add some excess draw for those ten years. We’ll save that for another post.

Age 65 Retirement Scenarios

So without backing into some assumptions for how much income to replace in the years before age 65, we can still play with other scenarios.

Here is 15% savings rate with 6.5% returns.


It doesn’t take much teasing of the data to find an interesting conclusion – if you are going to retire at 65 and are able to consistently save 15% throughout your working life, it’s important to get started by 35, but it is okay if you haven’t made much progress yet.

On the flip side of the coin, if you’re approaching 50 and make $200-250k (and want to maintain that lifestyle), you best be closing in on a million dollars, or planning to save even more going forward.

The Limits

This model is incredibly simple, major variables like taxable accounts are omitted entirely. I’ll probably revisit this at some point, including inquiring about the actual assumptions the folks at J.P. Morgan used, building in better ‘early retirement’ capabilities, making my own estimates for income replacement rates, etc..

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Jack’s Links

Mostly investment/market focused this week:

  • WCI on how to retire in 10 years: He’s focused on doctors, but really any high income professional has the option open to them to retire in 10 years. The catch, as is mentioned early and often in the article, is that to retire in 10 years requires retiring at a significantly lower standard of living than the typical professional lives at (because the typical professional both works for much more than 10 years, and probably doesn’t put away enough money to sustain that standard of living either). I share his optimism that it is never too late to save for retirement, at least while you can work.

If you really want to punch out of medicine in 10 years, you can’t live like a doctor now, and you can’t do it later. What you really need is a middle class lifestyle. And I’m not talking about the middle class where one spouse is a pharmacist and the other is an engineer. I’m talking about the middle class where the household income is $50,000.

  • Morningstar on who was on the good side of bad market timing: The author, John Rekenthaler, opens with an interesting point about markets that often goes ignored, transactions are symmetrical. There is a buyer of a share for a seller of a share. Therefore, in a claim he quotes, for every bad timer, there is a good timer (whether intentional or not).

In 2009, I attended several investment conferences, some targeting institutions and others targeting advisors. The message was identical: stocks out, alternatives in.

But I also think that when the blogosphere is really on form, its interactions throw up insights of a depth and quality that the mainstream media simply cannot accommodate.

  • Scott Sumner invokes the EMH: he does it to defend the idea of an NGDP market (some of the criticisms are asinine). It appears he agrees with my usual explanation when asked about the EMH – something like: “To a first approximation the EMH is true, to a second approximation it is obviously not true.” If that doesn’t make sense to you intuitively, then it is probably worth reading the post.

In fact, we do see lots of trading. We see speculation and arbitrage, even though asset prices are usually close to a position where risk-free arbitrage is almost impossible.

With apologies to my faithful subscribers, I think the links in my emails are broken, I am trying to fix it.


Statistical Pet Peeves

I am fairly well known around my office for cynicism skepticism around “fun facts”. I usually need to see the figurative receipt before I believe it. When it comes to more complicated topics, I’m going to want to see the study.

Not all studies are created equal, however, and there are a million ways to use results to mislead the target audience (often journalists or the public).

There are three kinds of lies: lies, damned lies, and statistics.

Benjamin Disraeli

There are two things I do when I spot statistic abuse: the first is to close my browser tab, shake my head briefly for having been tricked into wasting a click, and forgetting it ever happened. The second is, if the subject matter is interesting enough, to look into the original study and see what the authors actually said. If the authors themselves are the ones making things purposefully unclear, I usually just assume the study is biased too, and don’t update my bayesian priors at all.

Without further ado, two fast ways to make me think the author is a clown in the best case, or purposefully misleading in the worst case.

1.) Stating a change of a percentage as a percentage:

For example: Reporting a change in income taxes from 10% to 11% that looks like:

Income taxes are slated to rise by 10% starting in 2017.

The average reader is going to have absolutely no clue what this means, and is likely to conclude that taxes (which they probably know are already close to 10%) are going to double.

This sort of thing happens all the time, and is most often seen in headlines, which is one of my unforgivable sins. A faster way to my ‘ignore list’ does not exist. That is why my adblocker also blocks the entire news section of yahoo finance.

Now, there is a perfectly acceptable way to report the percent on a percent change, but using the same example above, it looks like:

Income taxes are slated to rise from 10% to 11% starting in 2017, a 10% increase.

It’s so easy to make things clear that I can’t help but have a harsh interpretation when it’s not done.

2.) Dual Y-axis Graphs

What is a dual Y-axis graph and why do I have beef?

Here’s the first sample I found on google.

Note the two y-axes. this is the hallmark of a two y-axis graph.

So what is the problem? The problem is that you can make a two y-axis graph “say” virtually anything you want. The relative values of units are completely out the window (and don’t get me started if the units are different). The only thing you can’t abuse is the direction of relationship from start to finish, assuming the data is a time series (meaning the x-axis represents dates/times).

If a graph has two x-axes and doesn’t have zero showing at the bottom of both axes, it’s a clear sign that the graphee has an agenda.

Now, sometimes you want to make as strong a case as possible, and sometimes you have a time series (which, in my opinion in the most proper time to use a two-axis graph, if one exists) rather than a bar chart comparing discrete variables or something, and the point of the graph is to reinforce the relationship within the series (upticks and downticks on the same days in the series, for instance), then a two-axis graph is a powerful visual tool.

For me, this means the person publishing the graph needs to have already made the point they are trying to prove clear (rather than using the graph as the smoking gun), and needs to have an already impeachable standing as far as statistical integrity. Needless to say, there aren’t many people whose graphs pass this test.

Dual axis graphs are a staple of finance presentations (investment bankers, sell-side firms, etc.) and publications with agendas, and it takes too much time to unravel the actual relationships shown in the data for them to be worth much.

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Retirement Doesn’t Mean It’s Time for Social Security

Retirement != Social Security Time

One of the biggest false constructs people have in their minds about social security is that they have to take it once they retire. I’m still not entirely sure if they think it is a literal requirement, or just an ironclad rule of good financial management, but it is overwhelmingly common.

Part of the problem probably lies with the most common language used around social security, “full retirement age”. Most people who turn 62 begin to educate themselves on their options, at least enough to know that every year they wait up till 70, they will increase their benefit (unless they are going to claim a spousal benefit, in which case they top out at 66 or 67 or some point in between).

For single people, especially healthy, wealthy ones (the kind that retire at 60 so they can travel Europe and hike while they have two good knees), it often makes sense financially to draw a little more from the portfolio from 62 until 70 for the enhanced benefit starting at age 70.

Why? Because the increase to social security is mostly risk free (some political risk, but the odds that two people of the same age won’t get grandfathered in because one started benefits and the other didn’t strikes me as tiny), and that increase is close to 8% (the math changes part-way through), which you would be wise to note, is much higher than that other risk-free return, treasuries.

Yield Curve

Yes, that’s 2% at the top of the graph. And yes, it does feel different to have a social security benefit that is growing at 8% per year versus having a portfolio with a balance that you can see growing at 8%, but the math is pretty much the same, and math doesn’t care how you feel about it.

The other nice thing about social security is that it is a form of insurance (in fact, your benefit at full retirement age is known as your primary insurance amount (PIA). If you do the riskiest thing in finance (well, besides invest with this guy), live a long life, the returns on delaying social security just compound and compound. If you die early (e.g., 72), yes your decision to wait sucked, but it turns out you didn’t need that money anyway!

Now, obviously there are cases where someone has saved next to nothing for retirement and can’t continue to work past 62, and they will draw social security as soon as they can, but for people who don’t fit into that bucket, just remember, you don’t have to take social security when you retire, you can file for medicare separately, and you’ll probably be better off to wait.

Couples is a more complicated issue as far as when they should begin taking benefits, although it got simpler/more complicated with the elimination of file & suspend. I haven’t taken the time to flesh out my new preferred rules of thumb (RIP to my file & suspend spreadsheet, you were so beautiful), so I won’t conjecture. But couples have the same option as single people, waiting to take benefits, even if they consider themselves “retired”.

So please, old(er) folks, don’t feel pressured by your friends or colleagues or CNBC (do they talk about social security?) to begin your social security benefits the day you walk out the door from your retirement party.



The Millennial Smokescreen, An Ode to Gen X

The greatest trick Gen X ever pulled was convincing the world they didn’t exist. At least when it comes to the changes in business.

I see what must be 10 articles a week about how this-or-that fortune 500 company is adding casual fridays, ping-pong tables, or mindfulness training to their set of perks so that they can attract the mercurial millennial.

Let me tell you, I’ve seen inside the beast, it’s all a trick. As a reminder for those of you who don’t regularly trade in generational labels, millennials are, generally speaking, 35 and under today. Gen X is 35-55. Baby boomer business owners/C-suiters are giving way to their Gen X successors, and under the guise of catering to the ever demanding and entitled millennials, the Gen Xers have begun implementing all the changes they wanted to see when they joined the workforce 20-30 years ago.

That’s right, if you thought it sounded ridiculous that millennials were demanding/creating sweeping cultural changes in their first 10 years in the workforce, consider yourself vindicated. This tea has been steeping for a long time.

For the baby boomers, don’t be too hard on yourselves, you couldn’t have seen it coming. For the millennials, keep enjoying the ride, but don’t give yourself too much credit. For Gen X – my figurative hat is off to you, convincing the old folks it was those darn kids, and improving the experience of being in an office at the same time was quite a feat.


Jack’s Links

Was in the Bay Area all week, not much time for reading, but still found a few good links:

  • WCI on evaluating a whole life policy: A great primer for understanding how life insurance works, has a walk-through of looking at the financial pieces (key: unbundling the bundle that is whole-life — impossible to look at the economics otherwise [just how the salesman wants it]), and gets into some relatively simple RATE and FV calculations that everybody should be able to do.

Financial Malpractice

Let’s step back for a second and think about what this insurance agent did. This agent took a 28 year old physician and sold her a whole life policy.

I have somehow managed to build a fairly successful practice and I’m not pushing hard to turn it into a billion dollar firm.

  • Ben Carlson on Good Questions and Great Questions: Hugely applicable to every area of life, not just finance. I often find myself rephrasing questions to clients before I answer because answering a good question can lead down a rabbit hole, while answering a great question is much more likely to start down a path toward peace of mind.

Good Question: How do I get rich?

Great Question: What does a rich life look like to me?

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Jack’s Links

Damn, back at it again with the fresh links. Good mix this week, some markets, some psychology, some economics.

  • Scott Sumner has a post about how bond yields aren’t surprisingly low on a real basis, which we all know is how you’re supposed to measure financial things. My favorite sentence is the last one:

If you want higher interest rates, tell the Fed to cut interest rates.

If more people understood what Scott is getting at, there would be a lot less wringing of hands about monetary policy.

It certainly doesn’t feel like someone is flicking the lights on and off. How can this be?

Surgeons also gave stronger recommendations to have surgery if they discussed the opportunity for the patient to meet with a radiation oncologist.

  • Last, I was recently digging into the relatively well-known BHB studies on Asset Allocation: this 2010 piece from Ibbotson I found to be a great and concise review of the original work and the subsequent literature. He succinctly sums up what is now 30 years of research, conventional wisdom, debunking, and myth.

So how should we interpret BHB’s 90+ percent? BHB captured the performance from both the market movement and the incremental impact of the asset allocation policy.

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Jack’s Links

Short and pithy is the theme this week.

“If there is a constant leitmotif in the papal discourse, it is the notion of the dangers of ‘unbridled capitalism’ and the demand that it should serve ‘men and not profit.'”

What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

As an aside, this is one reason why I am not nearly as hard on the UK for the Brexit vote as most of the economists whose views I agree with. From a fundamental point of view, either an independent UK and EU will come to trade terms which are mutually beneficial, in which case it is hard to see big long-term losses to the UK, or the EU is simply a bigger vehicle for protectionism and the UK didn’t make a big mistake by jumping ship. Obviously there are other factors and middle grounds at play.

Gold: It’s Still a Pet Rock

Want more links? Easy.

Jack’s Links

Happy 4th of July – on this most American of holidays please remember to give thanks for the fact that we have the Fed and not the ECB.

  • Scott Alexander with one of his trademark posts that is highly enjoyable to read in and of itself, but also applies to a whole class of things in a thought-provoking way. This post is about effects of parenting, but the bigger theme is studies not dealing with limitations that seem relatively easy to overcome (hence the title of Scott’s post). The best part about this post is that it isn’t about replication. Maybe I’m a replication crisis hipster at this point, but complaining about it doesn’t seem cool any more.

Let’s see what the study’s Limitations section has to say about this:

We calculated 42 tests and did not adjust for multiple comparisons.

Why would you do this? If NASA preceded their missions with statements like “We are launching a rocket to Jupiter, but we did not adjust for the fact that it is very far away,” we would stop taking them seriously. But for some reason in the social sciences it’s okay?

  • Timothy Taylor with a post about how (perhaps contrary to popular opinion?) the government is more about transfer payments than about provision of goods and services: Generally speaking this seems like a good thing to me, as the government is demonstrably bad at providing goods and services and there are seemingly fewer ways to be terrible at making transfer payments. Whether those transfers are done in thoughtful or intelligent ways or whether they ought to be making them at all is a question for another day.

Now the federal government is spending about 7-8% of GDP on “government consumption expenditures and gross investment,” which is now less than state and local government spending of about 10% of GDP in this category.


Can we create a firm…….

Where there are minimal politics

That has a very low turnover

That has a very high morale and high productivity…

[follow link above for the rest]


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Jack’s Links

  • White Coat Investor with one of his best (imo) posts in a while on debt: Anyone with high income and debt would benefit from reading this with an eye toward critically examining their priorities.

Therefore, if you are a doctor with a car loan, you probably have terrible money management skills. The status symbol isn’t driving a fancy car; it’s driving a paid-for car.

  • In what is certainly unfair to the rest of the financial advisor-centric blogosphere, not only does Kitces put out the best content, he also has great guest posts. This one, from Derek Coburn, on Networking, specifically networking to help existing clients: Everyone knows intrinsically that networking to help yourself reeks of desperation and never works, but the distinction Derek draws between networking as what I’d call ‘shotgun karma’ is a lot less effective than thoughtful networking between two parties who can certainly help each other, especially if you already have a strong relationship with one of those parties.

Of course I still needed to keep exceeding expectations as a financial advisor (you know, do my job), but I realized that by doing something valuable for clients, I could effectively eliminate my competition. Actively helping clients grow their bottom line is the Ultimate Tiebreaker.

  • H/t to David Henderson on this link to Bastiat on what is seen and not seen: Always humbling to read someone from 165 years ago eloquently (shoutout to the translator) describing issues that humanity is still grappling with.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

After-Tax Wealth For Various Tax-Efficient Withdrawal Strategies ncluding Partial Roth Conversion

Book Review:

I recently read (re-read? I think I listened to the audiobook before) The 4-Hour Workweek, which if you haven’t read it, has extremely little to do with working four hours per week, and everything to do with eliminating inefficiencies, bottlenecks, and self-imposed restrictions in your life.

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