WCI Online Course - Question Sample Financial Plan

[justlearning]

I just enrolled the WCI Online Course. I am writing my financial plan and reading through sample Financial plan in the course. I have question about the calculation in the retirement section. Sorry if it sounds dummy;

Scenario:
"Goal is $100,000 in income in today’s dollars within 22 years. Using the 4% rule, that requires a portfolio of $2.5 Million. We have just $120,000 now in retirement accounts. This will require savings of $53,000 per year (=PMT(5%,22,-120000,2500000,1)= -$53,152.20) or $4,400 per month.

Accounts used will be 401(k) ($18,500 + the $10,000 match), and Backdoor Roth IRAs, ($12,000), with the remaining $12,500 invested in a taxable account."

When you calculate PMT you assume 5% average return rate in the course of the 22 year right? and expecting $2.5 Million to last you 25 years?

Thank you.

[jhwkr542]

Yes, 5% average return is a reasonable assumption.  Nobody knows what it will be, but that's a safe, reasonable number to plan with.  As to expecting $2.5M to last 25 years at 4% SWR, that's a loaded question.  You'll see this debated and dissected all over the place, especially at the bogleheads forum.  My takeaway from all my time spent reading about it is that 4% (which is essentially just based on the Trinity study) is generally acceptable, but it's never set in stone.  Sequence of returns plays a huge role in all of this, particularly if the market tanks right as you retire.  If your $2.5M portfolio becomes $1.5M overnight, taking out $100k (6.7%) the first few years may not be the wisest move.  In reality, once you reach retirement, if you're spending $100k a year, you probably have some fluff/frivolous spending money in there, so you can spend less in the event of a market downturn to mitigate sequence of returns risk.  Additionally, you should have a very conservative asset allocation at retirement for this very reason.

[The White Coat Investor]

justlearning wrote:

I just enrolled the WCI Online Course. I am writing my financial plan and reading through sample Financial plan in the course. I have question about the calculation in the retirement section. Sorry if it sounds dummy;

Scenario:
“Goal is $100,000 in income in today’s dollars within 22 years. Using the 4% rule, that requires a portfolio of $2.5 Million. We have just $120,000 now in retirement accounts. This will require savings of $53,000 per year (=PMT(5%,22,-120000,2500000,1)= -$53,152.20) or $4,400 per month.

Accounts used will be 401(k) ($18,500 + the $10,000 match), and Backdoor Roth IRAs, ($12,000), with the remaining $12,500 invested in a taxable account.”

When you calculate PMT you assume 5% average return rate in the course of the 22 year right? and expecting $2.5 Million to last you 25 years?

Thank you.

Click to expand...

You can assume anything you like. 5% is an assumption. Anything between 3% and 7% is probably reasonable. If you're not comfortable with 5%, use something else.

There is nothing in what you quoted about "lasting 25 years." Not sure where that came from. If you haven't hit the part of the course where the 4% rule of thumb is discussed, it's coming. You can also read about it here:

https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/