How much money do I need to stop worrying?

I remember days when my family didn't have enough money for buying bread. I was about 7 years old and I was scared. 

In school I had to smear the black shoe polish on my shoes every day, because they were so worn out, they were gray. The soles were glued back several times.

I was not allowed to touch eggs in the fridge if we had any. I liked to go to my friend for whom eating scrambled eggs every day was normal. She was nice to share with me sometimes. 

The winters were cold and I remember how I was dreading getting out from under the blanket in the morning because the house was so cold. 


Now I have my own house. It is never cold in my house. I eat eggs everyday, unless I am traveling. 

I promised myself that I will do everything I can to never be cold again. I keep my house at 72 F degrees in the winter even if my friends try to persuade me that I could save money by heating less and that it is healthier to sleep in a colder room. 


By now I have earned more money then both my parents in their entire lives combined. But I still feel unsafe. When will that feeling stop?

Financial uncertainty

Everyone is different. And the safety threshold to feel financially safe is different for everyone, dependent on their previous experiences.

When I researched about financial safety, I found a (quite esoteric) exercise which should produce your minimum number at which you will feel good/safe/comfortable. I tried it. 

Here how it goes:
You should say the dollar amount starting from small moving up and watch how you feel. At certain amount you will feel comfort. If you are under or over your comfort amount, that will make you feel uncomfortable, feeling "not enough" or "too much". 
My comfort amount was 2 million dollars. Per month! 


Obviously that exercise was useless, but it made me to find a more realistic method. I ended up with something what is generally recommended: calculating and estimating expenses versus savings.



What can I estimate? 


It is useful to make some estimates and projections. Nothing is certain so all the estimates and projections are very approximate.

As life goes on, there are 3 main development scenarios:

1. Something non-catastrophic happens, like loss of job.
2. Something catastrophic happens, like disability or death. 
3. Nothing will change. 


A windfall also can happen but it is not one of the main scenarios. It is rare, I don't expect it but I will handle it well. 


There are some things one can prepare in advance for the three main scenarios.  


1. A non-catastrophic event. 
It is good to be prepared for a non-catastrophic event like a job loss. 
The emergency fund is the best preparation here. The fund should cover expenses until you can find another job. 

The amount in the emergency fund will depend on the ease finding another job in your field and the estimated fixed expenses. 
For example, if you are a highly qualified specialist, such jobs are rare, and your fixed expenses are high, the emergency fund should be of appropriate size. 
Check. I've got that. 


2. A catastrophic event.
Life does not give any guarantees. For something catastrophic like disability, loss of partner or your own death some preparations could be done. 

Your own death will be the easiest. It will make all your worries (including financial) stop immediately. 

But if you want your family to betaken care of, a term life insurance would be a good choice. A term life insurance is cheaper because it will have no value at expiration. 
The point here is the replacement of lost income in case of death of income provider. 
Especially in families with young children it can be very important to have this kind of insurance.
Check. I've got that. 

A disability insurance should cover the case of disability. They are more expensive than term life insurances and are supposed to replace lost income. They don't cover disability related medical costs.
Check. I've got that. 

  
3. No events. 
Nothing will change. Expenses and savings will stay the same.
The usually recommended estimates of expenses versus savings will cover that.
No check. I have never estimated anything like that. I will work at that right now. 


To make those estimates for expenses versus savings I need 2 variables: years left to live and money amount to live on. 

Life uncertainty

Certainly there is an uncertainty about how long I will live but it doesn't bother me much if I die before my money runs out. If (when) I die, my financial worries will stop automatically. 
But to make the projections I need approximate expected length of life.

The Social Security Administration has actuarial life tables with estimates of the life expectancy.  They are for year 2014 and for that degree of uncertainty about life using them in 2017 will be fine. 

I am 43 now. Per table my life expectancy is 39 years. First thing I see is that I have less years left than I already lived. It is a little sad.

43+39=82. 


Maybe it is not so sad. I might have some genetic modifiers. My grandparents died at 85, 95, 56 (heavy smoker) and 68. 

Because of optimism (I would prefer to live longer) and because of pessimism (I would not like to run out of money) I will use the maximum: 95 (that means 52 years left for me). 

Actually even that might not be enough because I have a granduncle who is currently 102 years old (he was married several times, because his wifes kept dying before him). Maybe my extreme maximum should be 102 or even more.

Anyway, now with my life expectancy numbers I can start planning the financial part. 

Financial planning

Since the esoteric method gave me unrealistic results I will use information I found on most websites which calculate retirement planning related needs. 

According to most, the magic number is $3,000,000. That number makes you money never run out at 4% yearly withdrawal rate if you withdraw $100,000 per year. 

But will $100,000 be enough for me?


Calculating current fixed expenses 

I calculated fixed yearly expenses.

I didn't calculate the bare bone minimum. Bare bone minimum is too scary. I want to have enough room not to worry about my heating costs and other things that add to daily comfort. 
This is not a frugal estimate, this is a comfortable estimate. 

The expenses as of 2017 are about $55,000. 




 Estimating fixed expenses in retirement

After retirement some expense items will disappear, for example term life insurances and disability insurance. 

I estimated that the expenses are a little lower, about $42,500.
But they are not inflation adjusted yet.  

Now I will add 3% of inflation to every item, using inflation calculator (I used one on www.calculator.net).

At age 65 with yearly 3% inflation the $42,500  will become $81,270. 

Due to continuing inflation the number will continue to change. By my age of 85 (in 42 years) it will be $146,790. 
Of course those are only the estimates, inflation may be lower or higher... 

Calculating necessary amount of savings

As mentioned before, the magic number for the amount of necessary retirement savings should be $3,000,000. 

That number should make you money never run out at 4% yearly withdrawal rate if you withdraw $100,000 per year. 


But it looks like I might need $146,790 at age 85 (if I live that long). 


To better see what happens, I made two tables, using various calculators on www.bankrate.com.
The first table includes estimated Social Security benefits. 

The maximum Social Security benefit for 2017 is $2,687 ($32,244 yearly). 
Because Social Security is under stress and the benefits might not keep up with inflation, I will use only 1% inflation for the adjustments of Social Security benefits.

The second table doesn't have Social Security benefits.

For the savings growth rate I will use very low 1% growth rate. Markets will go up and down. Historical results don't predict the future. We all know that.

I am probably underestimating growth and overestimating spending, but I am not calculating the best case scenario. In general, I like to under-promise and over-deliver and it definitely shows here. 

In the table below the projected savings at age 65 (in 22 years for me) are $3,000,000. 
Is it a realistic number? That is a completely different question (for a different post). 

Back to the table. 
With the chosen settings of 1% returns and estimated expenses rising with 3% inflation it is clear that this $3,000,000 number will decrease with time. 

Difference to cover is the amount to be covered from savings after the Social Security benefits. 

The last line in the table is the age when the money will run out.

Looks like this estimate makes the money to run out at my age of 108. 

The second table is without Social Security benefits. 
Here the money runs out at my age of 95.  

Of course all numbers are very approximate. 

Taxes and not calculated. 

The taxes are estimated lower in retirement because they are mostly based on earned income. Other presumed factors also may be different.

But now I have something to work with and when I will approach my retirement age, it will be easy to recalculate and see where I stand. 
I probably will recalculate it more than once.

Summary

It looks like a $3,000,000 nest egg will be enough if getting Social Security benefits. 

I need at least $3,000,000  with or without Social Security.

Without Social Security benefits the money will run out at my age of 95. 

I really don't want to feel the pressure to die at age of 95.

What I need is to get busy with how to make sure the returns above 1% so I don't have the pressure to die at 95 or at 108. I want to beat my granduncle.  



10/12/2017:
I just posted an update with additional information and some recalculations.