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How to plan for retirement?

Planning for retirement involves several key steps:

  1. Determine your pension: If you have a pension, visit the pension website or refer to your annual statement to understand how much it will be worth in retirement .

  2. Calculate retirement expenses: Analyze your monthly expenses and create a budget to estimate how much you'll need in retirement .

  3. Explore retirement calculators: Use online retirement calculators, like those provided by ChooseFI or New Retirement, to project your future income, savings, and expenses .

  4. Consider retirement accounts: Research different retirement account options, such as IRAs and Roth IRAs, and choose the one that aligns with your financial goals and tax strategy .

  5. Determine withdrawal strategies: Decide how you will withdraw funds from your retirement accounts in a tax-efficient manner. Consider factors such as required minimum distributions and potential penalties .

  6. Establish an emergency fund: Start building an emergency fund to provide a safety net during retirement. It's recommended to have three to six months' worth of expenses in cash .

  7. Plan for contingencies: Prepare for unexpected events by having backup sources of capital, such as downsizing your home, considering part-time work, or having suitable insurance coverage .

  8. Review and adjust your plan: Regularly evaluate your retirement plan and make necessary adjustments based on changes in your financial situation, goals, and market conditions .

Remember, retirement planning is a personalized process, and it's important to consider your unique circumstances and seek professional advice when needed.

(someone): And if I've learned anything from studying pensions, it's that once you study one pension, you've only studied one pension. every single pension system is a little bit different. So that's why I recommend head to the web page or head pull out the annual statement that might provide what the pension formula is. If you have a well-run pension though more often than not it's they're going to have some sort of built-in calculator on their website. There are two other websites that I mentioned in the book that allow you If you hack it, and I kind of walk the reader through the steps that are needed to hack the calculators, but there are two other websites that you can find a method for calculating how much your pension is going to be worth in retirement on an annual basis as you set up and examine your retirement spend plan.
(someone): So Grumbis, I think the next phase here is to talk about what the last two and a half years have looked like for you. You know, when we talked to you two and a half years ago, you are in the process of calculating this and making the decision to gut it out or not. And now we have the opportunity to talk with you two and a half years later and kind of look at, you know, you reach financial independence. You've hit your numbers, like kind of catch us up. What's happened in your personal life and your financial life over the last two and a half years.
(someone): Yeah. So some major changes happened. One is that I decided to retire a year earlier than my original plan. When I talked to you guys last time, there were some events again, kind of connected to my, uh, my mental health issues, as well as I started having some physical health issues that made me contemplate leaving at 20 instead of 21.
(someone): So the transition to retirement and just real quick, just to back up, you know, on our user base. We built this to help anybody. It wasn't built to help wealthier people. It turns out organically 130,000 people show up at our website every month. 80,000 people have built plans. Those users are, they tend to be millionaires and the average user has a million dollars. So they're kind of 50 to 65 year olds and they're definitely kind of this mass affluent. That's who's organically showing up. But the tool was designed and built to help people figure out, anybody figure out how to make the most of what they have. And again, you know, the solution isn't, you know, traditional kind of like just save and invest. That's part of it, but it's also expenses, social security, healthcare, long-term care, taxes, housing. Those are the things that we really dive into and what users do in our product.
(someone): So actually what I thought we could do, and what I love about new retirement is that it's not just one calculator, right? It's a, it's a series of calculators. That's that really is set up to help you figure out various aspects of your life. And I thought it's most basic level, the most basic level I could come up with to give our audience an example is we could just go look at a retirement calculator. And one of the things I always hated about typical traditional retirement calculators is that they actually capped your retirement age. Like you can't.
(someone): Amazing. Okay. So, uh, let's now just run a very simple five calculations. So I showed you my screen for this. Uh, I choose a fire. We actually built just a very simple five calculator, uh, that does the calculation that I like to do for this sort of thing. And we just want to basically present a simple projected out future value calculation. So it's nothing fancy here. When you go to apps.choose a And you click on the calculators option. There's two of them. And I'm trying to remember to see the retirement projection of the future value of investment. We're going to go with the, uh, the retirement one for right now. I'm pretty sure this is it. So on this screen, is this look okay? Can you see it? Yes. Cool. We're going to put your current age and then, uh, we are going to set out, let's see, we could put a retirement age. Now you don't really have any plans to retire early, but we would be interesting. Let's let's actually take a step back. It would be interesting to know how much you need. If assuming that your life were to stay the same, what would your number need to be for you to never have to worry about earning another dollar and know that you're good to go. So this is also a very simple calculation.
(someone): But the other reason is just that there are so many unknown unknowns out there when you're talking about a long time horizon, like early retirement, that. Who knows if the 4% rule is still going to apply in the future, maybe three and a half percent, like Karsten Jeske bigger and suggest is much safer, maybe even lower. Like some of the Bogle heads recommendations suggest makes sense. If you're retiring at something like 30, you should probably be looking at a 3% rate. So. The ways that you can make your plan bulletproof are really to look at your safe withdrawal rate, make sure that you're well diversified. I'm sure that's something that all of your listeners are already thinking about, making sure that you have an asset allocation that's positioned to grow, but also to give you some buffers. So having a big cash cushion, for example, we keep about three years of expenses in cash at all times, which I know those who Think about opportunity costs probably cringe at, but going into a volatile market like this, that is a big part of what helps us sleep at nights. Like we could go a really long time without selling shares and be totally fine. Uh, it's also really important to know when and how to cut your expenses. So if you're withdrawing shares during a down market, the best thing to do is not to keep withdrawing and harm your potential for hitting sequence of returns risk, but instead to cut your spending. And so knowing how you would do that before you get into that situation is really good. It's also good to build in some backup sources of capital or some contingencies. Like, for example, we know we could downsize our house and free up cash if we had to. House is paid off.
(someone): Well the first thing i would do is look at social security. So i made an assumption here that peter today makes fifty thousand dollars let's say he does that and he's gonna make that until he's age seventy and he's worked most of his life. If you go to the social security website and put in those numbers, you'll find that at age 70, Peter would get approximately $2,700 a month in social security income. At that point, he will also get the $1,000 a month pension. So we're up to $3,700 a month that Peter would get at age 70. Now recall that though, he'll get that pension starting at age 65. So what Peter can do at age 65 is he could take the pension money and start investing it. Today his salary apparently covers his expenses. So if he were to do that, he would build up a little bit of a nest egg and that would probably give him something on the order of about $300 a month that he could safely withdraw from that nest egg that he would have built up at age 70. So at this point now we're at roughly four thousand dollars right twenty seven hundred from social security one thousand from the pension and three hundred from the nest egg. That he will he will build up so now we're at about four thousand dollars of monthly income that peter will have at age seventy. Now Peter needs to think about, well, what will his expenses be at age 70? If they're under $4,000 a month, Peter has a decent chance to be able to retire at age 70. But there's more. First, any good financial planner will tell you, you need an emergency fund.
Brad Barrett: Like, is that something that's available? Are there resources you recommend?
(someone): So I have in part seven of my series, I posted a Google sheet where you can enter your personal information, what is your retirement horizon, and then you can enter these additional supplemental cash flows over the next say, 60 years. So you can start your social security, say, 25 years into your retirement. You can enter the numbers as percentages of your portfolio. And then you can see what would be the historical safe withdrawal rates, what would be the failure rates of, say, the 4% rule or the 3.5% rule. So there are some resources out there. CFIR SIM obviously has some simulation tools. Not sure if CFIR SIM is really that user-friendly where you can enter specific amounts that start at a certain time, and then the wife's pension starts, and then your social security starts, and then your wife's social security starts. I mean, I can do that all in that spreadsheet. I'm not sure if there are many other places on the web where you can do that.
(someone): Alternatively, if you want to use my Excel sheet, you can take all of your expenses on a monthly basis and you can add them up and down at the bottom, it'll give you a total. So that's there too. We'll put those side by side and use whichever one is more useful for you.
Brad Barrett: Alright, I'll go with Aaron on this. So Aaron, part seven, we will link to that in the show notes for everybody out there and people can just enter their own information and just use that going forward, right?
(someone): Yes. And then the one thing you have to do is this is the one clean sheet.
(someone): And one of the things I always hated about typical traditional retirement calculators is that they actually capped your retirement age. Like you can't. You can't retire before it was literally, literally when you're working down the retirement age, it wouldn't let you get below like 50 or something like, well, you can't retire before that. So just why even, why even set it up to do that? This will allow you to put in any number you want, right? Without dogma, do whatever you want. So I'm actually, I'm on the page right now. We're going to do just a sample calculation to just take a look at how this works. If you're watching on the YouTube channel, you can watch along with us. But if you're listening to audio, I think you'll get the sense of what we're talking about. So we've got it all set up for you here, this case study. I am 45 years old, right? So what I love about new retirement is it actually looks at it as if you are, it's telling a story, right? Tell your story. I'm 45 years old. Put the input in there. My monthly pre-tax income is $7,000. I have saved up to this point, $200,000, right? So you've got a $200,000 net worth. Every month I spend $4,500 and I save $500. So we put all this in and we run a calculation and we get some amazing data on the side here. What does my income look like if I retire at 66?
(someone): I've been listening to your podcast and love everything you two are teaching. I've been pretty good at putting the principles into place when it comes to frugal living and savings. I've actually always been pretty good at saving, but that's pretty much where my path to fi ends. So right now I work for a nonprofit that doesn't have any kind of 401k or anything close to matching. So I've started looking at retirement accounts, but I feel so lost. There are so many options out there from IRAs, Roth IRAs, index funds, stocks, bonds, and the list goes on. So my question is, how do I go about choosing a retirement account? Better yet, how do I begin to choose step one? What are the most important things other than fees to compare? Are certain accounts better than others when considering the road to FI? ends well before the normal retirement age. Does it ever make sense to do a traditional IRA? I'm saving money, but beyond that, I have no idea what I'm doing. Can you please provide some advice to the younger listeners who may not already have retirement accounts or spare 10,000 to put into VTSCX for that matter? Thanks, and please keep up the great work educating all of us. Best, Alyssa.
Brad Barrett: Yeah, that is a very powerful question. And, you know, I certainly apologize if we haven't touched on this at all in the past, but questions like this are extremely helpful for us to help really hone in the message for our entire audience. So please listen, know that we certainly were not intending to exclude the younger members of the audience.
(someone): I did do a little bit of research on VRS before we came on this call. It looks like 30 years is the standard. full investment period that you would have to work in order to get the full benefits. Now your partial investing point is quite low at five years. It's not going to start paying out until you hit the pension system's minimal retirement age at the earliest, which may be that 58 point, which is why the calculator is built that way. Of course, if you draw earlier than what the plan to retirement age is, which I think for plan two is connected to your social security retirement age. If I'm not mistaken, so that's probably around 67, 68 for you. That means if you only wanted to work up to partial vesting, however long, and then waited for that to kick in that partial pension that you earned, if you wanted all the money, you'd have to wait till 67, 68. If you decide to take it earlier, they will reduce the amount that you draw. They probably have some formula that takes it off by the number of years that you want to start getting your payment earlier. That said, my research, uh, actually let's start with your questions. Your very first question was, Hey, mathematically, how do I calculate this? There are a number of different ways. Obviously the website is one of them to calculate what your pension would potentially pay you. I don't know if it will calculate it over the lifetime or just show you the annual or monthly value that it would pay you, but that is going to be potentially the most accurate. Although you guys are so far in advance, none of this is really going to be all that accurate because you're making a lot of assumptions, right? Yeah.
(someone): Those considerations generally apply as well, but then I'll add a couple more, right? One is withdrawal strategy, which we've talked about. I can't just take that money before age 59 and a half without having some tax and penalty, right? So you might want to go into a Roth IRA for tax and penalty reasons. And then the second issue is the so-called required minimum distributions. So. General rule is all retirement accounts have required minimum distributions once you turn age 72. There's an exception to the general rule, and that's a Roth IRA. So you can have that Roth IRA sitting there and you're 72, 73, 74, 104, no required minimum distributions. If you have a Roth 401k, you do have required minimum distributions. Why don't you like those required minimum distributions? Well, they're not taxable out of a Roth. Right. So if you have a Roth 401k and you're 73 years old, you have to take an RMD, no questions asked, not taxable to you. So why you might be saying, well, why do I care? Well, you want to keep that money in growing tax free as long as possible for both you and your heirs. Right. So, you know, if everything else is equal. and you're about to turn 72, generally speaking, I'm going to recommend you roll from your Roth 401k to your Roth IRA, just so you can avoid RMDs and keep that money growing tax and penalty. Well, it's already penalty free, but tax free as long as possible.
(someone): If you leave your job during the year that you turn 55, then you can begin to take distributions from your 401k without having to pay the penalty. I really appreciate that input. I had seen it somewhere before, but that really wasn't a plan that we were looking to execute on. What we're planning to do is to start moving forward on our FI and our next phase of our life soon, like really, really soon. I don't know if I'm going to make it to 55, At either rate, what we want to do is use the 401k as the primary driver for our Roth conversion ladder. You might recall that I have just over $500,000 in that account. In order for me to get as much of that account converted to Roths before age 70 and a half kicks in and I'll be required to take required minimum distributions, I want to start that process at the beginning of 2018. We plan to pace it annually to get the maximum overlap of three separate goals. convert what we can to shield it from future taxes to minimize our current taxes and to meet our spending needs. Brad also asked a question about budget. I'm sending a separate email on that that has a spreadsheet that breaks everything down. In short, here's what 2016 looked like for us, really the last 12 months look like for us. The bulk of our spending, we spent right at $71,000 last year, but the bulk of that spending is a whopping $23,000 worth of vacation. That'll definitely go down in our FI lifetime with travel miles usage. Last year we spent airfare totaling $5,600. Cruises, two separate ones totaling $7,500. Our lodging was $5,000.
(someone): It could be hustling more. It could be taking certification. It could be lots of different things. I am in love with the net worth statement. Because it encapsulates all of your financial decisions. It's your dashboard. Okay, if I have this cash flow, and I have free cash flow, which is savings, how do I best allocate that to work to where I say I want to go to? And there's only five things you can do with money. You can give it away, you can spend it, you can pay down debt, you can save it, or you can invest it. And then there's a hierarchy of how you should address those. And so, you know, I have worksheets on all those little hierarchies.
Brad Barrett: Yeah, that's brilliant. I love that. Are those worksheets available to listeners of your podcast on the website?
(someone): Yeah, and they're all encapsulated in the book. Just kidding. They're all encapsulated in the book where the book just talks about how you should rethink retirement and then what conversations you should be having and there's worksheets attached to all of it.
(someone): And I know the book is Rock Retirement. It can be found anywhere books are sold. We'll have a link to it in the show notes for today's episode. But I think even more than that, our audience is going to get absolute benefit from those worksheets. But I have a feeling they're going to want to know more about this tailored approach that you're talking about, and they're going to want to connect with you.
(someone): We keep saving those just to pad for the future. And so that like if we do convert a little bit through backdoor Roth, we've still got plenty, but it's mostly been knowing, okay, we have this 18 year period where we have to support ourselves on taxable. So what will that take? And that's been just purely an exercise in Excel formulas and projections.
Brad Barrett: Yeah, I love that. And we're certainly not looking for a simplistic answer. So that makes sense perfectly. And, and yeah, we will link all those articles up in the show notes. So everyone can find that if you head over to and just click podcasts in the upper corner.
(someone): All right. So Tanya, I guess specifically, what are the different things that people should be thinking about in terms of contingency plans and backup plans for their backup plans? What do you recommend they think about?
(someone): Yeah, absolutely. I think a lot of it is similar to things that you should be thinking about at any stage of life financially. So I'm a believer that you should still have some kind of emergency fund, even if you have plenty of assets, just because The market timing may not always be such that you want to liquidate assets or you might have tax or healthcare subsidy reasons why you might not want to be selling shares at a given point. So having a little bit of cash savings set aside at all times, I think is a really smart move. I'm also a big believer in having insurance. So life insurance certainly isn't going to be something that everybody wants, but we both still have term policies.
(someone): And my thought process on that was if I pass away, you know, you've got different survival clauses on your pension, but the one we're going to probably choose is where my wife would get two-thirds of the value. So our thought on that is we'll supplement what she'd get in the pension by a life insurance policy. By the time I'm 70, it doesn't really matter at that point because, you know, the investments would have done well and she can get by on two-thirds of the pension. So we did that in case I would die early and she has to go you know, 30 years with a reduced pension, she'd have a little life insurance kicker to help her out. That was the logic there.
(someone): All right. And then another one that I know that you mentioned that I think is very reasonable for people to consider post retirement is this idea of part time work.
(someone): Yeah, it's, it's huge. I mean, if you look at the numbers, so where we're at on that, we intentionally are not going to retire until we, based on all of our predictions, we'll never have to work another day in our lives for money, right? That's the first premise. Once we get to retirement, We may well choose to work just for the fun of working, the social interactions, whatever you get out of it. So what we're thinking right now is we'll have our fifth wheel. Maybe we'll go out to Yellowstone and we'll work a seasonal job for the summer. Maybe we'll go pack boxes for Amazon for the Christmas rush. Maybe we'll do a couple of things like that.
(someone): You know, you're not married kids living in your parents' basement for the 20 years. Obviously your, your expenses increase, you're doing this with a family, but with these raises that you got, what actions were you taking to increase your savings rate? You know, how did you get more polished at this journey to financial independence as you went farther down the path?
(someone): Well, again, I wasn't doing all the, the right moves, but the 401k was probably the biggest one. By the time I actually left in 2018, my 401k was about 700,000. So I had definitely built that up over time, but I was just increasing the percentage that I was throwing in there and I was making all the wrong moves. I was investing in high fund mutual funds and different things like that, but I did increase that over time. And then the other piece was I started saving. We ended up buying another rental property in 2015, so that was part of where my savings went to, and now that's given us a nice steady cash flow. But other than that, we started trimming. expenses that were unnecessary. And that's it. I mean, this was, this is a very straightforward journey. I think in a way I didn't do anything crazy.
(someone): Did you ever calculate or track your savings rate over time? And do you have any numbers to share with us?
(someone): I didn't track it early on, but I can tell you for the last few years that we were pushing a 60% savings rate, which I thought was really good because as my wife had dropped down to part-time and wasn't working at the very end there. So
(someone): I think we're doing pretty good.
(someone): You're going to, it's going to be safe. It's going to be the capital one stuff. So you structure bucket one with all after tax. And then what we've done, I mentioned where we've got our net worth statement and we've linked each one of the accounts into one of the buckets. If you look at the IRA as an example, where you have forced, you know, RMDs when you're age 70 and a half, well, guess what? That's 15 years out. Okay, fine. I'll put that in bucket three. So I've got an intentional line in bucket three. That's my IRA before tax. And guess what? It's invested in equities, right? So, so you do have to take the tax structure into account when you place those specific monies into each bucket. And then, as you go through time, and you're rolling stuff from bucket 3 to bucket 2, bucket 2 to bucket 1, well, that might be where you take an IRA distribution, you pay the tax on it, and you've moved it into bucket 2, and you put it in bonds or someplace safe to kind of stage it for when you're ready to use it in bucket 1. That's the way that we've set it up.
Brad Barrett: So in bucket one, do you always have three to five years of liquid expenses, like on a rolling basis, essentially, like you're constantly refilling it? Is that, is that how you're mechanically doing this?
(someone): Yes.
(someone): All right. Well, let's talk about tax protection. Uh, you know, I think when you're talking about planning, comprehensive planning, there's a few things on this checklist that you should be considering. And some of them are one-off mechanicals.
(someone): Yeah. You know, Jonathan and Brad, I think, There's a lot of focus on how am I going to get my bang for the buck and do really interesting planning. And that's important, but protecting yourself and your finances is also important too. So I'll just give you a couple on my list here. One, and this'll be much bigger 10 years from now, but it's starting to creep in right. As folks pass away and they've had retirement accounts, they're leaving them to their heirs and their heirs need to take so-called required minimum distributions from retirement accounts. The idea is you've deferred money from taxation for many years. When you reach 70 and a half years old, or when you leave them to your heirs, that money needs to come out over time based on IRS tables. And so the deadline for taking money out of your inherited IRAs and retirement accounts, that's December 31st. If you miss that deadline, you could be subject to a 50% penalty. So make sure you've taken any RMDs if you've inherited a IRA or 401k. And then for those in our audience who are 70 or above, you need to think about your RMDs from your own retirement accounts. You need to make sure you take those out by December 31st.
(someone): But there's more. First, any good financial planner will tell you, you need an emergency fund. And Peter has the ability, probably depending on his income, to save up to $7,000 a year in a Roth IRA. That would be a great place to start an emergency fund because it can do double duty. It can act as an emergency fund because peter can take out his contributions at any time and let's say peter for the next ten years puts in seven thousand dollars a year which he's able to at age sixty. He will build up another nest egg that will now be tax free. And you could probably take about $400 a month tax free out of that at age 70. So now we're up to $4,400 worth of income every year at age 70. So is there a chance somebody like Peter could retire at age 70? I'm here to say that there is certainly a chance that he could, we would need to know more information. Here's what i would do if i was peter today i would take these four steps. One i would get a hold of my monthly expenses i would analyze three to six months worth of credit card statements and bank statements and get a handle on what it is that i spend every month that number is very important. Second i would go to visit the social security website put in his information and figure out what he might get at age 70 from social security. Third i would start an emergency fund don't delay just start putting aside cash and we can figure out if i raise best for that are for another way to save and invest that is is appropriate but i would start an emergency fund today. And then fourth think critically about your expenses you got ten years to your you want to retire you got time to reduce your expenses.
(someone): You know, you don't want her to think there's a nest egg coming. But in reality, if we die younger than, I think we've cash flowed out like 95, it's kind of, you know, we both die at 95 and we're fine. So there's realistically going to be some money left. And I've not gotten into the tax treatment. I think there are forced distributions once she takes it. but I'm not sure how the tax works on that. If it's, if it's a inherited, I'm not sure I should check into that, but you know what, she'll be happy. She'll get some money and she has to pay taxes. She has to pay taxes.
(someone): We'll try not to let her find out about this podcast so that you can let the secret ride a little bit longer. All right. All right. Fritz, the next thing that we want to talk about today is life insurance.
(someone): Yeah. What, what we did with life insurance, this was kind of interesting. I bought, we have life insurance through my employer, but obviously when I retire, I won't get that anymore. So I did buy a separate policy. 20-year fixed term, so it'll go until I'm 70. And my thought process on that was if I pass away, you know, you've got different survival clauses on your pension, but the one we're going to probably choose is where my wife would get two-thirds of the value. So our thought on that is we'll supplement what she'd get in the pension by a life insurance policy.
(someone): Like, for example, we know we could downsize our house and free up cash if we had to. House is paid off. So that would be easy to do. Talk about insurance. Talk about anticipating divorce, which is not a small thing. If you're in a marriage or a financially split partnership, knowing what you would do, you know, I do see a lot of people saving an amount where I worry that if they split, they wouldn't still each be financially independent. And it's worth thinking that through because- We are financially independent.
(someone): You are okay. Yeah.
(someone): Somewhere in the middle there. Exactly. No. And like with Pete just announcing his divorce on Mr. Money Mustache and there have been several other divorces among some of the well-known bloggers. This is not a crazy idea. Like we talk about safe withdrawal rates and focus on the 1% likelihood that 3.5% won't be low enough, but then we won't talk about the almost 50% likelihood of a marriage dissolving. So that's a good thing to think about too, creating your estate plan. I mean, there, there is a lot in that section to really think through to make sure that your plan is as solid as possible. Because the last thing I do, I want to do is recommend to anyone that they follow me down this path. And then you end up at 80 going like, Oh my gosh, I didn't save enough. At which point, what are you going to do about that?
(someone): Where would we recommend they put it?
(someone): So, I've actually had examples like that where people ask me, say an aunt asked me exactly that question. So, my first response would be, first of all, get rid of all of your high cost, high expense ratio mutual funds. So, I have seen some pretty jaw-dropping portfolio allocations that were recommended by financial planners or the local guy at the local bank. And so basically declutter your portfolio. And sometimes it's hard to declutter, because if it's in a taxable account, you could potentially look at generating taxable capital gains. But certainly in retirement accounts, I mean, that has to be decluttered. And it can be decluttered without tax consequences. Just move it over to a Vanguard or Fidelity or Schwab. Go into index funds. Of course, the allocation stock versus bond that would depend then on the age and the preferences. But yeah, I mean, that is basically the first step is always check your expense ratios.
Brad Barrett: All right. And my, my last question here, and we could pepper you with this stuff all day, but, uh, but we'll stop with this is, you know, someone, again, comes up to you at some cocktail party, they say they're 40 years old and they read this blog, right. And they want to retire. They've been diligent savers. They have, let's say $40,000 a year of expenses. They have 30 times saved up. So they have 1.2 million. And, but you know what they plan to live to 95, right. That's 55 years.
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