Ripped By A Reader

A reader at Seeking Alpha took me to task on several fronts in recent blog post about retirement saving and planning. The reader includes some of his philosophy, some math and appears to make a few assumptions about me personally.

His comment;

I take issue with a comment in the original article. "That people apparently think so highly of $300,000 is a commentary about financial illiteracy. Assuming someone could make it on $12,000 plus social security, they would be blown up after their first five-figure unexpected event "

First, let me tell you that I am far from financially illiterate. In addition to having a good education I believe I am much better in touch with the finances of the common person than the writer of the article and many of the commentators.

I, indeed, will live at least the next couple of years on my social security of $24,000 + another $12,000 for a total of $36,000 as my IRA hopefully continues to increase.The $36,000 is enough to cover the my basic expenses, the healthcare needs I have beyond what is covered by Medicare and a companion plan, plus enough to take one trip a year to visit my children and grandchildren. I have never had and cannot imagine ever having a 5 figure emergency. I can buy a serviceable car for much less than that, I know of no medical expense for which I am not covered which could cost that much. The villa I have in a condo association is covered by the condo maintenance agreement for repairs and insurance against any disaster. I am no longer married so the potential of a financially devistating divorce is not a possibility. I also keep a few months income in a savings account should an unexpected need arise. Many people would envy my situation.

I know of numbers of people who had no opportunity to continue their educations beyond high school, and during their 30's when some suggest they start saving were lucky to be able to put food on the table for their children even with the availability of food stamps, or prior to that program, with government surplus food. Many of these people, with a lot of hard work, made it into the lower middle class at some point in their lives but were pushed back into poverty as the wealth in this country became more unequally distributed to those at the top.

I also take issue with the 4% rule, though from a different perspective. Let us consider a hypothetical situation. Let's assume that a person retired December 31, 2009 at the age of 65 with $300,000. Let's give him a continuing life expectancy of 25 years, to age 90, which is much longer than average. Let's also look at a historically plausible rate of return of 7%, and 3% inflation. He could draw from his $300,000 investment $18,578 in 2010, and the same amount in 2010 dollar equivalent amounts for the rest of his life. Assuming the above 3% rate of inflation this would be $18,525 in 2015, $24,537 in 2015, $24,968 in 2020 and so on with $33,555 in 2030 and a final payment at the beginning of 2034 of $37,766 for a total payout of $677,363 over his 25 year retirement.

Should he or she wish to provide an income until age 95, and if the annual amount earned on investments was only 5.5% and the inflation rate 2.5%, on the same $300,000 the initial payment would be $14,928 which would grow to $19,909 in 10 years, $24,462 in 20 years and $30,500 after 30 years. The total payout would be $655,400 over the 30 years until age 95.

Of course the balance at the end would be zero; this is not an eat your cake and have it too scheme which some of the wealthy have come to expect; it is a plan which with social security would enable a person to have nearly $40,000 a year, in today's dollars, pretty near today's median income, for a long retirement.

Of course, $300,000 will also buy a pretty nice lifetime annuity too.

What you say? You want to retire before you can get full social security benefits or qualify for Medicare? Indeed, why work at all? If your daddy was affluent enough and his daddy too maybe you don't have to and really have no concept of the life of the working man from your priveledged perspective. After all, you're well educated, think anyone can save a million dollars, and the concept of living on $35,000 or $40,000 is foreign to you anyway.

As for those who are lifelong wage slaves, less well educated than you, are not as astute at planning as you and think luxury is a double-wide, $300,000 an unimaginable and huge sum and spent their lives trying to put bread on the table, "Let them eat cake."

My unedited reply;

Lengthy reply with a lot to chew on, thank you.

Your comment "I have never had and cannot imagine ever having a 5 figure emergency." I've never had that type of emergency either but it happens. Not being able to imagine it is not a reason to think it can't happen. Having been in this business for a while, all i can tell you is people get blindsided (whether they should have seen something coming is a different issue) all the time.

Next up "Let's also look at a historically plausible rate of return of 7%." If you get a Stock Trader's Almanac you will quickly see that returns are much lumpier than any average number that might be calculated which makes the rest of the scenario difficult to rely on. Do some more reading about this and you'll see that financial plans blow up all the time for relying on exactly the assumptions you make about returns. This may not resonate with you of course but I have worked in many phases of this business and I am telling you over reliance on this is bad news waiting to happen.

I'm not sure if you're comments about lifestyle, education and wealthy parents is directed at me or not but as I have disclosed countless times we live in an 1100 square foot cabin in the woods that we bought for $87,000 in 1998 that we gutted ourselves and worked on ourselves paying as we went. While I am at one of our cars is a 2000 SUV and the other a 2006 pick up truck. I have a BA from San Diego State University and while that was a fun time no one has ever been too impressed to hear about SDSU. As for retiring early, I don't ever want to retire, I love my work and plan to continue as long as I am mentally capable. And as for wealthy parents, one of my great lessons in life was watching the self inflicted financial mistakes my parents made that made their life much difficult than it had to be (both are alive, not sure the best way to word that part).

I may not be in touch with peoples financial situations beyond our client base, as you say, but I am in touch with how to make a financial plan work, how to increase the odds of failure and the behaviors consistent with both.

Needless to say the collapse of the roof at the Metrodome in Minneapolis due to the weight of snow while tragic for the building was great that no one was in harms way and because no one was hurt can serve as a humorous investment analogy for a long time.