I read a lot and figure someone needs $2M to really have a good shot at living well and retiring with few worries. Roger your thoughts?
The reader also shared that he is 58 with the implication that he is close to retirement age. Another reader left a comment on a Seeking Alpha post of mine agreeing that $2 million is the figure. Between the two comments I feel like I am being asked in part for my personal views and choices.
The best generic advice I can give is to live below your means, don't accumulate debt, save a lot and if you ever do need to fund your expenses/lifestyle out of your savings take no more than 1% per quarter. My use of the word generic is not meant as a slight, I believe the above combo is an essential foundation to a successful financial plan and we live by the first three now (we are a few decades from the withdrawal stage).
Assuming the 4% rule, a $2 million portfolio would allow for $80,000 in portfolio withdrawals. Are you then going to assume getting social security or not? How does the $80,000 (plus social security or not) compare with how much you live on now? Not how much you earn but how much you live on.
There are several types of expenses that we have to contend with and try to plan for one way or another. I've written about these before; things that probably can be easily planned, those that cannot and one-offs--things like vet bills, new tires and home repair.
Our recent three foot snow storm lead me to come up with another category which is things we probably will need. At some point I may not be able to shovel out a three foot snow storm. If we want to stay where we are then at some point we will need either a snow blower or an ATV that we put a plow blade on. These are not disastrous expenses but also not $100 to go to a baseball game either. We have a long uphill driveway which probably rules out a snow blower-- the cheapest option. A more expensive option would be the ATV and blade and an even more expensive option would be moving. Where we are it would not be wise to rely on being able to hire someone to do this for us.
This category is vague and obviously not completely knowable. There is visibility for needing to spend money on snow removal. This will take shape over time and become more visible. For some people there might be visibility for taking in a parent. Figuring out your variables here is obviously very important.
Once you figure your expenses (as best you can) you probably need to figure out what you need to be happy, what that costs and whether you can afford it as you envision or whether you need to make some sort of concession. Maybe you want to spend a month in France but you should really only spend a week. Maybe you want to spend $1000 on World Series tickets when you should really watch on TV from home. The compare and contrast possibilities are endless but you get the idea.
The other day I shared that we spent a lot (relative to us) on our New Zealand trip but that we incurred no debt in doing so which means the trip won't weigh on our finances in the future. The reason to mention this example is that spending on things that then stay with you for a couple of years will obviously add to the monthly financial burden which should be avoided at all cost--my own sense of priority would make an exception for medical events.
It is important for both partners to be on the same page with this issue and I know from professional experience that is not always the case. Getting the monthly nut down, saving a lot and doing some things that cost nothing creates a lot of options for doing other things and going places. We hike a lot and it costs us nothing. We spend a lot of hours on our volunteer endeavors which does not have to cost much if anything.
I also hit this topic with the idea of working much later than 65 or some other traditional retirement age. This will sound snobby but I have developed a low tolerance for staying with a job I don't like. This is a life's too short sort of thing. I realize I have been given a luxury that many people do not have but I think many people who read this site may have been given a similar luxury. I have three jobs that I love, two that pay and one that does not. I hope to do all three as long as I possibly can and with Mr. Backhoe as an example that could be a very long time.
This leads me to believe that plenty of people can find something they love that can pay them a little such that it removes some portion of the income burden they would otherwise place on their portfolios. Success here requires thought, time and planning.
I realize that was long winded but it addresses how I personally come at trying to figure this out. My nut is low enough that ex-a medical catastrophe we get by within the 4% rule. Let me be clear this is about living cheaply not having millions in the bank.
In today's dollars how much to do need to feel fulfilled in life and can you make the numbers work? If not then something will have to give.
Unrelated; the laptop saga is winding down. I got a new Lenovo in the mail yesterday. It was about half the cost of the one I bought in 2007 and probably four times the computer. I've transferred most of my documents and pictures but still have a lot of bookmarks to move over or otherwise set up, need to download a few things like Quicken and iTunes and I should be all set.
38 comments:
Been reading your blog for several years. I posted the question and do agree with your points.
I have always lived below my means stayed away from debt where practial and paid my way.
Now at 58 I am looking toward my next adventure and will heed your advice and look at 3% as the target because after all one must live within their means...
Roger, an off the topic question: what is your thinking on the percent of gold/other precious metals in a portfolio? You've discussed gold a few times and mentioned the so-called "Permanent Portfolio" having 25% gold. What level is prudent vs speculative? I have chosen to keep my gold holdings at 5-10%. What do you think?
I easily made the 2 million plus mark so feel I could add some thought here. Much of what Roger says is true but woefully incomplete. Example, avoiding debt. Debt is a tool and used wisely can reap huge rewards. Also, non portfolio types of instruments should be considered. It is unlikely equities alone will bring the desired outcome. From time to time, there exists better strategies. It takes work to get there.
A great quote: "conservatism is the great enemy of true wealth".
If someone has $80,000 income in retirement (we can discuss the amount later), I don't think they should be eligible for SS. Just my opinion. I definitely think "means testing" needs to be done because of the total debt load of the United Staes. If that person is used to living on $150,000, they had better adjust their life style and not rely on government to "make them comfortable".
Right 12:08, and while we are at it, why not be honest and change the name to Social Welfare?
Can't be social "welfare" if it was paid into over a lifetime of work so that is meaningless.
No point in means testing either -- adds lots of overhead* and further government prying -- just make the payments fully taxable and high income individuals and deficit reduction are taken care of automatically in the existing system at no additional cost.
*approx 15% of insurance company overhead is devoted to evaluation of client cases (AKA means testing) and denial of claims. In contrast, current SS administrative overhead is about 1% total (that's not a typo).
I'd also figure a reasonable growth of that 1M. To assume it sits still is not realistic.
Anon @ 12:08, I disagree. If I've paid into SS over a 51 year work life, I damn sure better receive my SS payment, regardless of how well my 401k performed. It's not a handout. We pay into the system.
Where can I find out more information on the 4% rule?
Health does not have to be a disaster to be expensive, especially if your employer is paying while you are working.
Medicaid supplement policies, co-pays, and non-covered dental, vision, and hearing expenses are just a few expenses that can add up.
I agree with individual who worked 51 years and paid into the system. People plan on this income in retirement. To have the rug pulled out from under them, just because they planned and invested well is not morally correct. It just encourages slothfulness.
If there is a SS takeaway, then just return all contributions (including company portions) to the individual with nominal interest.
This discussion is meaningless unless you get to a more granular level. Of the $2MM how much is pre-tax? Also is there a pension involved? These have a large bearing on the magic retirement number. The simplest way to determine the retirement number is to subtract from your clost of living the after tax income that you get from SS, IRA's and pension and multiply the balance by 25. This is how much after tax money you need to set aside
I am 55, and have been helping the older generation of my family with their money as they get old. Fixed costs like property taxes, insurance, food, etc.plus medical care eat up a much larger part of their income than anyone in our age bracket can imagine. At some point the 4% rule is just not enough anymore, unless there is MORE than 2 million -- usually starting after age 75 to 80 when uncovered expenses start to mount up: either living at home with a lot more help, or move to a continuing care community of some sort adds a lot to costs. Once the car is taken away, transport becomes a large cost as well.
My mother had the $2 milllion including her residence, till her house became unsaleable except at a steep haircut to what they paid for it in 2002, and their portfolio did not recover from the late 2000's drop since she had to take that 4% a year to live on through the downturn. Now she is, at age 80, sitting on about $1.2 million total assets and fixed costs of about $60,000 per annum. With relatives living into their 90's (and sometimes beyond) she is worried about running out, and making choices like getting a four tooth bridge rather than an implant to help anchor it.
Traditional retirement desires like socializing, travel, gifts and nice times with kids, etc. are no longer in her reach.
My other relatives with less are in dire straits, and the only ones still "comfortable" have over the $2 million. They are all at the vanguard in that none had a pension, just IRA's/401ks. My generation is screwed, because we wont be inheriting what we thought.
12:08, social security payments ARE FULLY TAXABLE to someone making $80k.
Don't forget end-of-life assisted care living costs.
Assuming you and your spouse will need two years of 24/7 full time assisted care living, you will need approximately $300K to finally close the books on your lives. Not exactly chump change.
Been there and currently doing that...
End of life? Go bankrupt and stick the state with it. I've seen people through it and when you get to that point there really is very little difference between what the fellow shelling out $300,000 gets and what the indigent get. Use the social safety net; you paid for it all your life. Perfection in this game means dying with zero - you can't take the excess with you.
For someone to say to that those making 80K per year should not be eligible for social security is mind boggling. Why penalize someone who spends time (prior to retirement) thinking about their future and providing a decent life for their family? I might be okay with this if you let me opt out now and no longer had to pay. Keep what I've paid in, but leave me alone......
4:54 AM
Anonymous said...
Where can I find out more information on the 4% rule?
The 4% Rule is this: If in the first year of your retirement you withdraw 4% of your retirement assets, and then each year increase the prior year's dollar amount by annual inflation (CPI-U, presumably), you have a reasonable chance of not outliving your nest egg.
I, personally, want more than a "reasonable chance". Thus, I prefer the "3.25% Rule."
So, with $2MM, can you live the way you want on $65,000/yr in today's dollars? Or, more applicably, on 3.25% of your nest egg? If not, close this browser window and get back to work.
$2 million at 4% amortized over 40 years is over $100k per year.
I feel a better plan that the 4% rule, is develop a portfolio of high quality dividend paying stocks, then live off the dividends. Your nut remains intact....
If you start building a portfolio with this in mind, compounding will do incredible things for you..
Yes, $2 million is a good place to start but there is the problem of inflation. If the Fed is happy at 2% inflation then you know it will be close to 3% and that over 20 years can markedly reduce the value of the $2 million and the $80k you are taking out under the 4% rule. so after 20 years the 80k will have the purchasing power of 32k and that's being charitible because in reality inflations impact compounds and the end result will be much worse.
What is all this talk about a nut?? What on earth does that mean?? Meanwhile all the old ladies in my grandmas retirement home spend their days going to doctors and specialists...free with medicare & social security too... and none of them ever paid a dime into either system.
As much as it pains me to say it, but the Supreme Court has ruled that SS is really a tax on current workers for support of current retirees and not any sort of savings plan for you when you retire. When you say "you've paid in all those working years", you were essentially paying a "elderly welfare tax", and not anything bankable for you.
In contrast, those three Texas counties (Galveston, et. al.)and their employees who opted out of the Federal SS when they had the chance (early 1980's) are sitting pretty with their own personal retirement money with retirement payments TRIPLE that of SS payments in comnparable cases.
Here is a retirement calculator that you can plat what-if games. Conclusion is that things are not nearly bleak as you might think with $2 mill and $80,000 withdrawl a year.
http://www.moneychimp.com/articles/randomness/retirement_odds.htm
Regarding social security. Its true that you paid in over your work lifetime, but the amount received is way disproportionate to all contributions. It should be taxed.
to the guy who mentioned amortizing 2M / get 100k per yr -- the 4% rule assumes you take a payment equal to 4% of your nest egg in year 1, and that in subsequent years you increase that payment using the inflation rate. so actually the payments are not fixed each year, they grow.
to the guy who said social security shoudl be taxed -- if you were paying into social security and paying federal income taxes today, you would realize that you are paying federal income tax on the amounts you pay into SS (at your marginal rate). so taxing again on the SS payments is taxing it twice and is really unfair for those of us in the minority who PAY income taxes rather than being net drain on the system
What if you wish to leave the 2m to your heirs? Can you generate enough income to live on with a base of 2m? What if I can earn 10% from prudent and active investment? I think I can do that with option writing and good dividends.
I think I can do that with option writing and good dividends.
That will turn out to be right or wrong but assuming a 10% annualized return is far more aggressive than I would ever consider.
Would anyone enjoy a complete analysis of what amount it actually takes to live comfortably. There is quite a bit of data that can't be exchanged in this forum. Just respond and I'll help.
Roger, I've been doing it for years.
If you can document that result, fund companies would be falling over themselves to hire you and you would be helping a lot of people. (not a sarcastic comment)
Of course I can document the results. The fund companies would not be interested because I do some sophisticated trades, mostly spreads. I'm an opportunist, take advantage of run ups to sell calls, on downdrafts I sell puts, but always with a hedge. I know before hand how much I can win or lose.
well i think you are wrong about fund companies not being interested.
I'll give a very quick example. I like MLPs. I bought TNH at $120 and have been selling put options all the way up.
Ok, but I am not a fund company, if you're records are verifiable by a fund company and the track record is long enough (subjective) you could hang a shingle in this way.
How can I trust a financial advisor who would buy a Lenovo over a Macbook Air?
mystro1 - how can you sell put options on TNH when it is not an optionable stock? Something smells funny...
Lenovo over a Macbook Air? Nice heckle :-)
Zman, nice detective work.
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