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Interestingly, at the age of 45, I took into account my spending habits, my conservativeness with money and reluctance to invest (ie, my retirement is based primarily on annuities), and the average inflation over the preceding 75 years, and I came up with a very similar figure, ie, $1.8 million with about half of that paid into layered delayed fixed annuities. Guided by that figure, I semi-retired at 49 (though have worked pretty substantially in some of the subsequent 10 years of "semi-retirement").
With the above plan, I was aiming at securing $30k per year at the age 45 (ie, in 2005), and increasing that by 4% every year - that is what I would have needed if I had only one condo, and lived with my boyfriend between my condo in Boston and his in Europe (he and I were together for 10.5 years - ie, until his death - but at my insistence kept all our finances strictly separate, leaving things in our respective wills to younger family members rather than to each other. I'm the kind of person that wouldn't touch any $ that I haven't earned myself).
Anyway, what happened is that he died (when he was 59 and I was 52, ie, 7 years ago), and I ended up working actually quite hard in some subsequent years, so overshot my retirement funds goal. I also bought 2 more condos, and now live between 3 condos in 3 different cities on the East and West Coast. Taxes, maintenance and utilities for the extra 2 condos cost an extra $14k per year altogether (but also reduce my need to travel to other places, and the condos are appreciating even while having usable value to me, thus serving as an inflation hedge should I need to sell them). At 59, my annual expenses (including taxes) are actually a bit less than $55k per year, ie, about what I projected they would be when I was 45, even though I did not factor buying 2 additional condos into the plan.
So, this retirement-securing figure of $1.7M per person of average needs actually seems realistic at any age, assuming that you spend about half of it on a super-conservative "investment" (ie, layered fixed annuities), because a fixed annuity starting to pay, say, $5,000 per month at, say, the age of 70 costs incomparably less if you buy it at 45 than if you actually buy it at 70. I have been told that retiring on a set of fixed annuities with layered starting times is comparable to retiring on dividend-paying bonds, but I am not sure whether that is true, I never really looked at the comparison.
So again, assuming the most conservative approach to money management (other than simply keeping it in the banks), and assuming average spending patterns for a single person, I think $1.7 M retirement figure actually does seem to be THE figure that most people are asking about when they ask "how much do I need for (either an early or regular) retirement?".
My decision making at retirement was similar..... I looked at the big, fixed expenditures, asked myself “what are the big expenses” to come, and decided to go for it. I’m single, no kids, lived in the biggest house I ever wanted and had the most expensive car I’d ever want to own, so I figured as long as I was well insured, I’d be fine. I didn’t see anything “looming” as far as big expenses. The home equity, about 700k or so at the time, was my LTC plan.
So 15 years ago, at 42, I pulled the plug. I admit, had I known how much health insurance was going to escalate, I might have waited a couple years. Or maybe not.
You said you could live with $0 portfolio as long as you had SS and Medicare. So I’m assuming age 65. I agree with you there, given you are, I assume, a lifetime high earner as an engineer, and live in a lower cost area.
Yet, you’d need $10M to retire (at least) at age 40? So worst case scenario, $10M blown in 25 years. Or, put in a more colorful way, $400,000 a year pulled out from underneath the mattress every year for 25 years.
This doesn’t make sense. Am I misunderstanding you? I could see $5M, maybe.
The misunderstanding is that a defined-benefit pension, or any cash-sum that's direct-deposited into one's account on recurring basis, is a slush-fund for personal expenses... be it rent, mortgage, therapy, marijuana dispensary, fuel for one's private jet, in-home nursing care or a McDonald's cup of coffee. A portfolio meanwhile is an object of devotion, that mandates care and feeding. One doesn't live off of one's portfolio any more than one carves a chunk out of a pig that happens to be the family pet. Instead, one buys bacon from the grocery store... that came from another pig, who hopefully was nobody's pet.
In large measure, an objective of our lives is to accumulate cash. We do so less from planning for a rainy day, or for decades of retirement, than as a kind of secular (materialistic?) badge of moral goodness. Call it Calvinism corrupted. To then reverse the flow of accumulation, which is what happens when the portfolio is drawn-upon, as source of sustenance, is a betrayal of one's life's objective.
Phrased another way, suppose that you join a start-up, that offers you salary or stock in the company. The company sells at some high valuation, and you obtain a payout of say $2M. In the alternative, you work at the company as an employee, earning $200K/year, for 10 years. Which is the better deal? Well, considering taxes, time-value of money and so forth, the $2M payout is more lucrative... especially considering that you pocket the money without doing any further work. But you see, psychologically the $200K/year salary is money that legitimately goes to funding one's living-expenses. It can be spent. The $2M goes straight into one's account at Fidelity. It can't be spent. The salary is a "better deal" in the sense of one granting oneself permission to enjoy the money.
What these retirement discussions - whether on our Forum here, or in the media - almost never address, is that the quest to "save for retirement" is only partially about actual retirement. The other part, which I think is the far greater part, is a kind of picaresque autobiography of the village-boy who goes on to build an empire. The only way to justify quitting early, is either if (1) the empire turns out to be un-buildable, or (2) in large measure it's already been built. The point isn't about having enough money to afford warm socks and a complaisant home-health aide, but to justify the putting of the capstone on one's life, declaring that enough's enough.
The misunderstanding is that a defined-benefit pension, or any cash-sum that's direct-deposited into one's account on recurring basis, is a slush-fund for personal expenses... be it rent, mortgage, therapy, marijuana dispensary, fuel for one's private jet, in-home nursing care or a McDonald's cup of coffee. A portfolio meanwhile is an object of devotion, that mandates care and feeding. One doesn't live off of one's portfolio any more than one carves a chunk out of a pig that happens to be the family pet. Instead, one buys bacon from the grocery store... that came from another pig, who hopefully was nobody's pet.
In large measure, an objective of our lives is to accumulate cash. We do so less from planning for a rainy day, or for decades of retirement, than as a kind of secular (materialistic?) badge of moral goodness. Call it Calvinism corrupted. To then reverse the flow of accumulation, which is what happens when the portfolio is drawn-upon, as source of sustenance, is a betrayal of one's life's objective.
Phrased another way, suppose that you join a start-up, that offers you salary or stock in the company. The company sells at some high valuation, and you obtain a payout of say $2M. In the alternative, you work at the company as an employee, earning $200K/year, for 10 years. Which is the better deal? Well, considering taxes, time-value of money and so forth, the $2M payout is more lucrative... especially considering that you pocket the money without doing any further work. But you see, psychologically the $200K/year salary is money that legitimately goes to funding one's living-expenses. It can be spent. The $2M goes straight into one's account at Fidelity. It can't be spent. The salary is a "better deal" in the sense of one granting oneself permission to enjoy the money.
What these retirement discussions - whether on our Forum here, or in the media - almost never address, is that the quest to "save for retirement" is only partially about actual retirement. The other part, which I think is the far greater part, is a kind of picaresque autobiography of the village-boy who goes on to build an empire. The only way to justify quitting early, is either if (1) the empire turns out to be un-buildable, or (2) in large measure it's already been built. The point isn't about having enough money to afford warm socks and a complaisant home-health aide, but to justify the putting of the capstone on one's life, declaring that enough's enough.
Ok, I get it. I never had that emotional turmoil. I made my 1.7+ very quickly and never really “nurtured it”. I understand what you are describing though. Therapy.
What do you think the number to take yourself from 40 to 65, given you are okay with having $0 portfolio at 65, should be?
How long is a rope? How much money do you want to spend each of those 25 years?
Let's say you accumulate assets (rental property, stocks, bonds, gold, etc) and then sell them at age 39 and keep the proceeds in cash stuffed in your mattress. That isn't a particularly reasonable assumption, but it does make things simple.
The current official inflation rate is around 2%. Let's say it remains 2% for all of those 25 years.
Let's say you wish to achieve purchase power parity each year going forward -- that is, you do not plan on spending either more or less in future years, adjusted for inflation, than you do in year 1. That isn't a very good assumption either, but it makes things simple.
Let's say you plan to spend $100,000 per year, each and every year, adjusted for a 2% inflation rate for each and every one of those 25 years. At the end, you'll drop down to living on Social Security. Again, not a particularly reasonable assumption, but it makes things simple.
Year 1 $100,000
Year 2 $102,000
Year 3 $104,040
Year 4 $106,121
Year 5 $108,243
Year 6 $110,408
Year 7 $112,616
Year 8 $114,869
Year 9 $117,166
Year 10 $119,509
Year 11 $121,899
Year 12 $124,337
Year 13 $126,824
Year 14 $129,361
Year 15 $131,948
Year 16 $134,587
Year 17 $137,279
Year 18 $140,024
Year 19 $142,825
Year 20 $145,681
Year 21 $148,595
Year 22 $151,567
Year 23 $154,598
Year 24 $157,690
Year 25 $160,844
Total $3,203,030
So, you'll need a little over $3.2 Million in after tax-cash at age 39 to squirrel away for the next 25 years.
But wait - in order to end up with $3.2 Million after-tax when you turn your assets into cash, you'll need a larger number to pay the federal income tax obligation. If you live in a state that charges you a state income tax, you'll have to pay state income tax on the proceeds as well. For example, California's top marginal income tax rate is 13.3%, I believe, and it kicks in at income over $1 Million/year.
Now, let's say your basis on the $3.2 Million in assets you are converting to cash is $3.2 Million (or greater). In that case your capital gains is zero. Then you're not going to have an income tax obligation on that conversion. In that case, all you need is $3.2 Million.
At the other extreme, let's say your basis on the $3.2 Million is effectively zero. Then you will have a big tax bill to pay, so you'll need more than that $3.2 Million in assets to end up with $3.2 Million after tax. How much much more? That depends on lots of assumptions.
At the extreme, let's say you're married filing jointly with no dependents, you have zero W2 income and only have long term capital gains with a zero dollar basis (again, not a likely scenario, but a simple one) and you have no deductions. According to TurboTax TaxCaster https://turbotax.intuit.com/tax-tool...ors/taxcaster/ , you'd owe $557,750 in federal income taxes on that conversion. Add in another, say, $160,000 for your state income tax obligation. Your total Federal + State income tax obligation for that year is about $717,750, leaving you a mere $2,645,280 in after tax cash to stuff into your mattress. That isn't enough, of course.
It turns out with the above not-realistic assumptions, you'd need assets worth about $4,250,000 to convert into cash when you're 39. You'd have a combined Federal and State income tax obligation of about 1,015,500 leaving you after tax about 3,234,500 to stuff into your mattress. Then remove cash per the schedule above, and you'd make it to SS age.
I may have made a mistake or two in the above analysis, so I'm sure others will jump in to correct it. And as I've said, the assumptions are not particularly realistic. Assume more favorable assumptions, and incur some risk, and you could start out with less than $4,250,000. As always, YMMV.
Last edited by RationalExpectations; 07-13-2019 at 11:41 AM..
How long is a rope? How much money do you want to spend each of those 25 years?
Let's say you accumulate assets (rental property, stocks, bonds, gold, etc) and then sell them at age 39 and keep the proceeds in cash stuffed in your mattress. That isn't a particularly reasonable assumption, but it does make things simple.
The current official inflation rate is around 2%. Let's say it remains 2% for all of those 25 years.
Let's say you wish to achieve purchase power parity each year going forward -- that is, you do not plan on spending either more or less in future years, adjusted for inflation, than you do in year 1. That isn't a very good assumption either, but it makes things simple.
Let's say you plan to spend $100,000 per year, each and every year, adjusted for a 2% inflation rate for each and every one of those 25 years. At the end, you'll drop down to living on Social Security. Again, not a particularly reasonable assumption, but it makes things simple.
Year 1 $100,000
Year 2 $102,000
Year 3 $104,040
Year 4 $106,121
Year 5 $108,243
Year 6 $110,408
Year 7 $112,616
Year 8 $114,869
Year 9 $117,166
Year 10 $119,509
Year 11 $121,899
Year 12 $124,337
Year 13 $126,824
Year 14 $129,361
Year 15 $131,948
Year 16 $134,587
Year 17 $137,279
Year 18 $140,024
Year 19 $142,825
Year 20 $145,681
Year 21 $148,595
Year 22 $151,567
Year 23 $154,598
Year 24 $157,690
Year 25 $160,844
Total $3,203,030
So, you'll need a little over $3.2 Million in after tax-cash at age 39 to squirrel away for the next 25 years.
But wait - in order to end up with $3.2 Million after-tax when you turn your assets into cash, you'll need a larger number to pay the federal income tax obligation. If you live in a state that charges you a state income tax, you'll have to pay state income tax on the proceeds as well. For example, California's top marginal income tax rate is 13.3%, I believe, and it kicks in at income over $1 Million/year.
Now, let's say your basis on the $3.2 Million in assets you are converting to cash is $3.2 Million (or greater). In that case your capital gains is zero. Then you're not going to have an income tax obligation on that conversion. In that case, all you need is $3.2 Million.
At the other extreme, let's say your basis on the $3.2 Million is effectively zero. Then you will have a big tax bill to pay, so you'll need more than that $3.2 Million in assets to end up with $3.2 Million after tax. How much much more? That depends on lots of assumptions.
At the extreme, let's say you're married filing jointly with no dependents, you have zero W2 income and only have long term capital gains with a zero dollar basis (again, not a likely scenario, but a simple one) and you have no deductions. According to TurboTax TaxCaster https://turbotax.intuit.com/tax-tool...ors/taxcaster/ , you'd owe $557,750 in federal income taxes on that conversion. Add in another, say, $160,000 for your state income tax obligation. Your total Federal + State income tax obligation for that year is about $717,750, leaving you a mere $2,645,280 in after tax cash to stuff into your mattress. That isn't enough, of course.
It turns out with the above not-realistic assumptions, you'd need assets worth about $4,250,000 to convert into cash when you're 39. You'd have a combined Federal and State income tax obligation of about 1,015,500 leaving you after tax about 3,234,500 to stuff into your mattress. Then remove cash per the schedule above, and you'd make it to SS age.
I may have made a mistake or two in the above analysis, so I'm sure others will jump in to correct it. And as I've said, the assumptions are not particularly realistic. Assume more favorable assumptions, and incur some risk, and you could start out with less than $4,250,000. As always, YMMV.
I am 59, and am spending less than $55,000 per year, while being very active. I assume my spending will increase by 4% every year, ie, approximately double after 20 years. So, I assume I will need $110,00 at the age of 80. I also assume that I will be spending only about 2/3 of what I am spending now starting in the late 80s, down to about 1/2 of what I spend now starting in the late 90s (and under the unlikely assumption that I'll live to 120). That means needing about $160,000 per year between the ages of 90 and 100, increasing gradually to $220,000 at the age of 120. My annuities cover exactly that (even without social security or other resources, which will cover emergencies or extraordinary inflation or occasional splurges). I bought those annuities with a total of only $1.2M in premiums, no more (and my first small annuity, paying $11,800 per year, actually started paying when I was 45).
I am 59, and am spending less than $55,000 per year, while being very active. I assume my spending will increase by 4% every year, ie, approximately double after 20 years. So, I assume I will need $110,00 at the age of 80. I also assume that I will be spending only about 2/3 of what I am spending now starting in the late 80s, down to about 1/2 of what I spend now starting in the late 90s (and under the unlikely assumption that I'll live to 120). That means needing about $160,000 per year between the ages of 90 and 100, increasing gradually to $220,000 at the age of 120. My annuities cover exactly that (even without social security or other resources, which will cover emergencies or extraordinary inflation or occasional splurges). I bought those annuities with a total of only $1.2M in premiums, no more (and my first small annuity, paying $11,800 per year, actually started paying when I was 45).
Yep. The point is that you CAN conceivably wire it, at any age, with about $1.7 M per person (I don't really know how you would adapt that to a couple or family), assuming a normal, not luxurious but not deprived either, lifestyle.
How long is a rope? How much money do you want to spend each of those 25 years?
Let's say you accumulate assets (rental property, stocks, bonds, gold, etc) and then sell them at age 39 and keep the proceeds in cash stuffed in your mattress. That isn't a particularly reasonable assumption, but it does make things simple.
The current official inflation rate is around 2%. Let's say it remains 2% for all of those 25 years.
Let's say you wish to achieve purchase power parity each year going forward -- that is, you do not plan on spending either more or less in future years, adjusted for inflation, than you do in year 1. That isn't a very good assumption either, but it makes things simple.
Let's say you plan to spend $100,000 per year, each and every year, adjusted for a 2% inflation rate for each and every one of those 25 years. At the end, you'll drop down to living on Social Security. Again, not a particularly reasonable assumption, but it makes things simple.
Year 1 $100,000
Year 2 $102,000
Year 3 $104,040
Year 4 $106,121
Year 5 $108,243
Year 6 $110,408
Year 7 $112,616
Year 8 $114,869
Year 9 $117,166
Year 10 $119,509
Year 11 $121,899
Year 12 $124,337
Year 13 $126,824
Year 14 $129,361
Year 15 $131,948
Year 16 $134,587
Year 17 $137,279
Year 18 $140,024
Year 19 $142,825
Year 20 $145,681
Year 21 $148,595
Year 22 $151,567
Year 23 $154,598
Year 24 $157,690
Year 25 $160,844
Total $3,203,030
So, you'll need a little over $3.2 Million in after tax-cash at age 39 to squirrel away for the next 25 years.
But wait - in order to end up with $3.2 Million after-tax when you turn your assets into cash, you'll need a larger number to pay the federal income tax obligation. If you live in a state that charges you a state income tax, you'll have to pay state income tax on the proceeds as well. For example, California's top marginal income tax rate is 13.3%, I believe, and it kicks in at income over $1 Million/year.
Now, let's say your basis on the $3.2 Million in assets you are converting to cash is $3.2 Million (or greater). In that case your capital gains is zero. Then you're not going to have an income tax obligation on that conversion. In that case, all you need is $3.2 Million.
At the other extreme, let's say your basis on the $3.2 Million is effectively zero. Then you will have a big tax bill to pay, so you'll need more than that $3.2 Million in assets to end up with $3.2 Million after tax. How much much more? That depends on lots of assumptions.
At the extreme, let's say you're married filing jointly with no dependents, you have zero W2 income and only have long term capital gains with a zero dollar basis (again, not a likely scenario, but a simple one) and you have no deductions. According to TurboTax TaxCaster https://turbotax.intuit.com/tax-tool...ors/taxcaster/ , you'd owe $557,750 in federal income taxes on that conversion. Add in another, say, $160,000 for your state income tax obligation. Your total Federal + State income tax obligation for that year is about $717,750, leaving you a mere $2,645,280 in after tax cash to stuff into your mattress. That isn't enough, of course.
It turns out with the above not-realistic assumptions, you'd need assets worth about $4,250,000 to convert into cash when you're 39. You'd have a combined Federal and State income tax obligation of about 1,015,500 leaving you after tax about 3,234,500 to stuff into your mattress. Then remove cash per the schedule above, and you'd make it to SS age.
I may have made a mistake or two in the above analysis, so I'm sure others will jump in to correct it. And as I've said, the assumptions are not particularly realistic. Assume more favorable assumptions, and incur some risk, and you could start out with less than $4,250,000. As always, YMMV.
Ok, the original question you highlighted referred to the after tax, under the mattress number. Ie, no tax implications. It’s all after tax money earning nothing. And a paid off home was also assumed. Silly, but that was the question.
What I’m getting at is with no mortgage and after tax money, how much does anyone really need to get from 45 to 65? Someone working and paying a mortgage would probably have to make $175k/year or so in salary to have $100k/yr left to spend.
If I could make $175k/yr in a non management engineering job from the age of 45 to 65, I’d sure as hell keep it too.
Ok, the original question you highlighted referred to the after tax, under the mattress number. Ie, no tax implications. It’s all after tax money earning nothing. And a paid off home was also assumed. Silly, but that was the question.
What I’m getting at is with no mortgage and after tax money, how much does anyone really need to get from 45 to 65? Someone working and paying a mortgage would probably have to make $175k/year or so in salary to have $100k/yr left to spend.
If I could make $175k/yr in a non management engineering job from the age of 45 to 65, I’d sure as hell keep it too.
How much would you budget for year 1 given that you pay no mortgage nor income taxes?
How much would you budget for year 1 given that you pay no mortgage nor income taxes?
I do live with no income taxes and no mortgage. In SF Bay Area. In a paid off home valued over 1M. I have the luxury of not having to watch my spending very closely, so I don’t budget. I do track it though, and in a normal spending year, I’ll come in around 35k. This year saw 10k in veterinary costs in January and I paid cash for a new car, so I will be much higher than that. I have zero health care costs since I have assets structured so as to minimize AGI and take advantage of ACA.
I am 57 and have been retired since 42. Single, no dependents. I had more than 1.7M “under the mattress” when I retired, but looking back, that would have been plenty.
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