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  #1  
Old 07-03-2011, 12:40 PM
dauerbach dauerbach is offline
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Make 2 million dollars last

I am 48 years old and just inherited 2.25 million dollars. I want to make that last the rest of my life. Here is what I am thinking of doing. Pay off the mortgage. There is 230,000 left. That is the equivalent of a 5% interest rate, but more important is the psychological impact of only having to pay interest and insurance, the new monthly payment will be about 1,300 a month. Eventually I will sell this house and buy a new one and that should leave me with about another 400,000. Now what to do with the money. I can without difficulty get a 100% safe 3%, but I would rather have around 100K a year income. While nothing is absolutely safe, what kind of investments are very safe, and will yield closer to 5%? And if no one here feels like doing this can you suggest a website where there may be greater interest?

Last edited by dauerbach; 07-03-2011 at 12:41 PM..
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  #2  
Old 07-03-2011, 12:48 PM
TruCelt TruCelt is offline
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Why would you buy a bigger/more expensive house? Better to move to a less expensive area and buy more house for less money.

2.5M is really not all that much to live on. It will allow you to live a comfortable middle class existence if you are frugal. Even in my area a $400,000 home is just completely unecessary and foolish for someone trying to live on a fixed income.
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Old 07-03-2011, 12:57 PM
dauerbach dauerbach is offline
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No, I would move out of this bigger, more expensive house and buy a new one. After selling the old and buying the new, I should sill have no mortgage and an additional 400,000. After paying off the current mortgage I would sell in a few years when hopefully the market will pick up some.
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Old 07-03-2011, 01:11 PM
markdash markdash is offline
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Why would your monthly payment be $1300 after paying off the mortgage?
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Old 07-03-2011, 01:25 PM
dauerbach dauerbach is offline
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That would be taxes and insurance. The current house is very large and very expensive. I would buy a house worth about half as much, so after that taxes plus insurance should be about 500 per month.

Last edited by dauerbach; 07-03-2011 at 01:26 PM..
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  #6  
Old 07-03-2011, 01:47 PM
fruitbat fruitbat is offline
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Go to www.napfa.org.

This is the associaton of fee only financial planners. These are folks who will not make money based on products or solutions they recommend. This is the level of financial issue that should not be hashed out on a message board. You need a plan that is sensitive to taxes as well as risk and that takes into account your unique situation and family dynamics.

Most people in your situation muddle through and then go find some financial product salesman who one of their friends or family members recommends. The right approach is similar to how you would find a good doctor or attorney. Like a doctor or attorney you will pay them for the time they spend working with you.

Good luck!
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Old 07-03-2011, 01:49 PM
Jonathan Chance Jonathan Chance is offline
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With some basic assumptions, if invested properly, 2.25MM should come to about $4.5k per month after taxes in perpetuity. That's about the equivalent of having a $100k per year job without having to work. So yes, one could live on that much and many do so on much less. It may not make you Warren Buffet but properly managed it will keep you going for the rest of your life.

I have a friend who is a retired insurance executive who does that. He has about $5MM and lives off the after-tax interest (about 10k per month). He says he doesn't spend it most of the time and it gets plowed back in.
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  #8  
Old 07-03-2011, 01:56 PM
picunurse picunurse is online now
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Originally Posted by TruCelt View Post
Why would you buy a bigger/more expensive house? Better to move to a less expensive area and buy more house for less money.

2.5M is really not all that much to live on. It will allow you to live a comfortable middle class existence if you are frugal. Even in my area a $400,000 home is just completely unecessary and foolish for someone trying to live on a fixed income.
I don't know where you live, but in the Seattle area, $400,000 will buy a modest older home of about 2500-3000 sq ft, 2-3 bedrooms, 1-1.5 baths. We live in one. New, single family homes are much more.
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  #9  
Old 07-03-2011, 02:37 PM
FoundWaldo FoundWaldo is offline
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Not to derail (well, maybe to derail), but I find house price discrepancies fascinating. Just the other day, I was reading on another forum, someone talking about buying a reasonably nice house for under $200,000 in Texas. Where I live, I really couldn't get any livable house in a decent neighborhood (without having to drive two hours to work) for under $600,000, and for something truly "nice" I'd be looking at a lot more. Really, the houses I actually like around here are over $1 million, without being all that big (some are well under 2k sf). Which is why I haven't bought one yet.
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Old 07-03-2011, 02:45 PM
Marine Marine is offline
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A house that is 2500-3000 square feet sounds just fine. And actually that would likely be 3 bedrooms, and 2 1/2 baths, at least around here. As I said, taxes and insurance are expected to be about 600/month. Say utilities and upkeep another 1K/month. I might get a job to supplement, at least in the near future. And I could expect to add about 400K to the savings when the house sells. Further, 20 years down the line I can probably expect another 2K per month from Social security. I am looking for a middle class environment, when where I can life comfortably and still afford to eat out and buy presents for family members.

As far as financial planners are concerned, my brother is quite successful at that, and if not willing to take control of the investing, he would at least be willing to advise me.
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  #11  
Old 07-03-2011, 02:47 PM
Marine Marine is offline
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Also, I don't know how to calculate it, but what if I was willing to run out of money on my 90th birthday. How much could I distribute then, including decreasing the principle for that to occur.
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  #12  
Old 07-03-2011, 02:53 PM
fruitbat fruitbat is offline
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Originally Posted by Marine View Post
Also, I don't know how to calculate it, but what if I was willing to run out of money on my 90th birthday. How much could I distribute then, including decreasing the principle for that to occur.
That is more difficult than it sounds. You won't have an investment pool with a steady rate of return and you will have to adjust for inflation over time. The general rule is that you can draw 4% of the value of your portfolio over time and adjust for inflation. So this would leave you with $100,000 from the $2.5 million annually with inflation adjustment.

There are a number of problems with that though. First is that it presumes you are willing to invest half or more the funds in stocks, some people may not be. Second, it is based on past data sets and we don't know whether that will continue into the future. Finally, it is very conservative in some ways in that most of the time you will be left with a substantial amount of money that in unspent at the theoretical end of your life. The 4% rule is meant to succeed even in quite adverse circumstances, so if everything goes fine you are left with a pile of money.

I think the closes thing to what you are asking would be to actuallly buy an annuity. The insurance company would assume the investment risk and the payout would cease at your death.
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  #13  
Old 07-03-2011, 03:04 PM
Marine Marine is offline
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Hmmm, an annuity. Sounds interesting. I will start searching around, but do you have any websites you might suggest?
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  #14  
Old 07-03-2011, 04:07 PM
pulykamell pulykamell is offline
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Originally Posted by FoundWaldo View Post
Not to derail (well, maybe to derail), but I find house price discrepancies fascinating. Just the other day, I was reading on another forum, someone talking about buying a reasonably nice house for under $200,000 in Texas. Where I live, I really couldn't get any livable house in a decent neighborhood (without having to drive two hours to work) for under $600,000.
Yeah, it's fascinating to me, too. I live in Chicago, so it's not the cheapest place in the world to live, but $600K will get you a shitload of house. I live in a 1200 square foot house (not counting the basement, which is another 600 square feet), with a garage on a 4000 square foot lot, in a reasonable neighborhood in the city proper, and it's about $150K.
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  #15  
Old 07-03-2011, 04:14 PM
PeskiPiksi PeskiPiksi is offline
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Here's what you can get for 1 Million in Tulsa. I knew there was something good about this place!
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  #16  
Old 07-03-2011, 04:20 PM
Shagnasty Shagnasty is offline
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I am in roughly this same situation as is most of my extended family. I can tell you what me, my father, and my brothers are doing right now. Very little except safe investments. It takes time for this stuff to sink in and I promise your plans and priorities will shift and take on a new form if you just hold mostly steady for a year or so. I bought everyone subscriptions to Money and Fortune magazines which have lots of good info that is easy to read. I also got accepted to the private financial advice forums on The Motely Fool www.fool.com (fill out an application on the site if you are interested in that). That is a very helpful website in general for this type of things and it has an active message board where you can ask detailed questions that are still of general interest to others. Several other little sub-tribes of family members have broken off and done everything from quitting their jobs to buying a helicopter school. I hope the make it a fun decade because they are going to be broke at the end of it, Don't make any rash decisions. Take your time.

Last edited by Shagnasty; 07-03-2011 at 04:23 PM..
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  #17  
Old 07-03-2011, 05:42 PM
Dewey Finn Dewey Finn is offline
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I don't understand the numbers in the OP. You've inherited 2.25 million and want to use the majority of it to pay off the mortgage, leaving you with roughly 250,000, meaning that your home is worth 2 million or so. But you're planning to sell it, and buy a smaller, less expensive house that will add 400,000 to your cash pile. Meaning that the new house is still 1.6 million. That's still a ridiculously expensive house for most of the country. I'd recommend not paying down the mortgage but instead investing the majority of it and then later move to a less expensive area.

And as someone asked, why would you still have a $1,300 monthly payment for interest and insurance? Insurance I can understand but what are you paying interest on?

Last edited by Dewey Finn; 07-03-2011 at 05:45 PM..
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  #18  
Old 07-03-2011, 05:55 PM
GuanoLad GuanoLad is offline
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I don't understand the numbers in the OP. You've inherited 2.25 million and want to use the majority of it to pay off the mortgage, leaving you with roughly 250,000, meaning that your home is worth 2 million or so.
I thought he meant the mortgage only has $230,000 left on it.

By the way, if you can't find a way to live off over $2m, you're not doing it right. That's plenty for a decent, if unspectacular, life.
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  #19  
Old 07-03-2011, 06:00 PM
Manda JO Manda JO is online now
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He probably means property taxes, not interest, though that seems low for property taxes, depending on where he is (and most places where normal houses are over a million are places with high property taxes).
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  #20  
Old 07-03-2011, 06:09 PM
Gatopescado Gatopescado is offline
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Now is the time!

Well, buy 4 4-plexes. Just use the cash for down-payments, using the interest payments on the properties as a tax deduction. With 4 seperate buildings, you'll reduce you tax rate to near zero if you are smart enough to work a Band-Aid. Keep the rents reasonable, the units maintained and they'll stay rented, if you are any kind of a decent landlord. They will pay for themselves and make you a slice on the side. Invest the rest of the money in "realitivly" short-term vehicles at the best rate you can get, rolling them over to higher yields from time to time as rates fluctuate. In the meantime, you are building equity, equity, equity! When you get older and tired of messing around with tenants, sell them off.

Quit work, collect old cars, ski and ride motorcycles. I know people who have done this with a whole lot less than 2.25M to work with!

Set for life!

Of course, this plan isn't going to work in New York City or The Bay Area. Move to where the livin' in cheap, there is no "rent-control" and kooky renter-friendly laws on the books (I'm lookin' at you, California!). Lots of other nice places to live, however.

Last edited by Gatopescado; 07-03-2011 at 06:12 PM.. Reason: I frequently talk out my ass.
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  #21  
Old 07-03-2011, 06:11 PM
Dewey Finn Dewey Finn is offline
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Originally Posted by GuanoLad View Post
I thought he meant the mortgage only has $230,000 left on it.

By the way, if you can't find a way to live off over $2m, you're not doing it right. That's plenty for a decent, if unspectacular, life.
OK, that makes sense. I still think it's better not to pay off the mortgage, partly because of the tax deductibility of the mortgage interest.
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  #22  
Old 07-03-2011, 06:11 PM
amarone amarone is online now
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can you suggest a website where there may be greater interest?
Try the Bogleheads.
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  #23  
Old 07-03-2011, 06:21 PM
Shagnasty Shagnasty is offline
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Originally Posted by GuanoLad View Post
By the way, if you can't find a way to live off over $2m, you're not doing it right. That's plenty for a decent, if unspectacular, life.
That simply isn't true even for someone who is fairly frugal to begin with. $2.5 million at 48 years old is extremely borderline for lasting the rest of your life even if you don't go crazy. That is about the recommended retirement portfolio amount for upper-middle class people that are much older than that. It can be done you but have to be really careful.

People always say that it takes money but the opposite is also true. It costs a great deal in real cash to have money and maintain it. There are investment fees, attorney's fees, and increased tax rates if you don't structure it properly. One of the biggest hits comes from dropping out of the workforce. You have to pay for your own medical insurance on the private market and you may take a huge hit in social security payments later. Having a lot of cash on hand means that your children won't qualify for need based aid to college and you may have to foot the whole bill yourself.

I am not saying this isn't fair but many people, even middle-class ones, get government help that they take for granted. You run the risk of paying increased taxes and getting little for it if you don't make good decisions early on. Making a big mistake in the beginning has an effect that will ripple throughout through the rest of your life so it is worth the time, research, and thought to make sure you get it right.
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  #24  
Old 07-03-2011, 06:27 PM
Shagnasty Shagnasty is offline
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OK, that makes sense. I still think it's better not to pay off the mortgage, partly because of the tax deductibility of the mortgage interest.
A tax deduction still means your are paying 2/3rds or so of that to the bank for nothing. It isn't free. People often say that it isn't wise to pay off your mortgage because the deduction makes a mortgage cheap enough that you can put the money elsewhere and come out ahead in by putting your money in other safe investments. If anyone knows how to do that safely right now, post where and how with a specific breakdown of the numbers. As far as I can tell, there aren't any safe investments that beat paying off a mortgage and I have run the calculations myself dozens of times trying. Even 3% is difficult to come by for safe investments right now and I don't know when that will change.
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  #25  
Old 07-03-2011, 07:04 PM
TruCelt TruCelt is offline
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OK, so what I meant was that there are many areas of the country - probably some near to where you want to be - where a lovely home can be purchased for insanely low amounts, often under $100,000.00. So if you don't have to work, why wouldn't you move to a place where you can get what you want for less?

These also tend to coincide with the areas where, say, a live-in housekeeper can be hired for very little. You may not want this now, but the day will come when it's the only thing allowing you to stay in your home.

Think ahead, decide where to live, don't just stay put as a default.
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  #26  
Old 07-03-2011, 07:38 PM
Shagnasty Shagnasty is offline
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OK, so what I meant was that there are many areas of the country - probably some near to where you want to be - where a lovely home can be purchased for insanely low amounts, often under $100,000.00. So if you don't have to work, why wouldn't you move to a place where you can get what you want for less?

These also tend to coincide with the areas where, say, a live-in housekeeper can be hired for very little. You may not want this now, but the day will come when it's the only thing allowing you to stay in your home.

Think ahead, decide where to live, don't just stay put as a default.
That is good advise in general. Even within the U.S., cost of living varies wildly depending on location. You can't retire with $2.5 in New York or San Francisco at 48 and expect the money to last for your life. If you were willing to make a bold move however, Costa Rica is a good option for American ex-pats financially speaking. You could just go there and probably live really well on that amount of money for the rest of your life. I have been there. It isn't a true 3rd world country. There are Americans everywhere and the health care system is quite good even by American standards, they don't have a military, and it is quite safe. Malaysia has even better incentives for American ex-pats than that if you want to live a truly rich lifestyle with servants but that type of move isn't for everyone. A nice house in Texas may be a better fit.

DO NOT forget to take inflation into account. It is low now but it may not always be. You can easily expect to live another 30 years and maybe much, much more. Inflation compounded over time will eat up much of your investment gains besides the other fees like taxes and money management costs. Don't think you are instantly rich because you aren't. I have personally known people that have gone destitute with much more than that because because they were stupid in the estimate of their "wealth" and what it would actually bring to them.
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  #27  
Old 07-03-2011, 11:05 PM
Rand Rover Rand Rover is offline
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A tax deduction still means your are paying 2/3rds or so of that to the bank for nothing. It isn't free. People often say that it isn't wise to pay off your mortgage because the deduction makes a mortgage cheap enough that you can put the money elsewhere and come out ahead in by putting your money in other safe investments. If anyone knows how to do that safely right now, post where and how with a specific breakdown of the numbers. As far as I can tell, there aren't any safe investments that beat paying off a mortgage and I have run the calculations myself dozens of times trying. Even 3% is difficult to come by for safe investments right now and I don't know when that will change.
Well, depends on what you mean by "safe." The broad US stock market has returned 10% in every rolling 20-year period. So, if you have a 20-year time horizon for an investment, it's pretty "safe" that you'll get something around 10%.
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  #28  
Old 07-03-2011, 11:08 PM
pulykamell pulykamell is offline
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Well, depends on what you mean by "safe." The broad US stock market has returned 10% in every rolling 20-year period. So, if you have a 20-year time horizon for an investment, it's pretty "safe" that you'll get something around 10%.
I'm with you on the stock market, but that's not quite true.
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  #29  
Old 07-03-2011, 11:12 PM
pulykamell pulykamell is offline
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That's the Dow numbers. You want something a little more broad, here's S&P500..

It's still a good bet, and what I'd do with a significant portion of that kind of money if I had a long investment horizon.

Last edited by pulykamell; 07-03-2011 at 11:12 PM..
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  #30  
Old 07-04-2011, 08:04 AM
dauerbach dauerbach is offline
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I did indeed mean pay off a 230,000 mortgage. I did mean property taxes rather than interest. And I do not think for a second that I can live like a millionaire. I was hoping to be able to live a solid middle class existence. Only one child is left in school, and she has a full scholarship. She may go to medical school afterwards, and while I wish I could pay for it, I think doing so would no fit into the plan for the money to last my lifetime.
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  #31  
Old 07-04-2011, 09:44 AM
Dangerosa Dangerosa is offline
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I'm with you on the stock market, but that's not quite true.
That chart also assume you are reinvesting dividends. Which is a good assumption if you are in the growing wealth stage and aren't living off your investments. And a less good assumption if you are living off investments.
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  #32  
Old 07-04-2011, 10:47 AM
markdash markdash is offline
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What is the property tax rate in you municipality? I'm just curious, as the $1300/month seemed really high for just insurance/property tax, but then again, I live in California, where we are fucking idiots and keep our property taxes artificially low.
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  #33  
Old 07-04-2011, 11:24 AM
Martin Hyde Martin Hyde is offline
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Originally Posted by Shagnasty View Post
That simply isn't true even for someone who is fairly frugal to begin with. $2.5 million at 48 years old is extremely borderline for lasting the rest of your life even if you don't go crazy. That is about the recommended retirement portfolio amount for upper-middle class people that are much older than that. It can be done you but have to be really careful.

People always say that it takes money but the opposite is also true. It costs a great deal in real cash to have money and maintain it. There are investment fees, attorney's fees, and increased tax rates if you don't structure it properly. One of the biggest hits comes from dropping out of the workforce. You have to pay for your own medical insurance on the private market and you may take a huge hit in social security payments later. Having a lot of cash on hand means that your children won't qualify for need based aid to college and you may have to foot the whole bill yourself.

I am not saying this isn't fair but many people, even middle-class ones, get government help that they take for granted. You run the risk of paying increased taxes and getting little for it if you don't make good decisions early on. Making a big mistake in the beginning has an effect that will ripple throughout through the rest of your life so it is worth the time, research, and thought to make sure you get it right.
I have a friend who has saved very little for retirement, he has made $100,000+ for many years and was making $85,000 a year in the early 1980s (when that was very solid money.) However he is one of those people who looks at a pay check as a challenge to defeat, and having any left over when the next one comes a sign of failure. He could literally have retired at age 50 if he had smartly saved away for retirement. Instead he is 55 and has less saved than many civil servants who have usually made slightly under the national per capita average their entire lives.

He recently told me that he thinks he could live on $40,000 a year in retirement and that he was wanting to retire "soon." When I told him how much money he would need saved just to earn $40,000 a year for 20 years (which would be more than a 50% pay cut) he was a little upset...; especially since he could live another 30-40 years.
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  #34  
Old 07-04-2011, 08:23 PM
Hari Seldon Hari Seldon is offline
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What would worry me is inflation. I am already worried about it even though I am 74 and have retirement income close to $100K/year. Yes, it is low now, but 30 years ago, it was getting up to maybe 15%.

The disparity in housing prices is enormous. My house is 1300 Sq Ft (plus basement) and the guy two doors down just sold the identical house for nearly $750K.

Now I understand there are places in the upper midwest where you can get a house for almost nothing.
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  #35  
Old 07-04-2011, 10:52 PM
jasg jasg is offline
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Hmmm, an annuity. Sounds interesting. I will start searching around, but do you have any websites you might suggest?
Shop carefully, understand what you buy and remember that the annuity is only as good as the insurance company behind it.

Often, annuities are a better deal for the salesman...
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  #36  
Old 07-05-2011, 06:06 AM
amarone amarone is online now
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Shop carefully, understand what you buy and remember that the annuity is only as good as the insurance company behind it.

Often, annuities are a better deal for the salesman...
I would hope that the recommendation was for a single premium immediate annuity. For all other types, the salesman comes out best. An SPIA pays a guaranteed income for life. This can be level, or you can have it increasing by a set percentage or by inflation.

With large amounts of money you should buy annuities from several different companies so that you do not lose everything if the company goes under.

I just got some online quotes (I'd give you a link, but you would have to be a Vanguard client to use it) and an inflation-adjusted annuity for a 48-year old will initially pay about 6% The down side is that you have spent all the money. If you die the day after you take out the annuity, it is all gone - your heirs get nothing.

An immediate annuity can be a sensible part of the picture, but I wouldn't put all the money into it.
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  #37  
Old 07-05-2011, 06:55 AM
C K Dexter Haven C K Dexter Haven is offline
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Paying off a mortgage may or may not be a good idea. It depends on the rate of return you can get on your capital, vs the rate of interest you're paying on the mortgage. For instance, if you can refinance with a fairly low mortgage interest rate (say, 4.5%) then the expectation is that MOST years in the future your money will earn significantly more than that. Plus, of course, the interest on the mortgage is deductible on your taxes (I'm assuming you're US-based.) So, paying off the mortgage is not necessarily the best thing to do financially.

Second, I would avoid annuities. The interest rate tends to be very low, which means the purchase price is high. You would do better with secure investments.

Remember that you're not just talking about he next five years. At 48, you need to plan for the next 40 years (or longer.) You need NOT to be tied into something like an annuity, which may sound good now but over the long haul will not prove reasonable.
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  #38  
Old 07-07-2011, 10:20 AM
flyboy flyboy is offline
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You need NOT to be tied into something like an annuity, which may sound good now but over the long haul will not prove reasonable.
Could you provide the numbers that lead you to this conclusion? Not trying to debate it, just curious.
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  #39  
Old 07-07-2011, 03:05 PM
Greg Charles Greg Charles is offline
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Originally Posted by Rand Rover View Post
Well, depends on what you mean by "safe." The broad US stock market has returned 10% in every rolling 20-year period. So, if you have a 20-year time horizon for an investment, it's pretty "safe" that you'll get something around 10%.
Based on DJIA numbers, and if I'm doing my math right, that number is more like 6.3% per year for the 20 years ending yesterday ... and most of that was growth during the 1990s. Going back 10 years gets you more like 2% per year, so unless we have a super decade ahead of us, we're not going to get to that 10% rolling 20-year period average for a long, long time.
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  #40  
Old 07-07-2011, 10:52 PM
Duckster Duckster is online now
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Convert it to cash and put it under the mattress or bury in the yard until September. Otherwise, if the US defaults on August 2nd, the amount you will have invested will take a critical hit.

Last edited by Duckster; 07-07-2011 at 10:52 PM..
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  #41  
Old 07-08-2011, 04:21 AM
chowching chowching is offline
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Go to a third world country. You can buy cheap house and land there. Start your own business. 2 million dollars can go a long way.
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  #42  
Old 07-08-2011, 08:53 AM
jacobsta811 jacobsta811 is offline
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Quote:
Originally Posted by Duckster View Post
Convert it to cash and put it under the mattress or bury in the yard until September. Otherwise, if the US defaults on August 2nd, the amount you will have invested will take a critical hit.
If you really believe the US will default, shouldn't he convert it to a basket of Yen, Euros, and a few other smaller currencies ?
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  #43  
Old 07-08-2011, 09:12 AM
pbbth pbbth is offline
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Put it aside and don't touch it for the next year. Go to work every day like nothing changed, set appointments with a financial adviser, consider all the things you are going to want to do with your life and how that money might help. Do you want to set up a trust fund for each of your children? Pay off the mortgage? Travel? Switch to a career that pays very little but has always been your heart's desire? Take the time to figure out exactly what you want and exactly how the money will work for you before you touch a dime of it.
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