How much money to last me till I die?

Factual Questions
21

Isn’t this just an annuity/mortgage calculation?

If you want 60 payments of $50,000 at a real interest rate of 3%, then you need $1,383,778 (assuming your first payment is at the end of the first year) or $1,425,292 if you want the first payment upfront (and 59 pmts after that).

If you want 12 payments/year, with the first payment at the end of the first month, it looks like you need $1,390,549.

I’m pretty sure (nearly positive) you can just subtract the inflation rate from the interest rate to get the 3% real rate, and just calculate a fixed annuity, rather than a growing annuity.

22

I have to correct the above. The real interest rate is given by the Fisher equation, (1+real rate) = (1+nominal rate)/(1+inflation rate), so you would put 2.91% into a regular annuity calculator.

That would make the initial investment $1.41 million, assuming an annual payment starting at the end of the year.

23

I don’t understand the 4% rule, it seems like something invented by writers with financial ties to money management agencies. If you are 65 and even if all your money does is keep up with inflation, you will not run out until you are 90. Very few people live to 90. Also, when people talk about the 4% Ryle, many of them assume safe, consistent and reliable rates of 6-9% annually for your working life. Again, it’s all a sales job.

To the OP, your calculator has to account for variants in inflation and the lack of debt. Even if it takes you 50k a year now to live you likely have rent or a mortgage, car loans,student debt, etc. Ideally that will all be wiped out.

Plus your tax structure on investment income is not the same as salaried income. You may find yourself living a 50k lifestyle on 30k with no debt and lower taxes.

Plus inflation varies by product. Consumer goods and food deflate over time. A 24 pack of coke cost $6 25 years ago, and it still does today. Medical costs grow far faster than inflation.

24

A couple of comments:

a) Keeping up with inflation requires taking on risk. You’re not going to keep up with inflation with savings accounts, money market accounts or even bonds. You need to have some sort of asset allocation that involves stocks and/or real estate. (see “c” below)

b) If you are 65, do you want to bet that you WON’T live until 90, or that your money will run out before you hit 90? I sure don’t.

c) I’m not exactly sure what your point is regarding “assume safe, consistent and reliable rates of 6-9% annually”. Nothing “safe, consistent and reliable” will return 6-9 % right now. To get in the 6-9% range, especially the high end of that range, over the long run, you have to take some risks, as in equities. 6-9 % is reasonable as a long-term average, perhaps, but there will be years when you lose 25 % and years when you gain 25%. That’s why a withdrawal rate should be low, so that you still have money in the game and can recover from 1-5 years of lousy or even negative returns.

d) To what “sales job” are you referring? I don’t understand. Are you suggesting that brokers, mutual funds and other investment people have a vested interest in telling people to invest too much? No doubt. But given the paltry savings/investments that most families have, it’s not working too well.

25

Then you do understand the 4% rule.

Actually, at age 65, you have one chance in four of living past age 90. You expect some return over and above inflation to compensate for this.

But keep sticking it to those “writers with financial ties to money management agencies”. Your brave iconoclasm is way better than actuarial math.

26

Not really. You can earn inflation plus 1% with a 20-year inflation-protected government bond.

27

Heck, you can earn inflation+0.2% with series I savings bonds, and those are state and local tax free and federal tax deferred.

28

Duly noted.

29

The 4% rule came about as a result of an academic study known as the Trinity Study. It was not invented by writers. It was based on an analysis of historic returns, and therefore did not assume consistent and reliable rates of 6 - 9% annually. The period studied (1926 - 1995) included massive market swings.

30

In case you doubt this, here is a life expectancy calculator from Social Security which confirms it.

31

A Canadian RRSP (convert to RRIF at age 71) is basically an investment account that pays no taxes. You pay income taxes as you take the money out. I assume the IRA and 40ik work about the same? there’s a formula that starts at about 7% at age 71 an the mandatory withdrawal goes up each year, until by age 90 you are taking 20% of the remaining balance each tyear.

The other thing - by the time you are 90, unless you are the active guy that walks 4 miles to the train station every morning, you probably don’t need as much income. Presumably, too your house is paid off before that and your expenses are lower. So perhaps you can reduce your take out toward the end if you find you aren’t keeping up. Travel and see the world while you can afford the travel health insurance. Sit on the beach and sunbake later in life…

32

This aspect is often debated. There’s little doubt most people travel and dine out and spend more in the early years of retirement, and then adopt a less expensive lifestyle as they age - whether by choice or imposed by health or finances. The problem with this from a safe withdrawal rate aspect is that if you spend down more in early years you have less of a cushion and fewer assets to withstand a market dive. On the other hand, Social Security and/or other pensions should kick in sometime between 62 and 70, whenever they choose to start. Given all of the variances and what-ifs, I still think a 3.5-4.0% withdrawal is reasonably safe, even if you start before age 65.

33

Also, if you’ve got health issues as a ninety-year-old, you may need additional income to pay for assisted living care.

34

I once played it through when I was working for an insurance company (in Germany). EUR 700,000.- invested at age 40 would get me a lifelong pension of EUR 30,000 anually, after taxes. That was with employee’s discount though.

35

Alright, so as I understand it : the problem with this plan is that there is a possible risk that you live longer than expected, and a risk that your investments will lose too much value for the fund to be sustainable.

There are a few people lucky and hard working enough that they could actually carry out this plan. Just had your company bought out for a few million? Made a successful startup IPO? Won a big settlement as a partner for a small law firm? Etc.

I take it that an annuity reduces the risk, and I guess a smart person would actually buy several smaller annuities from different firms, just in case a single firm goes bust?

The thing is, the risks of outliving your savings or losing them in bad investments may not be large, but you won’t find out about them until it’s far too late to do anything about it. Suppose you get the big payout at age 48, and you decide to go live in nice places for the rest of your days. 20 years later, if you suddenly find out your investments have gone bad and your lifestyle of enjoying fine European olive oil and exercise has extended your lifespan another 15 years beyond expected, well, you might not have such cushy final years.

This brings up another point. For a certain amount of money per year, you could live in a cheaper country (Argentina, Brazil, that kind of place) in quite nice conditions, enjoying the charms of various mistresses and other semi-professional companions. I’m not sure exactly how much money it takes, but I know it isn’t as much as you would expect, given that many things are cheaper in Argentina/Brazil/Eastern Europe/ other “2nd world” countries.

I think it depends, but somewhere around 50k-100k USD per year, in todays money, is probably what it takes.

I never hear about anyone wealthy and successful doing this, however. Why don’t well paid people just work for 10 years or so to get enough money together for some kind of annuity or other guaranteed income plan and then just go disappear into the comforts of somewhere nice?

36

Well, this is the scenario you need to avoid - in most cases it would be a surprise only if you neglect to monitor your investments. The biggest risk in trying to live off your investments for many years is if they do badly in the early years. So you look out for that. If you have a bad year or two early on, then you hope to be able to correct or ameliorate that by tightening your belt until things recover.

37

In an earlier thread someone suggested the idea of a deferred annuity, which sounded appealing to me. You might, for instance, take a portion of your retirement funds and buy an annuity that will pay out a sufficient amount each month, but (and this is the deferred bit) won’t start paying out until you’re, say, 75 or 80 years old. You still have the rest of your retirement savings to live on but now have a fixed timeframe in which those savings have to last. It seems that it would prevent outliving your investments.

38

I read somewhere recently that a significant number of people are selling their houses in London (£1mill gets you a 1 bed apartment) and emigrating to Chile, where living costs are low, the weather amenable, and the government fairly stable.

39

I imagine you could accomplish almost the same thing by selling a home in London and moving to a more rural or distant part of the British Isles.

40

I can admit that I’m wrong, and sorry if my post came across as offensive. My point was that when financial advice article show up they always assume a much higher rate of returns when investing vs. when retired. Both compel people to invest as much money as possible in industries where those same industries take 2% off the top.

I wasn’t aware 25% of 65 year olds survived to 90. That is good. But only 10% make it to 95 although that number will be much higher in the future.

I’ve never read the trinity study, but this blurb using the same data finds you can withdraw 6% a year over 20 years and only run a 10-20% failure rate. A 6% vs 4% withdraw rate can mean having a 300k retirement fund vs 450k.