If you have $500K in investments and don't think you're rich, you will be beheaded.

The BBQ Pit
101

[QUOTE=Cemetery Savior]
Mike Fun (and others!), I’d like your opinion on the 80% of earnings that most calculators use for a gross-sum spending benchmark (including SS, 401(k), pension, etc.).

Everything I read/subscribe to/hear tells me that I’ll need to have enough investment income to create 80% of my pre-retirement earnings. For some reason, that just seems way high.

For that matter, a calculator on TD Ameritrade’s website tells me that my wife and I will need $4.8million to retire. That seems to be crazy-talk.

Thoughts?

-Cem
[/QUOTE]

I think the problem is that calculators like that (and articles that talk about how much retirement savings you’ll need) are coming from the investment banks and brokerages who have a vested interest in your saving and investing as much as possible. So take those numbers with a grain of salt.

102

[QUOTE=Cemetery Savior]

For that matter, a calculator on TD Ameritrade’s website tells me that my wife and I will need $4.8million to retire. That seems to be crazy-talk.

Thoughts?

[/QUOTE]

You need to keep in mind that the people providing this advice have an incentive to get you to save/invest more. They make more money that way. There is zero incentive for them to address how you can live comfortably on less income. That doesn’t mean they are wrong, just that they focus on the income part of retirement and ignore the outgo part.

That’s why they come up with insanely high numbers like 80 percent. There is no logic to that number. They just pull it out their arse to try and scare you into investing more money with them.

103

Some posters have already touched on this but it really is about perspective. Where you live and your lifestyle are really what defines rich or not, regardless of actual dollar value. Investments don’t really count, because they’re not liquid–you may own a million dollar home, but you still have to pay taxes on it, and you can’t spend a house short of selling it. And cost of living varies–the apartment I’m in right now would probably cost us twice as much if it were in, say, downtown Halifax rather than the suburbs of Lincoln, and we’d likely have to pay extra for parking. Looking at a dollar value is a really bad ruler in this kind of situation.

Different people have different ideas of a ‘decent’ lifestyle too. For example, where i grew up people are moving away in droves, and there’s plenty of homes on the market. Yet some of my classmates are building new houses rather than buying old. I can only assume that it has to do with the ‘ooh, shiny’ factor that comes from having new versus used. Most of these kids probably not only didn’t buy their first car, but may not even have to buy their first boat* (Which costs $20k just to outfit with radar and the like). For them this is normal–I think I’d pass out if my father was going to give me the equivalent of half a million dollars.
*Fishing community

104

[QUOTE=jjimm]

(By the way, what’s the state of pensions in the US: do you have pension funds with tax breaks, or does everyone just use their 401K? That’s certainly the impression the vast majority of posters in this thread are giving me.)
[/QUOTE]

Defined benefit plans like pensions are slowly disappearing and being replaced by defined contribution plans like the 401K. Speaking very generally, you pretty much have to have a union job or a government job to expect an old-fashioned pension in the States these days. And I’m not sure how much longer even that will be true. Some state governments are trying to switch to defined contribution plans.

105

[QUOTE=LionelHutz405]
You need to keep in mind that the people providing this advice have an incentive to get you to save/invest more. They make more money that way. There is zero incentive for them to address how you can live comfortably on less income. That doesn’t mean they are wrong, just that they focus on the income part of retirement and ignore the outgo part.

That’s why they come up with insanely high numbers like 80 percent. There is no logic to that number. They just pull it out their arse to try and scare you into investing more money with them.
[/QUOTE]

Kinda thought there might be an ulterior motive. :wink:

I always thought there should be a savings-adjusted “future income” number. For example, if my wife and I are really only living on 80% of our salary now (we’re ‘teh lame’, and like to save), then shouldn’t I project to live on 80% of 80% (i.e. 64%)? If I remove our mortgage (which we won’t be paying in retirement), I think we’d could duplicate our lifestyle for 48% of our current income.

Sorry for the hijack, but I don’t see VCO3 coming back to defend his de-capitated savings theories.

-Cem

106

[QUOTE=LonesomePolecat]
Defined benefit plans like pensions are slowly disappearing and being replaced by defined contribution plans like the 401K. Speaking very generally, you pretty much have to have a union job or a government job to expect an old-fashioned pension in the States these days. And I’m not sure how much longer even that will be true. Some state governments are trying to switch to defined contribution plans.
[/QUOTE]
So when you say “pension” do you mean government-controlled/funded schemes? I think there’s a terminology difference that I don’t quite understand. We have “old fashioned” pensions here that are company or government run (and they’re going down the tubes mostly), but we also have private pension schemes that are basically just investment funds, but there’s zero taxation on them. But you can’t touch them until declared retirement age. Do they exist where you are?

107

[QUOTE=Sequent]
I’m not spinning anything, and I don’t contest your point. I’m simply noting that, meagre as it might be in any particular context, $500K is still a lot more money than most people have–even just in the USA. And if you have a lot more money than most other people, you’re rich. Even if you don’t live like it. Even if you don’t feel like it. Even if all you see are other people who are even richer. It doesn’t make you evil, or greedy, or even unusually fortunate. But it does make you very wealthy in the eyes of most Americans.
[/QUOTE]

Well that is fair. But by your definition, that puts everyone that is upper middle class in America in with the rich. That is changing the common definition of rich in this country.

108

[QUOTE=CrankyAsAnOldMan]
Sorry, I think you’re off. If you have a couple of kids who may want to attend college, and you’re prudently planning for retirement, than $500,000 isn’t rich. Secure, maybe. MAYBE. But not rich.

Hi, my name is Cranky, and I just like repeating what others have said.
[/QUOTE]
You know, the paying-for-kids-college has come up a couple times already. My dad paid for my college 100%, tuition and housing, and the general opinion among my college friends was that I was from a rich family. Just because my dad could pay for college. (FTR I went to state school, so he wasn’t paying for Harvard rates or anything like that. And we had modest house, drove modest cars, etc.) Likewise, anyone who didn’t have to take a crappy part-time job, or got money from home for new clothes, sorority dues, or a not-shithole apartment, also rich, at least according to kids on the other side of things. So I guess my point is that VCO3’s definition of rich isn’t too far off from that of a bunch of college kids from Chicago and suburbs.

I guess the fact that VCO3 thinks like an 18-year old isn’t really news, though.

109

[QUOTE=jjimm]
So when you say “pension” do you mean government-controlled/funded schemes? I think there’s a terminology difference that I don’t quite understand. We have “old fashioned” pensions here that are company or government run (and they’re going down the tubes mostly), but we also have private pension schemes that are basically just investment funds, but there’s zero taxation on them. But you can’t touch them until declared retirement age. Do they exist where you are?
[/QUOTE]

That’s what a 401k is. Money is taken out before income taxes and can be invested in certain ways. There are hefty penalties if it is taken out before retirement, though one can borrow against that money. I did that for a while, I was paying interest to myself. Is that evil, VCO3?

110

[QUOTE=jjimm]
So when you say “pension” do you mean government-controlled/funded schemes? I think there’s a terminology difference that I don’t quite understand. We have “old fashioned” pensions here that are company or government run (and they’re going down the tubes mostly), but we also have private pension schemes that are basically just investment funds, but there’s zero taxation on them. But you can’t touch them until declared retirement age. Do they exist where you are?
[/QUOTE]

Pension over in the US tends to be reserved for defined benefit schemes - your employer (and you) pay money on a regular basis into a scheme that when you retire pays you a set amount each month, usually a percentage of your income over a period of time at the firm (eg an average of your best 5 years). The trouble with these is that they are huge liabilities for firms on an ongoing basis, especially those firms that are contracting in size. tax laws have allowed these to be underfunded for years - if you are growing, that isn’t a problem, as like any pyramid scheme you are paying for the pensions of previous workers with the contributions of a larger base of present works (oversimplification alert). However, if you are like the Detroit automakers, for example, with a shrinking workforce/revenue, and are having to pay out on a larger number of past employees, you can get in trouble.

Far more common are defined contribution plans, such as the 401(k) or 403(b) plans. Here you contribute money to an account, pre-tax, and your employer may add to it (mine doesn’t… sniff). When you retire, there is no guarantee of a onthly payment - you walk with a lump sum. If you access this before retirement age, you not only pay the income tax on whatever you pull out, but you also get hit with a 10% penalty tax rate on top, which can be pretty crippling. Definitely to be avoided. Now of course you can turn that into a guaranteed income stream by annuitizing it, but it isn’t linked to your previous earnings, it is based on how much you put in.

111

[QUOTE=Cemetery Savior]
If I remove our mortgage (which we won’t be paying in retirement), I think we’d could duplicate our lifestyle for 48% of our current income.

[/QUOTE]

I think 48% is a much more realistic number. In addition to no mortgage payment think about:

No need to save for retirement anymore. As you get closer to retirement chances are you are saving a big whack of money each month into your retirement account. You get to spend that money now.

The kids are gone and you don’t have to live in a big house close to work anymore. You can sell your big house and move to something smaller in a cheaper area. Lower property taxes; lower utility bills, and lower insurance. You might go nuts and move to another country where the cost-of-living is really cheap. If you do that, you can live on much, much less than 80% of your current income. Not for everyone, of course, but worth thinking about and an option your friendly financial advisor will never suggest.

If you used to have a long commute to work, you now save all the expenses associated with that since you are driving less. If you had two cars, you can probably get by easily with one now. Cars are expensive to own and maintain. So you are talking nice savings there.

You have time to garden and grow some of your own food. Lower grocery bills.

It’s better to reduce your expenses rather than increase your income because you can’t be taxed on that. Your tax rate will be much less.

Don’t let some financial advisor scare you into living in virtual poverty your whole life just to attain some magical (huge) amount of retirement savings. A percentage based on a lifestyle you aren’t living anymore isn’t very useful.

112

[QUOTE=LionelHutz405]
I think 48% is a much more realistic number. In addition to no mortgage payment think about:

No need to save for retirement anymore. As you get closer to retirement chances are you are saving a big whack of money each month into your retirement account. You get to spend that money now.

The kids are gone and you don’t have to live in a big house close to work anymore. You can sell your big house and move to something smaller in a cheaper area. Lower property taxes; lower utility bills, and lower insurance. You might go nuts and move to another country where the cost-of-living is really cheap. If you do that, you can live on much, much less than 80% of your current income. Not for everyone, of course, but worth thinking about and an option your friendly financial advisor will never suggest.

If you used to have a long commute to work, you now save all the expenses associated with that since you are driving less. If you had two cars, you can probably get by easily with one now. Cars are expensive to own and maintain. So you are talking nice savings there.

You have time to garden and grow some of your own food. Lower grocery bills.

It’s better to reduce your expenses rather than increase your income because you can’t be taxed on that. Your tax rate will be much less.

Don’t let some financial advisor scare you into living in virtual poverty your whole life just to attain some magical (huge) amount of retirement savings. A percentage based on a lifestyle you aren’t living anymore isn’t very useful.
[/QUOTE]

Do you have a pamphlet, sir?

I am taking your advice and stopping this “saving” thing altogether.

VCO3, I am joining your anti-savings team! Time to plant my garden!

-Cem

113

[QUOTE=LionelHutz405]
The kids are gone and you don’t have to live in a big house close to work anymore. You can sell your big house and move to something smaller in a cheaper area. Lower property taxes; lower utility bills, and lower insurance. You might go nuts and move to another country where the cost-of-living is really cheap. If you do that, you can live on much, much less than 80% of your current income. Not for everyone, of course, but worth thinking about and an option your friendly financial advisor will never suggest.

[/QUOTE]

Odd then that I recommended every client at least consider doing that. If you think about it, cashing in home equity is in the interest of the financial advisor. What they want is to increase your net assets under their management. A million dollar home gets the financial advisor nowhere. Selling that home, buying a $300,000 smaller home in a cheaper area, and investing the $700,000 with the FA results in big benefit to the FA.

114

[QUOTE=villa]
If you access this before retirement age, you not only pay the income tax on whatever you pull out, but you also get hit with a 10% penalty tax rate on top, which can be pretty crippling. Definitely to be avoided. Now of course you can turn that into a guaranteed income stream by annuitizing it, but it isn’t linked to your previous earnings, it is based on how much you put in.
[/QUOTE]
OK, that’s actually very similar to private pensions, except that for companies that participate in such schemes, we also get employer contributions (the mugs!) and a state pension too, but that’s miniscule. Depending on the scheme, we can either take the lump or get a pre-agreed monthly stipend out of it.

So a 401K is mainly aimed at pensions, but you could, if you wanted, do something else with it - and when younger people talk about cashing in a 401K, they’re really, really getting screwed on tax?

115

[QUOTE=villa]
Odd then that I recommended every client at least consider doing that. If you think about it, cashing in home equity is in the interest of the financial advisor. What they want is to increase your net assets under their management. A million dollar home gets the financial advisor nowhere. Selling that home, buying a $300,000 smaller home in a cheaper area, and investing the $700,000 with the FA results in big benefit to the FA.
[/QUOTE]

That’s true. I was purposely focusing on the savings in your day-to-day living expenses that will result, not in any profit made in selling. A FA will have no interest in those, but they do affect what percentage of your current income you will need.

116

[QUOTE=jjimm]
…
(By the way, what’s the state of pensions in the US: do you have pension funds with tax breaks, or does everyone just use their 401K? That’s certainly the impression the vast majority of posters in this thread are giving me.)
[/QUOTE]

I’ll be due for about $1300/month from a pension if I don’t start withdrawing until I’m 65, but the events of the last decade have made me lose some faith in corporate America. Getting out of pension obligations require a lot of long-term malfeasance and a crisis or two (such as the PBGC (a government insurance fund for pensions) becoming insolvent), so odds are that my $1300/month will be safe. However, tell that to the United Airlines retirees (and don’t anyone mention Enron). I know I’m very, very fortunate to have my pension plan. For about the past ten or fifteen years, I think that pensions at most companies have all but dried up. (I know for sure that new-hires at my company cannot join the pension plan).

The thing that (I think) everyone’s reacting so strongly to is that a lot of us have built our nest-eggs the old-fashioned way – by saving money over many, many years. As I said earlier, $500K seems like a lot of money when you’re young, but I’ve been contributing to my 401K for 23 years, and I’m embarrassed that it’ll take six more years for me to hit $500K. Saving money is really difficult, and you have to do it every day for several decades to get anywhere. But what’s the alternative? It seems like the only responsible thing to do.

BTW: Noon in Los Angeles – I work literally across the street from LAX (in a building next to the one with the two white globes, for those of you familiar with the area). It’s like an apocalypse. It’s something like 95 degrees and the sky is sort of like sunset, a mixture of yellow and peach, except that the sun is high in the sky. There’s a light dusting of ash on my car, and my eyes started watering when I walked one block away to get lunch. It’s weird.

117

I think it’s time to turn off the Catholic radio. It only makes you agry.

118

[QUOTE=jjimm]

So a 401K is mainly aimed at pensions, but you could, if you wanted, do something else with it - and when younger people talk about cashing in a 401K, they’re really, really getting screwed on tax?
[/QUOTE]

Pretty much, yes. There are some ways to get at the money under some very limited circumstances, and many plans allow you to borrow against the money, but taking it out should pretty much always be a last resort, as you pay your highest marginal tax rate on it, plus 10%.

119

[QUOTE=Skammer]
I think it’s time to turn off the Catholic radio. It only makes you agry.
[/QUOTE]
And there’s the third word ending in “gry”.

120

[QUOTE=ParentalAdvisory]
How naive can the OP be? More math for ya…

http://www.thesimpledollar.com/2007/04/26/compound-interest-versus-inflation-the-battle-for-your-money/I put together a rough excel calculation showing the purchasing power of $500,000 after twenty years with 3% inflation if you chose to not invest at all:



Yr:     Purchase power: Inflation taken:
0	$500,000.00	$15,000.00
1	$485,000.00	$14,550.00
2	$470,450.00	$14,113.50
3	$456,336.50	$13,690.10
4	$442,646.41	$13,279.39
5	$429,367.01	$12,881.01
6	$416,486.00	$12,494.58
7	$403,991.42	$12,119.74
8	$391,871.68	$11,756.15
9	$380,115.53	$11,403.47
10	$368,712.06	$11,061.36
11	$357,650.70	$10,729.52
12	$346,921.18	$10,407.64
13	$336,513.55	$10,095.41
14	$326,418.14	$9,792.54
15	$316,625.59	$9,498.77
16	$307,126.83	$9,213.80
17	$297,913.02	$8,937.39
18	$288,975.63	$8,669.27
19	$280,306.36	$8,409.19
20	$271,897.17	$8,156.92

$270,000 if you choose to retire will not afford you much after twenty years, and will require you to work until you die, assuming you’re even healthy at that point.

Say you live today with your budget for housing and living costs being 25k per year, with inflation averaging 3% per year, your cost of living also goes up.



Yr:     Cost of living: Added cost of inflation:
0	$25,000.00	$750.00
1	$25,750.00	$772.50
2	$26,522.50	$795.68
3	$27,318.18	$819.55
4	$28,137.72	$844.13
...
18	$42,560.83	$1,276.82
19	$43,837.65	$1,315.13
20	$45,152.78	$1,354.58

So if you have $500,000 in todays dollars in 20 years (really $270,000 purchasing power) and do nothing and want to retire, you’ll be lucky to afford 6 years of non-working time because you’ll need to spend $45,000 to survive per year.

Same amount if you averaged 7% after investing:



Yr:     Balance:        Earnings:
0	$500,000.00	$35,000.00
1	$535,000.00	$37,450.00
2	$572,450.00	$40,071.50
3	$612,521.50	$42,876.51
4	$655,398.01	$45,877.86
5	$701,275.87	$49,089.31
6	$750,365.18	$52,525.56
7	$802,890.74	$56,202.35
8	$859,093.09	$60,136.52
9	$919,229.61	$64,346.07
10	$983,575.68	$68,850.30
11	$1,052,425.98	$73,669.82
12	$1,126,095.79	$78,826.71
13	$1,204,922.50	$84,344.58
14	$1,289,267.08	$90,248.70
15	$1,379,515.77	$96,566.10
16	$1,476,081.87	$103,325.73
17	$1,579,407.61	$110,558.53
18	$1,689,966.14	$118,297.63
19	$1,808,263.77	$126,578.46
20	$1,934,842.23	$135,438.96

So if you invested and things worked out good, you could have a safe withdraw rate of 4%, you’ll get $76,000 per year (beating inflation with some left over). Likely less if you pay taxes, but you can afford to not work for 40+ years in this scenario.
Let’s look at 1975 and having $500,000…

http://www.westegg.com/inflation/The thing is, is that the OP is the type of person that will be bitching how broke he is when he’s 70 years old, and voting to enact a tax on everyones Roth IRA so he can eat :dubious:
[/QUOTE]

These charts are confusing to me, I know i am stupid, but can you explain why you should take the defltionary effect in purchasing power of today’s amount and also take into effect the projected inflation itself. IOW you say $500K today will be worth $270K in 20 years while at the same time a $25,000 lifestyle will cost $45,000 to maintain. Shouldn’t only one of these numbers be relevant?