Perhaps I should of asked this question before retiring last month. I have noticed
several websites saying that you need a million USD to retire and even then you can
run out of money. For example, this page describes how long a million dollars would
last depending on where you live:
I would think that if you put your million in some safe investments that earn, let’s say 5%
a year, you would have an income of $50000 a year without ever having to touch your
original million dollar investment. In other words, you would have a 50K income forever,
plus whatever you get from Social Security.
While inflation is not being accounted for in the above scenario, is this still
a realistic amount? It seems excessive to me since you have a 50K income for
the rest of your life. Of course, it will fluctuate some with the stock market and
interest rates but a 5% return seems reasonable to me.
So what do you think? Is this a good amount for retirement or are banks and
investment firms just trying to increase their income?
That’s to be avoided! It’s gonna get worse with boomers entering final years. Otherwise if you can live comfortably on a yearly 4% withdrawal plus social security income stay out of the ER and hospital. Life is fucking good.
So you go broke from the nursing home fees, and then die, making the debt moot. Meanwhile you’ve given big gifts to your heirs each year before you went into the nursing home, so the lack of inheritance doesn’t matter.
That never seems to happen on schedule. Someone really needs to create an autonomous kill switch that is triggered by a floor of quality of life, mental acuity, and remaining savings.
Of course the trick is finding a safe investment that earns five percent a year consistently. Right now, you could get that in a bank account (perhaps a CD) but a few years ago, you wouldn’t haven’t gotten that much.
Not on schedule, but eventually. It’s my understanding that nursing homes aren’t allowed to just kick someone out once their assets are used up. They’ll get whatever they can from your estate, and foreclose on your old house if it’s still in your name, but they’re left holding the bag after that. Which is probably part of why nursing homes are so expensive to begin with, because they have to suck up as much as they can to make up for the ones who won’t pay completely.
I hear this all the time. I certainly don’t have a million dollars. I am 57 and plan on working until at least 66. There is a scenario though where I could retire with 1 million. It would have to be a very favorable outcome but it is possible.
The funny thing is I keep seeing all of these experts say you need $1m. I actually see some saying more like $1.4 million so I looked up on Yahoo finance just how many people have that much today for retirement. They say only 10%. How can anyone afford to retire? I think the large majority of people - thinking the US here - will have quite a bit less than $1million at retirement. But I am sure most people who read and post on the straight dope are all millionares …
This is the big issue. Unless you retire with some iteration of fully paid medical with Long-Term Nursing Care built in or otherwise accounted for (good luck finding that combo), medical costs can become quite burdensome towards the end of life. If you’re truly destitute you’ll get care, but generally in grim surroundings. If you’re well-off/insured, you’ll get treated a lot gentler.
I frequently see folks blithely assume they’ll commit suicide or have some other out when the time comes that they’re bedridden and approaching destitution. But the world is a lot messier than that and the best-laid plans can easily go awry.
Most of these estimates of the amount needed start with the assumption that you want to maintain, more or less, your pre-retirement income. In retirement, some expenses will be higher (health care costs, particularly) and some will be lower (work clothes and commuting costs, for example). If you can downsize radically, perhaps you can get by on what Social Security provides.
However, my goal is to have a bit more than that.
My 401(k) plan is with Fidelity and their advice is to “aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.” I’m on track to achieve that.
The guideline I always see quoted is 25x your living expenses (which should be lower than when you were working), rather than a flat $1M. Leaving it invested in something like the SP500 is supposed to give you a hedge against inflation and EOL expenses, though that’s harder to predict.
The problem is that in a recession, your $50,000 annual withdrawal starts to eat into your principal. If a recession doesn’t happen until a few years from the end of your life, it’s probably not going to be a major problem. But if it happens near the beginning of your retirement, it could really ruin you.
To mitigate this risk, most sources will advise you to set your first-year withdrawal at no more than 4% of your nest egg’s value (some sources now say 3.8% max), and adjust upward for inflation each year after that so you can maintain your lifestyle. If things are going OK, then your nest egg will probably grow a bit - or at very worst, it won’t shrink.
if you finally get to where you need assisted living, then you’ve got $1M to tap into. $70K per year for five years works out to $350K, with part of that coming from SS (say, $75K) and part coming from the nest egg (say, $275K). If you finally get to where you need skilled nursing, you’ve still got $725K in your nest egg. Skilled nursing is really expensive, but the good news is that if you’re in skilled nursing, you’ll probably be dead before you run out of money.
If OP has a $1M nest egg, then they probably worked, which means they probably also have social security income to supplement that $50K. But of course income tax will eat into all of that. And you’re right, $50K will get you pretty meager accommodations. My dad was paying about $70K/yr for assisted living near the end of his life, and it was merely OK. He was in skilled nursing that cost $15K per month, but he was only there for about four months before he died.
What debt? nobody’s going to lend you money for nursing home accommodations. If you can’t afford it, then you end up on Medicaid, and they “look back” over the past five years to see if you’ve given away assets or sold them for less than market value - and they will deem you ineligible for Medicaid for whatever length of time they think those assets would have lasted if you still had them in your possession.
Safe investments don’t earn 5% a year. They earn 1-2% a year above inflation. Tops.
Even low inflation will eat you alive over 20-30 years. The first however many percent that equals inflation you earn needs to be kept in the account until fairly late in your life.
And whatever interest / dividend income you get from your investments is taxed whether you withdraw it or not. Or at least it will be unless it’s being earned in a Roth account.
You think you make $50K. But you need to leave ~$35K of that in the account every year to account for inflation until you’re near death and can start consuming principal. So now you have $20K to live on. You need to pay ~20% income taxes on all 50K, plus 50 or 85% of your SS, so about 15K. Now you have $5K left. My Medicare part B, D, & G supplement cost about $10K a year total . you’re already $5K in the hole.
So you have zero money for rent, utilities, groceries, medical expenses & co-pays not covered by medicare, car payment and gasoline.
Minimum. More would be nice. I suspect you’re joking, but I couldn’t maintain our current house and overall standard of living situation for $10,000 per month. I charted our fixed expenses a couple of years ago, and realized that we’d need quite a bit to retire unless we moved to something much more affordable. Taxes, $1000+ per month. Insurance, (flood, cars, fire) $1000+, per month. Utilities, $1000 per month. Etc. etc.
Cost of living varies greatly by style and location. $50K after tax doesn’t cover my annual rent on a 1-bedroom apartment. Not to mention any of the other unavoidable expenses that e.g. @Procrustus mentioned. $50K before tax, so $40K after tax, is even worse.
Living in the boonies in a trailer is cheap. But even then, taxes, insurance, and inflation are a big bite. And don’t scale by location; they’re universally almost the same rate.