One million dollars needed for retirement?!

In My Humble Opinion
201

The linked article actually talks about a scenario in which the retiree experiences a drop in market value right off the bat, when taking a fixed figure (adjusting upward for inflation every year). It’s initially based on a percentage of the value at the beginning of things - e.g. the person takes 4% of a 1M nest egg. Then that 40,000 bumps up the following year - if inflation is 5%, she takes 40K x 1.05. or 42,000 in year 2, and so on.

Going with that approach, any bad year can have a permanent effect on your funds. SO yeah, your nest egg WILL shrink if the timing happens to be bad.

Another approach I’d heard is to take that percentage each year. If her funds perform well in the first year, she’s got a larger basis to take the 4% from. If they do badly, she has to either get less money the next year, or she takes a larger percentage of the value.

e.g. if her 1M drops to 920K after year one (between the 40K wothdrawal, and losses), the next year she either takes 36,800 the second year, or she takes a larger percentage of the 920K. 40,000 is 4.3% of the balance.

Taking a fixed PERCENTAGE of your funds may mean income variation from year to year but won’t chisel away at the priincipal as fast.

If you are lucky / frugal / etc., you’ll hopefully be able to live even within the 40K (plus other sources of income like SS, pensions) and put a little of that aside to cover the shortfall in year 2. and so on. And the amount you don’t use in year 1 may be gone from your retirement account, but you can still save / invest it in non-retirement funds.

An alternate approach is

202

There’s a whole lot of room between what you want and “not homeless or starving” and people who are afraid of running out of money and therefore afraid of retiring aren’t generally talking about being afraid they won’t be able to maintain the sort of lifestyle you are talking about. They are afraid they will only be able to manage “not homeless or starving” but $100K with a paid off residence will get you better than “not homeless or staving” in all but the most expensive places in the US. And by “all but the most expensive” , I’m not talking about fairly large areas like NYC - you can absolutely do it on $100K in a decent neighborhood in NYC but not in every neighborhood.

203

5% assumes living off the interest.

But then describe a retirement that Robin Leach would narrate. The original post I replied to was regarding people terrified they’d be eating cheap cat food in a refrigerator box on only $3M in savings.

204

As mentioned above, homeowners insurance and property taxes can be a “house payment”, depending on where you live. We pay more now for those two items than we paid on the note when we first took it out, even though the house is paid off (we owe my parents like 70k on a note: cheap refinance).

Places with low property taxes and insurance are also places with substandard access to healthcare, so that’s a tradeoff.

205

Sure - but you’re going to pay those whether you have a mortgage payment or not so a paid off house still costs less per month.

That depends - my property taxes are low for the area ( property taxes outside the city are 2-3X mine) but that’s because my city has an income tax and those other places don’t. For some people, it probably doesn’t make much difference , but income taxes go down as your taxable income goes down.

206

She died in 2004, so the distribution is under the old rules. I opted to take it over my anticipated life span… so once a year I get anywhere from 500 to a thousand bucks.

Even before the law changed, I’m not sure how it would work for my husband, if I go first. I suppose the answer is to for me draw it all out and spend it on a fancy car or something!

207

5% assumes a lot of things, but just living off the interest isn’t necessarily one of them. As previously mentioned, it likely doesn’t account for inflation risk, for sequence of returns risk, and has a strong chance of eating the principal by a considerable amount.

I’d prefer to greatly err on the side of caution - it doesn’t take much of a medical emergency to quickly drain a lot of money out an account these days.

208

I THINK (I’m not a tax pro, by any means) that he could roll it all over into his own IRA, or take RMD distributions based on his life expectancy. That’s what I gleaned from this page, anyway.

209

Unless your money is earning NOTHING, it will last longer than 20 years. It’s likely that you can safely count on at least 1% interest every year, which extends things quite a bit.

Because I’m avoiding work at the moment, I fired up Excel, and with an assumption that you are taking 4% of the end-of-year principal, and interest of 2% a year, you still have half your money after 33 years. Of course, your drawdown there has been slashed in half also - you start with 40,000 a year, and are getting roughly 20,000 that year.

If you start out taking 40K the first year, then bump up your drawdown by 1% per year (lower than the 2% growth I assumed ), it’s all gone in 32 years. Taking 5% to begin with, and yeah, it’s gone in 24 years - huge difference there! Of course, if you aren’t retiring until age 70, that may not be a worry.

Using the IRS’s RMD tables (the one I grabbed shows it starting at age 72, which I know is no longer the case, but this is just a thought exercise), with the same assumption re interest, you’d take about 37K the first year. It creeps up for about 18 years, BUT your principal is going down every year, and it’s half gone at that point. To be fair, if you don’t start using the money until you hit 72, you’ll be 90 at that point, and preserving your capital may not be a major worry. And the MRD percentage goes up faster as you get older.

The loss of spending power due to inflation is a very real concern. Some expenses can be locked in, e.g. if you own a house now, maintenance and taxes may creep up but the principal / interest will not. Some discretionary expenses like travel will gradually drop as you go from the “go-go” years into the “go-slow” and “no-go” years. But you still have to eat and pay the electric bill.

I absolutely need to do some more crunching on our finances. My “lalalalalala I can’t hear you” thinking is along the lines of “take the MRD, and ONLY the MRD, and try to spend less than that”.

210

That matches with my understanding, BUT - it’s not clear whether there’s a “reset” button when the spouse beneficiary (my husband) inherits an already-inherited IRA. I’m already taking distributions on my mother’s IRA funds, using my own life expectancy.

For my own IRAs, yeah - my husband will be able to treat them as his own.

Like I said, it may be simplest if I just take all the cash from the inherited IRA and have some fun with it! (not really… though it would just about be enough for a new car. albeit not a luxury model).

211

Yes, but its presenting as 'zero housing costs" is pretty inaccurate. I have a 60 year old 3br 1700 square foot ranch. I pay nearly $1000 a month in housing costs. Thats not nothing!

212

After reading this, I think you’re right!

Inheriting an Inherited IRA: What You Need to Know | SmartAsset

213

I didn’t read

Could you live on that considering no mortgage, rent or car payment ?

as no housing cost. Even without mortgage/rent there are other housing costs.

214

That was my post, and I’d appreciate you not mischaracterizing what I wrote thankyouverymuch. I said I was worried my money would run out. In like 30 years. I’m not fucking terrified or seeing my future as inevitable eating of cat food, and you and @Broomstick can please stop putting words in my mouth. Anyone who is retired - anyone - lives with the uncertainty of how long their funds will last. Of course I’m fucking worried. I have cancer and blood clotting issues – these aren’t cheap hobbies. At some point one or the other may catch up with me and eat all my funds and that strikes me as a goddamn legit concern.

215

I’ve never even grossed $150K in a year, much less had that after tax.

I’m still within easy reach of sailing/boating/beaches (although admittedly our winters will likely be more winter than many would like). I have plenty of activities. I can travel. Heck, I used to fly airplanes as a hobby and I’ve been to Europe all while earning under $100k in a year.

Now, when I would be happy living, location-wise, might be different than what you would want, and it’s really all about location, location, location.

At this point short of winning the lottery I’ll never have even 1 million dollars. My financial planner has me on track to maintain my current (admittedly modest) standard of living through my mid-90’s, and I’m planning to pool resources with two other retirees in an even lower cost location once I am no longer bound to working full time.

I may have less money than many here but I will be neither homeless nor starving or trapped at home. I will not have a multiple-thousand square foot residence, or be able to travel first class around the world, but I expect to have a comfortable retirement.

Also how long their health will last - which yes, I know you mentioned in your next sentence. You are correct, it’s something a person should be concerned about. In many ways failing health is a worse disaster than have to downsize to a smaller residence or stop taking trips or a lot of other potential things.

The only American I’ve ever met who truly did not worry about these sorts of things was a genuine billionaire. Good for him and his family. (People in other countries typically don’t have the same worries about being denied health care for not having enough money that we in the US do) For the rest of us… a million dollars, or even 10 million, is not an iron-clad guarantee. You do the best you can and then you have to accept that there is some risk in life.

216

Thanks for acknowledging. Robin Leach ain’t dictating my retirement. As an unemployed retired person, you have to be quite conservative no matter how much money you have (to a point), because life can have calamities. Sometimes many.

217

Huh - thanks. That doesn’t shed a lot of light on things, unfortunately, but it does talk about some inheritance / tax / probate concerns…

Maybe I’ll start taking larger withdrawals now, and using them to fund extra Roth contributions or something as long as I’m still working. Sort of like an unofficial Roth conversion.

218

And those are likely to be less than the rent on an equivalent (or even smaller) place - if you are renting, the landlord has those expenses plus needing to make a profit.

So yeah, “no housing costs” is unattainable (unless you are living free with someone), but anything you can do to reduce them is a bonus.

I looked at our mortgage statement recently, and the escrow figure (taxes and insurance) is close to 40% of the payment. We’re in an area with relatively low property taxes. A house of the same value near my daughter would have about triple the tax bill. Near where my brother lives, more like 5 times. No clue what the insurance would be in either of those locales; I’m assuming similar, as none of the 3 locations is especially prone to natural disasters.

219

I agree that the article had definite flaws.

A 401(k) does address the portability concern, and even more so now that the vesting rules are so much more employee-friendly.

I’m sure companies made out like bandits when employees left after less than 10 years. All that money the company had (or should have) been putting aside, suddenly becomes theirs again. And of course if you worked for A for 15 years, then B for 15 years, your combined pensions would be a lot less than if you’d stayed at either one for the full 30 years.

Of course with a 401(k), you have the HUGE problem of employees not always saving what they should. To me, THAT is the biggest flaw. If you have little disposable income anyway, it’s pretty hard to basically make 5-10% of that disappear (and far too many people take that money, with all the tax and penalty issues that entails, when they change jobs).

220

Mandatory contributions would help to fix that. The amount they would put into a pension put into a 401(k), with the ability to match more, would help also. More financial education would help. But the fable of the ant and the grasshopper shows this is not a new problem. It also shows why privatizing social security would be a disaster.