$1,000 - no impact. Into the stock fund you go.
$10,000 - no impact. Into the stock fund you go.
$100,000 - buy a new car, the rest in the stock fund.
$1,000,000 - not sufficient to retire. Buy a house or townhouse and a car, the rest goes… wait for it… in the stock fund.
$10 million - ok, now I can retire. But all I’m doing is moving to Denver, buying a townhouse and a new car and relaxing for a long while.
I already HAVE tickets to Hamilton. Feel free to turn green with envy.
OK, it’s the national tour, when it comes to San Francisco, but still.
Already green that my daughter got to see it for ten bucks the last week it played at the Public.
$1,000 - new rug
$10,000 - new rug
$100,000 - new rug
$1,000,000 - new rug
$10,000,000 - new rugs
Yep.
Say we have 1 million right now in retirement (IRA / 401(k). Can’t touch any of that for a few years w/o triggering penalties. Can’t touch Social Security for another 6 years, minimum. And say we take 150,000 a year in income to match our current lifestyle. Bear in mind, we live in a very expensive part of the country, so that 150,000 doesn’t go all that far - we would not have to worry about daily bills but nor would we live a lavish lifestyle. We could stretch it further by moving to a cheaper area but let’s ignore that for now.
Let’s also ignore inflation and other expenses increasing over time.
So: put aside a million of that 10M, to pay down the mortgage, and put in trust or whatever for the kids and also for the parents.
For 6 years, we’d be exclusively drawing down that million. 6 x 150K is 900K. Let’s round that up to a million. Now 2 of the 10 million is gone.
So we’re Social Security-eligible. Still no Medicare for 3 more years. Let’s say that with SS, we only need to draw down 110K a year. By the time we’re in our early 70s, that 10M is down another 1M, to 7M.
The aging parents are both from long-lived families, but have significant health issues and would likely need increasing levels of care. They are also nearly destitute. We are currently spending well over a thousand a month providing them with housing. Add in other expenses, possibly nursing care, and let’s say that’s 50,000 a year for up to 10 years. That 7M is down to 6.5M.
Neither kid will require skilled nursing care (high functioning autism for one, emotional issues for the other) but neither is likely to be able to get a job that pays especially well, so let’s say we want to have 75K a year for each to supplement their earnings. That’s a lot of money now especially if they moved somewhere cheaper, but again, let’s ignore that. If we go with 75K for 50 years (assuming the principal grows but is roughly on par with inflation), that’s 3.75 million apiece.
That brings the 10M down to, well, -1 million. Oh, yeah: don’t forget that 1 million in retirement money. So we’re now in our early 70s and the money is all gone. Now we’re living on Social Security alone.
This is a very simplified example and lots of nuances: for example we wouldn’t need to put much aside for the kids right now aside from college money. The kids could live with us, saving housing money. We could move someplace cheaper. The parents might not need the level of financial support I mentioned. Etc, etc, etc. Or, we could have a catastrophe that would mean someone DID need full-time skilled nursing care, making the picture much worse.
Realistically, if we had a 10 million dollar windfall we could probably retire pretty much immediately - BUT, we would want to work with a planner to be as sure as anyone can be that we had everything covered.
It’s just not that clearcut.
I am quite certain that 1 million would not be enough to get us “set for life”. 10 million probably would - but only if we were very careful at the outset.
I’m not seeing it. Why do you need to spend down the principal? According to this article, 4% is a reasonable rate of return for a conservative retirement investment portfolio. Just put the $10 million in such a portfolio, and presto, it’s as though you have a job paying a salary of $400,000 per year. Better, in fact, because that income will be capital gains, which are taxed at a lower rate than earned income. $400k per year isn’t enough to take care of special needs kids and aging parents? You’ve said $150k would match your current lifestyle, so that still leaves $250k for the kids and parents. Then you just set up your will so that after you’re gone, that $10 million goes into a trust that will take care of the kids.
Historically, 4% has been regarded as a reasonably safe withdrawal rate that ensures the money will very likely outlast you, but that withdrawal rate assumes that in the coming decades the stock market will continue to deliver its historic rates of return, which is a questionable assumption these days. It also assumes you are retiring at 65, i.e. you probably only need the nest egg to last ~25 years. If you’re retiring in your mid-50s, that’s an extra ten years of living that needs to be covered, and if you have special-needs kids that are 25-40 years younger than that, then the nest egg needs to be even more durable. That means a more conservative asset allocation, and a withdrawal rate considerably less than 4%. Maybe 3%.
So now your $10M portfolio is generating a safe, reliable income of $300K per year into perpetuity. After capital gains taxes come out, you’ve got $240K left to cover living expenses for you, your destitute parents, and your special-needs kids.
Assisted living costs vary from state to state. If you’re in an “expensive” area like Connecticut, the monthly per-person average is about $5600. So to house two parents and two kids in assisted living is going to cost about $270K per year. For average accommodations.
Leaving nothing left for your own retirement. In fact, those numbers yield a $30K shortage, not to mention the parents’ own living expenses. you will need to keep working until your elderly parents die, and will have to shop around for slightly below-average assisted-living accomodations for your parents and kids.
I agree, for retirement at 65, 4% is an old standard rule of thumb, to not spend all the money by the time you die. But it’s based on historical results, and expected returns now are lower than historical. You can go to
https://www.bogleheads.org/forum/index.php
and see endless discussion of this, often based on somebody posting a peer reviewed article for comment. But suffice it to say there’s plenty of well informed push back on the idea you can safely withdraw 4% starting at 65.
But here the question is being asked to the whole audience, not just people who are at least 65. If you’re 25 or 30, you’ve not only much longer to go at current life expectancy, but much more ‘risk’ that life expectancy dramatically extends in coming decades. A more reasonable assumption is that you’d only withdraw enough money every year to maintain the inflation adjusted principle indefinitely. Again there’d be debate exactly what level would achieve that, but a reasonable discussion would be between 1 and 2%, strong optimists or pessimists might make a reasonable argument for a number outside that range but definitely not 4%. Keep in mind, it’s the return earned by a balanced portfolio (100% stocks is too much risk of losing the financial independence the $10mil gave you in a big down turn, after you’d junked your career), after expenses, after taxes (on interest dividends and cap gains) and after inflation.
$150k, say, inflation adjusted after tax income indefinitely is still obviously comfortable, but a significant % of people could add very significantly to that or even more than that by continuing to work. I gather the idea of the top option of the question is, ‘what would you do with an amount of money the income from which dwarfs what you’re able to earn on your own?’ $10mil muddies the waters by not being big enough to do that for a non negligible % of people.
What? No padding?
$1,000 - Something fun - weekend away
$10,000 - Something fun - probably a weeks vacation + deposit to investment account
$100,000 - Something fun + mortgage prepayment to this years maximum + deposit balance to investment account
$1,000,000 - pay off my mortgage, finish funding retirement accounts, keep working but take awesome trips now that housing and savings are mostly off the table.
$10 million - Huge piece of property somewhere the climate is lovely and populate it with dogs and horses.
I don’t mean to pry, but if in a hypothetical situation with a gift of $10 million you’re still not sure with certainty you could cover all these difficult real-life costs you describe…what’s your plan in real life, when you don’t have that $10 million windfall?
That’s not reasonable at all. Who wants to die with 10M in the bank?
The trouble of course is that you don’t know how long you’re going to live, so it’s hard to know how much to spend each year. But having 10 million and not spending any of it really defeats the point.
I grant you that a million isn’t what it used to be, but only a tiny fraction of all people can expect to earn 10 million during their working life, so receiving that amount absolutely changes everything.
$1MM annuity pays about $4000 or $5000/month for the rest of your life, assuming you are a bit older.
$1,000 I would put it in the bank, and I would be really happy for a couple days.
$10,000 I would invest it in mutual funds, and I would be really happy for about a week.
$100,000 I would invest it in mutual funds and be able to retire one year earlier, and I would be really happy for a month.
$1,000,000 I would probably work for another five years and then retire. I would be happy for four months.
$10 million I would retire after four weeks notice. I would be really happy for six months or longer.
$1000
Nothing of notable significance.
$10,000
This begins to have noticeable significance. We’re worried about affording a wedding this year; with $10,000 that worry is rather significantly reduced.
$100,000
This is very significant, enough to have the effect of being worth more than $100,000 because it would be money put towards debt payment and tax-beneficial retirement plans. Would really impact our peace of mind.
$1,000,000
Significantly life changing. Not enough to retire, but would rapidly accelerate the retirement process, probably by ten years. With a million dollars we would have no mortgage, no other debt of any sort, could maximize allowable RRSP contribution backlog and would still have money. Our disposable incomes would be vastly higher, allowing for much more rapid savings while still enjoying vacations and such.
$10,000,000
Completely life altering. Immediate retirement and exploration of entirely new ways of living our lives. Relatives would be assisted to some extent but $10 million would not be enough to allow all of them to retire, just to help a little.
$1,000 - Wouldn’t notice really. Pop in in the ol savings account and use it on something around the house or a trip
$10,000 - a bit in savings, a bit in the roth, a bit for a trip, and maybe replace the fridge, water heater, or AC, as they are all about due.
$100,000 - pay off the house. This will feel like a lifestyle change as that opens up a chunk income every month.
$1,000,000 - most problematic amount. Not enough to retire - too much to spend at once. Invest some, splurge a bit, pay off house / car / etc, maybe move to a new neighborhood. Resist urge to quit job without a plan.
$10,000,000 - I could retire at my current lifestyle, and probably then some. Would do so.
Take some numerical examples. Say you’re 25 and live to 85. Assume real after expense, tax, and inflation return is 2%. The amount to spend $10mil all the way down to zero by age 85 is $287k/yr, inflation adjusted. The amount to spend none of it (again inflation adjusted) is, obviously, $200k/yr. Now say you decided to spend at $287k/yr but the long term return turns out only 1.5%. You run out of money at age 75. Say you decided conservatively to take out $200k and real return turned out to be 1.5%, you end up with still only half, $5mil (inflation adjusted), at age 85. Then assume a medical breakthrough some decades hence (and assuming reasonably good genes and lifestyle habits) and a 25 yr old gains a good chance to live to their 120’s. $200k/yr at 1.5% runs out at age 119.
The general idea I’m trying to communicate is that the answer is similarly sensitive to small differences in assumptions about return, or larger but plausible ones about longevity, as it is whether you assume you eventually spend down the money or not. And actually we have no idea what future returns or longevity breakthroughs might be. For younger people, a safe assumption will asymtotically approach assuming the money must last indefinitely at the expected return, which is much simpler calculate too. 
Wow! You must really hate being bald. 
What our financial planner did, when we asked this very question, was to do a Monte Carlo simulation given a starting point, some income up to some age, socail security, and expected expenses, adjusted for inflation. They simulated a range of market returns, and gave for each year how much money we had at the 10%, 50% and 80% levels - 80% meaning that the simulation gave an 80% probability of having at least that much.
It was quite sensitive to retirement age and money at retirement. They ran the simulation out to age 87, very reasonable considering that my father lived to 95 and my wife’s mother lived to 90 and her father is still here at over 100. Start high enough, and have controlled expenses, and you can have a 50% chance of basically having all your money at this age.
So there isn’t one answer. The web sites showing what you need to retire are junk - play with the numbers and you’ll be convinced of this.
If you take out 2% a year (= 200k the first year) you’re still at 3.6 million after 50 years and still have 72k a year, which is four times the median retirement income in the US. Add to that interest or other gains and you both have a really nice income, especially early on, and you’re still being conservative. Obviously if we all start to live until 200 adjustments will have to be made.
Or just spend the first 5 million and then at 70 buy a policy that will pay out a reasonable income as long as you live so the insurance company assumes the risk of longevity. Since you’re 70 already at this point you’ll get a pretty sweet deal, so you probably don’t need to spend more than 2 million and still have 3 million as walking around money.