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« FMF March Money Madness, Round 1, Posts 33-36 | Main | FMF Cruise Review, Part 7 »

February 22, 2012


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I definitely agree to focus on income, not the net worth number itself. My plan primarily is to build up a real estate portfolio for income while I'm still working. This way I have both income which does not eat into principal and is "inflation adjusted" as rents rise with inflation, and the principal also is inflation-protected as property values rise with inflation.

It makes a gigantic difference if you are one of the fortunate people that receive a pension upon retirement. In our case we both have pensions, and since turning 62 we also receive Social Security. We live primarily on our pension income. Our investment portfolio of bonds generates about 5% which is tax deferred in our IRAs and tax exempt in our Trust fund. Thus the majority of our taxable income comes from the MRDs that we must take from our IRAs starting when we turned 70. When the MRDs are due we just transfer money from the IRAs into our Trust and also have our estimated State and Federal taxes witheld at the same time. The net result is that our IRAs are gradually diminishing and our Trust account keeps growing, as does the total value of our portfolio.
If interest rates were to start rising, as some of our bonds mature the money would be used to buy new bonds with higher yields.

Thus this article doesn't apply to us since, at 77 and 78, we will never outlive our money.

When I ran the numbers about a year ago, it set our goal at just above 5 million. We are looking to retire in 27-30 years. I did use a very conservative approach to calculating that number but we figured it's best to err on the side of caution. By my calculations if we keep our current savings and contributions going we'll fall short by just over a million dollars, so we will really have to focus on growing our income even more, and making some good investment choices.

It's pretty daunting!

It's unfortunate that $4 million is the new retirement goal. For so long, even investment professionals were advising a $1 million dollar goal per person, but when you crunch the numbers, that really may not be enough!

Why is it "not enough"? They seem to be saying that $4m in 30 years would generate about $49k a year if you assume relatively higher 4% annual inflation for 30 years. Is $49k a year "not enough"? Am I misunderstanding?

Hey wait a second!
Didn't we just learn some of the pitfalls of the 4% rule in March Money Madness Round 1, post 32?

So, yeah, that Four Million generates enough to withdrawal $160,000 safely if the first 10 years of returns in retirement are positive. We're hanging an awful lot of hope on the American economy continuing to be Prom Queen. has a great tool for estimating and planning for retirement. It asks for current age, age at retirement, assumed age of death, annual income desired in today's dollars, assumed inflation rate, and assumed ROI.

For me to retire at 55 and live until 95 with an annual income of $60k in today's dollars (and assuming only a +2 point differential between ROI and inflation) I will need to have ~$7.85M dollars at retirement.

One dollar today will be worth 30 cents at 4% inflation after 30 years. So $49K per year is full time employment at minimum wage in the year 2043, that is $14K and change in today's money.

Good luck.

Lurker Carl,

The $49K figure was adjusted to today's dollars. It would be $160K in future dollars.

That doesn't sound too bad, especially if a home is already paid off. Ideally, in retirement you would eliminate a lot of the expenses that were necessary during your working life.

Old Limey - I agree with you on the pension. I am 48 and will probably retire at 58 (could retire well before that). My projected pension payout (with survivor benefits) will more than cover our expected living expenses once I retire. Our 401K, after tax investments and social security will all just be gravy.

Haha! Oh, man, I was just about to post about this article on CNN! Beat me to it. :)

I had similar reactions, but think the 4% withdrawal rule is pretty conservative for a lot of reasons. In 30 years, my belief is that interest rates are going to rise and not that long ago 4% was a CD rate (I got an Ally bank 5-year CD at 2.89% in late 2010). Like with 529 plans, my plan is to max out as much as I can and worry about inflation and rates if and when it happens. Not keeping my head in the sand. I'm just worrying about things I can control (what I save) and not worrying about what I can't control (inflation and interest rates). If you're with me give me an Amen! (If you're against me, you're dead to me, haha).

Always keep in mind the time value of money when assessing the true purchasing power of a sum of money in the future. When a large sum of money is discounted at the rate of inflation, it can be remarkable how a seemingly massive future sum can look less impressive in today's dollars. It's a basic concept, but I think the awareness of how this works in practice is low.

I was actually planning to retire at 59 but when I was 58 the company offered a "Salaried Incentive Retirement Program" called SIRP to all of us and it induced me to move my date ahead by 6 months and get a bonus of 32 weeks gross pay. The Cold War had recently ended and the research project I was in charge of didn't make a lot of sense after the USSR fractured into many smaller countries. After I retired my wife and I took a very interesting trip to Russia. It was one of our most interesting trips ever, going by river down the Volga, from Moscow to St. Petersburg. We found the people extremely hospitable and the country had a lot of historical and very beautiful places to visit along the way. I would say that if you are thoroughly enjoying your work and look forward to going in every day don't be in a huge hurry to retire.


How do you set your goals for the amount of money you will need in retirement? I just started my career; I will have 40+ years to save. Currently, my spending is far below what I would expect later in life. I also expect my income to be significantly higher than it is today (adjusting for inflation, of course) 20 years into my career.

Given the HUGE amount of uncertainty in determining the amount that I would need or want in the year 2052, how can I begin to tell if the amount I am saving will match my needs?

Investments that just keep up with inflation:

Bonds, Treasuries, CD's

Investments that are indexed for inflation:

Dividend paying stocks, rental property, wage income.

When retiring for long periods of time choose investments in the 2nd list.

Finally, look at the PE/10 and Q ratio to ensure valuation is good when buying dividend paying stocks, right now is still a time of rich valuation.


Yeah, 4 million sounds about right to me.

Old Limey,

You are right, I probably won't want to "retire". I like my job, but it can very intense at times. Once I "retire", I will probably do consulting work. I will also want to devote more time to volunteer work. I probably don't see myself really slowing down much until I have health issues.

Jeff M --

See this post:

One thing to keep in mind when thinking about needing to save that much money is that the amount you save each year will probably increase as a result of inflation.

For instance, if you make $75,000 in 2012 and save 10% for retirement that is only $7,500 a year. But if you adjust your salary 2% per year for 30 years (and assuming no merit/position wages), you should be making about $133,000 a year. And 10% of that is $13,300.

$4 million is quite a bit of money. But its not impossible, because you are not going to be saving it all only on a 2012 salary.

I think people forget that sometimes.

$88K/yr, not enough? My annual expense is only around $35K/yr.

Soon after I retired I made contact with a large number of subscribers to the fund and index database to which I had recently become a paid subscriber. The contact was through what in the early 90's was called a Bulletin Board which was a means to post e-mails on the board and exchange info with fellow subscribers. After a few months I started writing snippets of computer code to do calculations that the company's software didn't provide. My efforts were received enthusiastically and it wasn't long before I was busier than when I was working. I embarked on the task of programming many methods of the technical analysis of fund and market trends. The market was doing great and it wasn't long before I was working from 8am to midnight, 7 days/week writing what turned out to be a very large program with a 300 page manual.
My long career in aerospace had taught me that software has to be very easy to use if it is to be successful, and mine was, I always preached that "The User is King" since nobody likes hard to use software. In the beginning I gave it away free to any subscriber that asked for it and received a host of great and very useful feedback and new ideas from some very experienced investors. Each subscriber had a unique identification number to prevent my code from being given away for nothing to others. This eventually turned into a very lucrative sideline when I decided to go commercial with it and for quite a while my wife and I were kept busy getting manuals printed, CDs generated, and hauling trunkloads of priority mail packages every day to the post office. Eventually the demand slowed and we were able to return to a normal life, but for a couple of years it was very hectic. The company also had a huge conference every year in cities across the USA, whereby I could be one of the speakers and this helped me publicize my program to new subscribers, and of course, word of mouth is the biggest help of all. There's nothing like a successful investor telling his friends about what is helping him do very well in the market. It was great for the company and it was good for me and turned out to be a great transition from work to retirement, brought in money, and helped enormously with my own investments as well as those of my customers. In July 2008 the database had grown so large that my old MS-DOS, non-Windows, software started running out of memory so I took it off the market and gave all of my coding to the company free of charge. They then incorporated much of it into their own software.

Old Limey,

Sounds like you had fun and it probably did not feel like work. I have been offered jobs to run companies, but I think it would bring on more headaches. I will probably focus on helping to launch several companies with a management team approach. I will also probably take a few board positions and maybe work with a VC.

One question I have for you is if you is how your current investing style would change if you were my age versus your current age and position, taking into account the current market dynamics.

$4Million may look like a lot of money, but anything can happen. The best form of security is financial education, having the ability to make your money work hard for you, and staying a step or two ahead of inflation through above average returns on investment

The investing style I used between 1993 and 2007 worked very well but Bill Clinton was president from 1993 until 2001 and left office with the country at peace, with a large budget surplus, and a modest national debt. These were the Goldilock years, not too hot, not too cold, but just right. The bulk of my very large gains came between 1993 and 2000. Then from 1/1/2000 to 10/5/07 when I was still active but quite defensive my APR was still 12.24% compared with 2.33% for VFINX. Then after my market indicators looked ominous I went to all bonds from 10/5/2007 to today and my APR was 3.89% compared with 0.30% for VFINX.

After two uneccessary wars, paid for by going into debt, along with other unfunded programs and tax cuts, and suffering through the greatest ever recession, high unemployment, and the bursting of the housing bubble and the soaring deficit and debt I have no confidence in being able to obtain good returns trading diversified mutual funds or ETFs when the rating agencies are issuing downgrades almost daily both here and in Europe. The easy money from the government has also caused commodity prices to soar, particularly now with petroleum products and some of the metals. There's also the situation of a congress that is hopelessly gridlocked.

If I wanted high returns I would have to trade and would go back to becoming a reluctant stock picker. You can do well this way but it takes a huge amount of work and requires that you never take your eyes of what's happening to your basket of stocks as well as being ready to act at a moments notice when necessary - hardly suitable for busy people still in the workforce.

A person who cannot live on $88,000 per year in today's dollars has a spending problem, not an income problem.

I hear that Mitt Romney recently said that the new American Dream is no longer owning your own home, it's getting your kids out of it.

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