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August 18, 2012


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It would be awesome to be able to know you'll have $50,000 a year but that doesn't seem to include inflation. By the end of your retirement that $50,000 a year will seem like much less.

I retired in September 1992 with $320,000. Between us we have 2 pensions and 2 SS checks coming in. My highest ever annual income was $74,000 and my wife's was $16,000. We raised three children, each doing well, two are multi-millionaires, the youngest (48) is getting close to a million.

Thanks to the bubble and a fabulous stockmarket between 1993 and the end of 2007, the $320,000 we started with is now producing tax free Muni bond, and tax deferred Corporate Bond and CD income, of $321,191/year. The pensions and SS add another $65,040/year.

My situation is unfortunately not repeatable for the majority of upcoming retirees.

I was just looking at Fidelity's new issues of municipal bonds, the coupons range from 2% to 3%. In 2008 I was buying new issues of munis with coupons between 4.5% and 5%. My CDs have coupons ranging from 4.65% to 5.15%. My corporate bonds have coupons ranging from 5.0% to 5.5%. My bond maturities are laddered out to 2040.

Today's future retirees have undergone a triple whammy.
1) They have had 13 years (8/1999 to 8/2012) where the S&P500 has made nothing.
2) Interest rates are now so low that CDs and new bond issues have very low coupons.
3) The great recession has been unlike all previous ones and has defied all of the stimulus attempts to return the economy and employment rate to normal.

I can understand why owning rental real estate is looking better and better. The homes in my development that have come on the market this year have sold for pre-bubble prices (over $1M) and had multiple offers. This development however is in the heart of Silicon Valley, close to lots of major Hi-Tech and Internet companies, and blessed with a fantastic year round climate. Home rentals of all types are not plentiful. However there are a lot of retail properties for rent because of many small business closures.

I find these rules of thumb just that. Thumbs.

It does not take into account what a person wants to do in retirement or how much debt or a whole mess of factors too numerous to mention.

I find these numbers highly questionable for someone at the age of 50.

Two things I like about your article:
1. The idea of starting at $50K. I wished I had learned years ago that it's not "how much" to retire, but "how little" one needs to retire. It might seem like semantics, but when one realizes FI is within the realm of possibility, it gives one control over one's life.

2. Real estate returning 8% vs 2%. That's a 4 fold difference. Huge. I want to pay for a place and let the incoming monies be my spending money.

If you retire at 50 and live to be 85, a fixed income of $50,000/year is not going to be nearly enough as you get older.

One example - We bought our current home in 1977 for $107,000. Now in 2012, 35 years later it would sell for close to $1.2 million. That's just one example of inflation.

Other examples are essential expenses such as food, gas, and all of the other things you can't do without such as electricity, natural gas, water, sewage & garbage service, phone service, TV, home repair and maintenance, internet service, car repairs, property taxes, health insurance, car insurance, home insurance. Then there are things you could do without but won't want to such as eating out, clothing, vacations, entertainment etc. etc.

Even with an unrealistic inflation rate of just 2%, prices will double over 35 years. Fortunately California has proposition 13 that only allows property taxes to increase by a maximum of 2%/year.

As others have said, the article didn't account for inflation. However, it also didn't account for spending down the capital. Assuming 3% inflation, the table should also show how long a real income of $50,000 can be maintained:

Yield: 7%, Savings needed: $714,286, Lasts for: 23 years
Yield: 6%, Savings needed: $833,333, Lasts for: 25 years
Yield: 5%, Savings needed: $1,000,000, Lasts for: 27 years
Yield: 4%, Savings needed: $1,250,000, Lasts for: 30 years
Yield: 3%, Savings needed: $1,666,667, Lasts for: 35 years
Yield: 2%, Savings needed: $2,500,000, Lasts for: 42 years

Under lower-yield, higher-savings assumptions, that doesn't work out so badly. Still, I hope no one relies on MSN Money for financial advice.

Not sure how they got these numbers. Certainly you have to account for inflation, as Old Limey says. When I go to and plug in the numbers for a 35 year retirement, I get the following-

@ 7% with 3.5% inflation you would need $1,051,299
@ 5% with 3.5% inflation you would need $1,384,783
Their 5% example with $1,000,000 would last 35 years if inflation averages 1.19% .... we can probably expect more than that.

For myself I plug in the numbers as if I'll live to be 80. For me right now that's only 24 years. I don't count SS in the equation, although I do expect to recieve something. I think of that money as my back up. If I should live beyond 80 I would have 10-15 years to invest all the SS money. Something like that.

According to an article in today's San Jose Mercury News it's getting a lot harder for real estate investors to find properties that meet their purchase requirements. Foreclosures have dried up and attractive properties that would make good rentals are getting very hard to find. That may account for the reason that volume in the stockmarket has been at all time lows for the last few months. People may be getting tired of trading in a market dominated by program trading by the big investment banks and have turned more to acquiring a portfolio of rentals rather than a portfolio of stocks.

I have known several people, including my manager, twenty years ago, when I was working, that had acquired upwards of 10 rentals. Finding suitable properties takes skill. Back in the Jimmy Carter days of high interest rates (1977-1981) I was investing in limited partnerships that gave 2nd. mortgages on apartment buildings and homes. It was very lucrative as yields got up into the 16% - 18% range. One requirement we had was we insisted on a loan to value ratio of no more than 70%, had nothing to do with "Section 8" properties, and did a visual inspection of everything we bought. We never had a deal go bad and for quite a few years it was far better than stocks. We also collected late fees and early payoff penalties on some occasions.

One partnership where we had a 1st. mortgage involved a beautiful home owned by a builder. He stopped making payments so we put it into foreclosure. We were already counting our profits when to our surprise the IRS stepped in, paid us off in full, and acquired the property out from under us, as is their right when they are owed a lot in taxes.

@Old Limey

You stated that "1) They have had 13 years (8/1999 to 8/2012) where the S&P500 has made nothing."

Not really sure that is a correct statement. You can claim that the S&P might not have increased in total value and that the price of the S&P500 on 8/1999 was the same as 8/2012. On Aug 1, 1999, the S&P500 was at 1397.91. On Aug 1, 2012, the S&P was at 1375.32. So you are correct that the value of the S&P was unchanged - there was no capital gain.

However, this ignores another component of return - dividends. If we are to assume that most long term investors reinvested the dividends they received from a low cost ETF (say with expenses around 5 to 10 bips) that mirrored the S&P500, then the total return would be higher. Investing $10,000 in the S&P500 on Jan 1, 1999, and then looking at your account statement on Dec 31, 2011, you would have seen your account balance at $12,900. This is an annualized return of around 1.95%.

The real killer is inflation. Running inflation adjusted returns on the above dates shows that you actually lost purchase power during that time period. Your 10k really only had the purchasing power of 9.3k at the end.

All of this ignores asset allocation, dollar cost averaging etc.

Jake is correct. Just to piggyback on what Jake said, If you invested $10,000 in Vanguard 500 Index fund (investor shares) in 8/1/99, you would have had $13,000.49 on 8/1/12. That includes expenses. Not a great return, but better than zero. If you'd dollar cost averaged as most people do with their retirement accounts, I'm sure th rate of return would have been better.

P.S. I used morningstar's chart feature to figure out the returns of the S&P 500 for those dates. It's a great feature.

One of the unintended consequences of our Fed having a policy of cheap capital / low interest rates forever and ever: savers who rely on fixed income (i.e. mostly older folks) get creamed. Okay, many older workers have only themselves to blame for not being able to retire - they didn't save nearly enough. But let's be honest - with bond yields as pathetic as they are right now, you need a lot more savings to generate the income you need to retire. Which puts pressure on the labor market - older workers working later in life instead of retiring.

Thanks for your table, that is the correct way to project the retirement cash flow into the future, not the way the article did it.

"My personal goal is 10% return, so the amount needed is even lower."
Your personal goal is just that, a goal, once reality hits you'll get 7%-8% after all expenses (planned and unforseen).

Tony -

You haven't been reading my real estate investing posts, have you?

@Bad_Brad. I think you are right on both counts. Most people really have not saved enough (but many could have come a lot closer if they had maintained the frugal habits of their Depression era parents). But at the same time, interest rates are pathetically low. I think if you want income, you'll need to focus on bond funds that invest internationally, such as Loomis Sayles Global Bond or Loomis Sayles Bond. They are riskier than your typical bond fund, but interest rates are so low, you're effectively forced into it.

In 13 years from 8/1/1999 to 8/1/2013 the S&P500 had an ANN=0.26%, ie. $10,000 grew to $10,340.

In 13 years from 8/1/1999 to 8/1/2013 fund VFINX had an ANN=2.04%, ie. $10,000 grew to $13,000.

The reinvestment of dividends makes a difference, as it does with all income funds, even when its only 2% in this case, but turning $10,000 into $13,000 over 13 years isn't going to produce a great retirement nest egg for anyone.

I'm happy with 5% annual income (tax exempt or tax deferred) now that I am almost 78 but when you're young you need much higher returns than that to build up your nest egg to a size that will take you through a comfortable retirement. To do that you need either a strong, healthy, stockmarket for many years or if you don't believe that is in the cards maybe exploring the ownership of rental properties may be another option.

The Loomis Sayles LSBRX bond fund has a 14.22% return YTD but a maximum drawdown YTD of -3.27%.

A better and less volatile fund (over many time periods I examined) that I recently invested in when I had some corporate bonds that were redeemed is PIMIX, which is PIMCO's Income fund. It has a 19.92% return YTD and a maximum drawdown of only -0.89%.

The PIMCO fund is available in two share classes with different management fees.
PIMIX Institutional class, $100,000 minimum 19.92% YTD (6.73% of which is monthly annual income)
PONDX Investor class, $2,500 minimum 19.63% YTD.

I wish I had invested 10,000 in Apple in 1999, I would not have to worry about all these calculations or money for that fact.

@Old Limey

Agreed. 2% won't make anyone happy.

I don't know all the stuff about investing that you talk about. I never invested any of my money. When I retired at nearly 69, I had $78k in my 503b. Since I have SS & 2 small retirements, I only withdraw the minimum each year and fix my home or travel. In the last 6 years I have withdrawn $15k and my total is still $74k. $15k out and only $4k down. I think that is a good return on my money. I didn't start saving until I was 50. I am currently earning 2.75% this quarter.

I do know that if I draw out the minimum each year, it should last me another 24 years and I am now 75. It is amazing how much less I spend since I retired. My emergency fund is way down at the present because I just paid cash for another car. But it won't take too long to put the fund back up to where it was.

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