Thoughts on Being a Millionaire and Retirement

Here's an interesting piece from the NY Times that takes several views on being a millionaire:

They begin with the "a million dollars isn't what it used to be" argument:

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.

I'm not sure comparing something to an apartment cost in New York or what an NBA player makes for a good argument, but I get what they're saying. Imagine the difference today in having $1 million versus having $8.7 million. Big difference, right?

They go on to admit "while it's not the fortune it used to be, it's more than most people have":

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent.

The rest of the article notes how $1 million isn't the huge amount it may seem to be when it comes to retirement saving. The summary of their thoughts:

Consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds wants to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

A few thoughts here:

• I think the 4% rule has been de-bunked enough that it's not really reasonable even as a guideline, so I wouldn't put much weight on it. If anything, I think you need to plan to take LESS than 4% out.
• It would be nice to invest in muni-bonds and live off interest during retirement, but you need a whole lot of money to do that. That's why I think most retirees will need to invest in equities (at least to some degree) well into retirement.
• $40k could be supplemented with Social Security and working part-time and get a retiree up to an average income, so it's not the disaster the piece makes it out to be.

The article goes on a bit more, but here's a quote I found especially compelling:

“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

Yikes!

Scary, but true!!!

A couple final thoughts:

• Those who don't save enough will likely have a very poor retirement.
• The best retirement strategy IMO is one where you amass enough assets and then distribute them so that you can live off your savings alone and not spend and principal. This is the retirement plan I'm working on.

Comments?

Comments

[K D]

Those that spend well below their means benefit doubly when they reach retirement. Not only have they accumulated more wealth to support their retirement but they also have a lower cost of living (so they don't need as much income). The low interest rates of the past several years make me think we may consider annuities when we retire, but again the rates on those are depressed by low interest rates as well. It's a fine kettle of fish we're in.

I agree that being a millionaire today is not a hallmark of wealth (but it is better than not being a millionaire).

[Traciatim]

Though I'm not sure what you get for social security, but if I assume you make 3% on your money, and withdraw 42k and top up with 8k of social security you can live on this 50k for over 30 years with 1m of funds.

If you had a paid off house, that seems like it would be pretty easy. Even if you just move to a fairly low cost area it seems like it would be pretty simple to live on.

Are they saying there is a 72% chance you will live to over 95? Maybe I'm doing my math wrong.

[elb]

I really have no issue at all with spending down principal up to a point. Nothing wrong with taking capital gains in a good year, it doesn't all have to be dividends / interest. I'd rather take the cap gains at 15% than interest @ordinary income rates.

[Kathy]

A million may not be what it once was but when you read about people who have saved under $25K for their retirement, you realize a million is still significant wealth as compared to the rest of the savings out there. I'll take a million as a gift any day.

[Old Limey]

The following statement in the article completely ignores the fact that each muni bond pays interest twice/year that can be spent or reinvested into more bonds.

"Consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds wants to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die."

Our muni bond portfolio currently yields 4.953% interest and generates $181,728 annually which is free of federal taxes. A large portion of our bonds are also free of state taxes. When I also add in 2 pensions, 2 social security checks, CDs, and tax deferred income from corporate bonds in our IRAs, the total income is over $400K.

The mandatory required distributions from our IRAs are also more than enough to take care of our state and federal taxes.

With two elderly people, zero debt, and all of the interest getting reinvested into new bonds there's no way in the world that we could ever run through our capital. We also have great healthcare at the best clinic in Silicon Valley that costs $326/month under my former employer's retirement plan.

Bottom line - We have no choice but to still be saving at the ages of 79 and 81. Our 53 and 56 year old daughters have portfolios of over $3M each and they and our 50 year old son will eventually inherit everything we have. Not bad considering we stepped off the boat in 1956 with $400 between us.

[Millionaire 9]

It really doesn't cost much money to live a comfortable life, especially if your home is paid off. As is so often the case, the NYT article does not contain enough information to provide a useful analysis.

At age 65 and the kind of worklife that would allow acquiring $1mm, S.S. should provide at least a couple of thousand a month (more if married). You can figure out your own expected payout here... http://www.socialsecurity.gov/OACT/quickcalc/index.html

A life expectancy of 30 years, earning 2% above inflation, would easily allow a drawdown of $52K/yr today. Plus $24K/yr S.S., and you are looking at $76K/yr with no housing expense and no kids at home. $6,000 a month. More than most people make while working. I'm not seeing a problem. My wife and I spend about $2,800/month and do whatever we want. If you don't go crazy with your cash and spend it on hookers and blow and divorces and attorney-fees, you will be fine.

@OldLimey, again, well-done. Congrats to you and your wife and children; you sound like a wonderful family.

[Sarah]

20 years without any equities is a lot.

I think people posting here are really not taking the cost of health care into consideration, though. Obviously, Medicare will bear the brunt of a retiree's health care costs, but getting sick ain't cheap, regardless. That's where the money goes in retirement, especially if you end up needing in-home assistance.

[Mortgage Free Mike]

I think there is a lot of fear spread about retirement. Do the best that you can, retire and if you have to go back to work part-time at some point, well that's just what will have to be done. Of course, a health crisis cannot be forecasted, but neither can the stock market. I just keep stocking my money away and try not to worry too much about articles like the one in the NYT.

[Mike Collins]

I like the plan you laid out in your earlier post where your goal is to live off the income generated by your assets instead of selling them off. If you can do that and also increase that income to adjust for inflation you can live off the principal indefinitely.

[Paul]

My mom is 84 years old, and still has over 50% of her assets in equities, but she has edge down a little over the last 5 years. Careful diversification is the key.

[Steve]

The "you can't retire off of a million dollars" and "social security pays almost nothing" arguments show me how much these writers spend.

My parents collect $3K/month in SS. They have a $700K nest egg from which they draw $2k/mth.

So here they are with a paid for house and $5K/mth in income and no retirement savings to worry about or college or childcare, and less taxes, etc etc.

I know Suze Orman would send them back to work for another decade....but they already live quite well in my opinion.

[Retired by 40]

This is great to think about! I based my retirement number on the 4% rule, but there are several other things that I factored in as well. I am counting on "passive" income - like 2-3 rental properties to supplement my income. 4% is what we need to live on, but we could withdraw much less given the rental income every month.

[M-19]

This is interesting, really. Because I do see this as a problem for those people who have no savings.

My parents get about $3000/ month in social security. That is $36000/ year. However-- their Medicare cost of $700/mo is deducted out of that sum before the get it. That leaves them with $2300/mo or $27,600/yr to live on.

If you have not saved--and all you have is $2300/ mo to live on-- you are not living the good life.

Now my parents saved a little bit too. So they supplement their income with a bit of savings from a small portfolio. That worked ok until 2008. Like many people, they panicked and sold near the bottom-- locking in their losses. So their "supplemental income" is now quite a bit less.

Retirement is tough unless you save a lot (most do not). Retirement is hard unless you have a pension (most do not). Retirement is hard unless you have employer funded health (most do not). Retirement is hard if unless you have no mortgage ( Most do have a mortgage ).

Many people say the solution is to work in retirement? That is fine until you cannot physically work or mentally handle it. Plus-- lets face it-- there is age discrimination. Where is an 80 year old guy going to work?

If this seems scary-- well, it should be. Many people need a wake up call.

[JimL]

I agree with Sarah on healthcare costs. It is a potential big ticket item and the future costs could really get out of hand based on the current under funding of Medicare and the potential need of living assistance.

[Old Limey]

JimL
As a former Brit I'm very familiar with the British National Health System (NHS) which was founded in 1948 soon after the end of WWII.

It may surprise many Americans to know that the NHS does not charge citizens (or even visitors) for healthcare. The costs are paid from taxation, such as a very high VAT (Value Added Tax) on a great many purchases excluding food.

I used to wonder how they can manage to do this. It's partly due to the fact that Brits pay higher taxes than Americans. However in my opinion the reason why the American healthcare system is so expensive is that our government, for a great many years, has decided to be the policeman for the world and to engage itself in almost every war that starts, going back to Korea, Vietnam, Kuwait, Iraq, and Afghanistan of which the only one that was justifiable in my opinion was Kuwait, which the elder Bush waged over a very short time and with great success. Fortunately the current administration has avoided getting entangled in the war in Syria even though some very prominent senators wanted us to.

When Eisenhower left office he made a memorable speach warning the country of the danger of allowing the Military Industrial Complex to grow excessively. Unfortunately the powers that be have not taken heed of his wise words and we have paid the price with huge budget deficits, a gigantic National Debt, and a vast array of very expensive weapon systems that see very little use these days now that the Cold War with the USSR is long gone and the former Soviet Union is fragmented.

[Mark]

@M-19. All of your points are excellent. However, as they relate to the article, your parents would be in great shape if they had a $1M portfolio. 3% of $1M would be a additional 30K, which would be plenty for them to live on. Even if they had 500K, they'd probably be totally fine. So to a certain extent, this article is a bit of fear mongering.

[Mark]

@Old Limey...

I'm surprised your analysis of health care in America is so superficial. I expect better from an engineer who is excellent at math.

Our government spends a ton on Medicare/Medicaid. With the amount of money we spend on those programs, we ought to be able to cover EVERY citizen without taxing anyone another dime. Our health care system in America, whether public or private, is bloated and inefficient.

[M19]

@ Mark @ Old Limey

You guys are not as far apart as it may seem. We are taxed plenty as Mark said. And you both seem to feel that the Government needs to prioritize and be more efficient. I totally agree. The amount of waste and fraud and overpayments are staggering. My feeling is we do not know the half of it. And we should. Transparency is just a talking point--- and that goes for both sides.

On the flip side, The readers and commenters on this blog are quite savvy. They are savers and investors ( or they want to be). We are all striving to make the most of our money by saving, investing and being thoughtful and prudent. It seems a we are a charitable bunch as well.

If only our government bureaucrats read the FMF blog we would all be better off !

[M20]

I've decided that discretion is the better part of valor, so I'm biting my lip re: the political comments.

@M19 - Hear, hear! The FMF blog should be near the top of the list of required reading for both sides of the aisle!

[JeffinWesternWA]

Politicians can read??

LoL...

Yup...

regarding "retirement": I did it at 47, but, I had a military retired check (officer) and a great health care system (Tricare), (not to mention about $3M~ in assets), now with a 70% disability compensation check (tax free)from the VA and FREEE health care that has been world class (and priority for nursing hme care should I need it - something veterans earn if 70%+ disability rating), my financial life IS in order..

But, as a former and respected financial planner of 16~ years, her's some pointeres (yet again):

two SS checks WILL need to be supplemented by a (at least) one pension or some other living "income" or investors will need something such as an annuity (yep, they work-WELL-sold myself one - a variable one no less, with a living income lifetime rider) to provide a lifetime of worry free income.

Then a portfolio is needed to supplement. As far as the 4%~ withdrawl rule, this past decade PROVED that 4% is too aggessive, at least for young retirees, but should suffice.

Answers: Plan to work till 70 (and delay social security) or file and suspend.

MAX the IRA's! (and if no pension - consider an annuity for an IRA that guarantees income)- since IRA's are taxed as oridnary income, like an annuity it makes little sense to put non IRA monies into such a vehicle that will only be subject to capital gains taxes.

Live well below your means - attempt to be mortgage free, and of course eliminate consumer debt many years prior. If you have to finance - you CAN'T afford it! (credit cards, cars, HEL's, et all-are bad!)

Think 15% of gross income as a minimmum target to save (when young) and much more in the high earning years.

It's never to late to start - and to not spend on something now, so as to have security later.

Heck, I don't even have cable tv as example, but, I get 30 channnels FREE via an antenna, that's $1K~ a year ALONE saved. I also have a car with 186K miles too. Cheap to insure, no depreciation. Easy to repair - though I rarely have to. I biked to work for years. I purchased older cars, fixed 'em, drove 'em sold 'em, often for MORE than I paid! Just some examples.

The path of least resistence ISN'T founnd on this blog :)

[MoneySheep]

The view of retiring poor or well depends on individuals. I know this guy who worked his butt off for 15 years showing $22,500 a year on his 1040. Never owned a house to live in, never had cable TV. Then one day, after 15 years, he bought a home with cash, and retired. I know he is a multi millionaire, but he still live like he makes $22,500.

[kiznajade]

Investing for your retirement is a wise idea while you are still young. We work today and have pleasure tomorrow.