$2.5 million to retire (Legg Mason PR story)

[Ready]

Since this is a conservative forum, most members are more comfortable with an SWR of 3% or even 2.5%, even though history has proven 4% to be quite safe. At 4%, $2.5M yields $100K per year, which would be enough for the two of us to live comfortably in Southern California. But when the SWR drops to 3% or below, it just doesn't leave much room for cushion.

We no longer have a mortgage or any debt, but our house is now 15 years old, and we've spent over $50K in renovations, repairs and upgrades over the past 12 months. If we had to live on $75K per year, it would have been challenging to spend that much on the house.

And while most articles think of a retirement age being about 65, with social security right around the corner, this is the early retirement forum, where SS might be 20 or 30 years away.

 

[Big_Hitter]

$2.5M may seem like a big number to some but one should take into account (sans db income) that we are assuming all of the longevity risk, all of the investment risk and will have to shift to more conservative investments as we get older.


Yes, it's conservative but it's my number.

 

[EastWest Gal]

Other than housing and gasoline, the cost of living in So. Cal. is quite low. Occasionally you might run the AC. OTOH, you could just hang out at the beach where it is 20 degrees cooler during the heat waves, or just go to a museum or the library when it is hot to save your electric bill. You rarely need heat. Housing is the biggest issue. If you have a paid off home, you should be set. Property taxes are fixed at 1% of assessed value and does not change from the time you bought the home, or 1976, whichever was earlier. No snow removal, no major insect problems, and produce is often much cheaper than here in the east.

 

[papadad111]

Some of the comments here have me worrying. I don't have $2M+ but plan to retire this year. Now, I do live in fly-over country. House will be paid for. One son on full ride at college and the other likely to do the same. I do have rental property so, as every landlord knows, I will only be cutting down from two jobs to one! Still, I don't have the pension (and certainly not the pension with the COLA) many here are lucky enough to have.

My mother had one rental and a smaller nest egg than this and manages quite well. Occasions cruises, road trips, flies to visit friends when she wants to travel, covers family members flights on occasion. New used car every 5-7 years and yearly dealer maintenance. Eats well. Eats out when she wants. Yet her nest egg is increasing even though she pays an FA 1% to manage her accounts. Complains about her taxes.

It just doesn't cost that much to live well.

How old are you?
What are your current expenses?
How long to you hope to be retired ?
How much is comfortable to you?
Do you have pensions ?
How old was mom when she retired? Bet she got full SS too...


I'd like to see your math. I'm in fly over states and think more than 2.5m would be necessary to sustain us from mid 40's through end of life. Now If you're 63 and "retiring early" with SS now or within the next few years, I get what you're saying.

But this is an early retirement board and that implies retiring in 40's or early 50s. I think that's where things are different.

Social security likely to be reduced or not around at a in another 25-30 years. No pensions .. It's all on our own.

Again i would like to see your math. What do you think you'll spend and how will you source that money in retirement ( thud....the sound of reality check).

 

[papadad111]

Lets call it 2.5 million per couple.

That is 75k a year, at best. Will you recommend me to buy Silver plan or Platinum for Health Insurance? If silver what if I get really sick? How much will it cost me out of packet? What if at 50 both of us have major health problems?

Will I get any SS ....

+1

 

[2B]

Back in the 1970s - pre-DW and children - I decided that $200,000 was more than enough to retire in my 20s. Blue chip stocks paid 8% dividends. Health insurance was not in my mindset. I was a well paid engineer making about $12k/yr and spending less than half of that.

Times change. I think that's the biggest risk for a young couple retiring with (only ?) $2.5 MM. For those of us much closer to death, $2.5 MM seems a safe amount to retire with.

 

[JoeWras]

A lot can skew people's perceptions.

If you have a solid health care benefit and are early retired, it can really color your thoughts about "what's enough."

If you are paying yourself, even with ACA (see above about unexpected out of pocket expenses on some plans), then you really feel the need to have more, just to pay for the health care alone.

Same can be said about early pensions, COLA'd pensions, etc.

 

[jkern]

Other than housing and gasoline, the cost of living in So. Cal. is quite low. Occasionally you might run the AC. OTOH, you could just hang out at the beach where it is 20 degrees cooler during the heat waves, or just go to a museum or the library when it is hot to save your electric bill. You rarely need heat. Housing is the biggest issue. If you have a paid off home, you should be set. Property taxes are fixed at 1% of assessed value and does not change from the time you bought the home, or 1976, whichever was earlier. No snow removal, no major insect problems, and produce is often much cheaper than here in the east.

This isn't true. The base property tax increases 2% per year. In addition, there are several other taxes (voter approved bonds) and fees that also may increase each year. My property taxes have increased by almost 3% per year over the last 27 years.

 

[EastWest Gal]

This isn't true. The base property tax increases 2% per year. In addition, there are several other taxes (voter approved bonds) and fees that also may increase each year. My property taxes have increased by almost 3% per year over the last 27 years.

Rats. It's been 15 years since I lived in CA. I own property there (purchased in 1908 by my great grandparents, so I haven't seen a tax increase. I guess they do it based on assessed value. Did you see a drop in taxes in 2008-9? I suspect not. But the bit about the weather and lack of heating bills is true.


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[mickeyd]

Looks like Legg Mason is trying to make folks that do not have $2.5M put aside think that they need to get on the Legg Mason band wagon (horse, train) and invest in one of their many actively managed mutual funds.

I'm probably just going to stay with my boring Vanguard passive portfolio.

 

[pb4uski]

....if you FIRED at 55, had a mortgage, travelled and hung out at your country club every day (when not travelling) I don't think it's an insanely high number

Not insanely high, but IMO much more than what one "needs" to retire unless you live in a high COL area or have a high lifestyle.

I retired at 56, refinanced just prior to retiring so I have a mortgage, we travel some (just got back from 8 weeks down south), we both belong to the country club and also golf while on vacation and at courses other than our home course, and live quite comfortable on less than $2.5 million and sleep quite well at night.

 

[pb4uski]

...I'd like to see your math. ....

How's this.... if you have $2.5 million and can invest it and earn a real return of 2.5% then you could withdraw $88k in the first year (and adjust it for inflation every subsequent year) for 50 years.

The present value of $88k a year for 50 years at 2.5% is $2.496 million.

As a point of reference, the historical nominal rate of return for a 60/40 portfolio is 8.8% and inflation is 3% so the net real return is 5.9% so there is a lot of provision for adverse results built into the 2.5% discount rate.

 

[papadad111]

How's this.... if you have $2.5 million and can invest it and earn a real return of 2.5% then you could withdraw $88k in the first year (and adjust it for inflation every subsequent year) for 50 years.

The present value of $88k a year for 50 years at 2.5% is $2.496 million.

As a point of reference, the historical nominal rate of return for a 60/40 portfolio is 8.8% and inflation is 3% so the net real return is 5.9% so there is a lot of provision for adverse results built into the 2.5% discount rate.

I hope the nominal rate of return by historical standards continues to hold true! I would be happy with 2.5% real rate of return over 50 years. Having 88K equivalent per year and leave nothing to heirs is doable.

Sadly. Hope is not a plan ....

 

[ulrichw]

Not insanely high, but IMO much more than what one "needs" to retire unless you live in a high COL area or have a high lifestyle.
[...]

Here's the exact quote from the article (emphasis is mine).
"According to a recent Legg Mason survey, U.S. investors said they will need an average of $2.5 million in retirement to enjoy the quality of life they have today."

I think the article's title (and OP's paraphrasing of the thesis) may have led this conversation down a path that wasn't really implied by the content of the article itself.

Really what this might be interpreted to be saying is that the people in the survey are enjoying lifestyles that cost them around $75K a year today (or $88K or whatever the investors in the survey thought their spending level could be on a nest egg of $2.5M). That doesn't sound too unreasonable to me.

 

[Dreaming of Freedom]

I hope we don't need $2.5 million to retire, because we are only going to have about half of that, plus a little bit of rental income a few years after retirement when the mortgage is paid off. I will be 40 & my S.O. will be 58. I may still work part time just to reduce our risk a little more. We live in a less expensive metro area in the Midwest. I can't imagine how many more years we would have to work to double our nest egg. Ugh!

 

[longranger]

What I need more than the 2.5M in investable assets and a high likelihood of a good SS chunk beginning in 5 to 12 years is the courage to take a leap of faith. Like many on this forum I have long realized that no matter how long I work and save nothing will guarantee financial security. Peace of mind with that leap of faith is gradually setting in as I get less and less comfortable with the alternative of waiting too long to enjoy the good years DW and I have left. Spreadsheets, simulations etc.. have been of major help figuring out a rational ballpark number for RE. That has been the easy part. Now we need to want freedom enough to take some risk.

 

[urn2bfree]

Me and DW trying to do a pro-forma post FIRE budget. The stuff that's expensive is 1) health insurance - which is easily as much as a mortgage payment as we won't get ACA subsidies for a few years post FIRE and 2) other forms of insurance eg Umbrella liability policy. Disability insurance and with teen drivers, car insurance. 3). Cellphone service seems ridiculously expensive by historic "utilities" cost.

With just basics we are well over 5k per month - in middle America and we have no mortgage. Also that is basic as in No special travel and no sinking fund to set aside the annual deductible and max OOP for healthcare each year.

Some things to reconsider--
Disability insurance? In retirement? What is that?

Car insurance for teen drivers? I know it may sometimes feel like it, but they are not teens forever. The cost to insure them is not something that has to be budgeted for the entire 40+ years of retirement. That cost goes away-- or should, anyway.

A good Health insurance plan is clearly going to be the major monthly expense, but should be less than $2000 a month. But surely,(and no I won't stop calling you Shirley) it too should go down a little when you reach Medicare age.

Depending on local tax rates, property/real estate taxes can be the next most likely large on-going expense in perpetuity.





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[pb4uski]

....Me and DW trying to do a pro-forma post FIRE budget. The stuff that's expensive is 1) health insurance - which is easily as much as a mortgage payment as we won't get ACA subsidies for a few years post FIRE and 2) other forms of insurance eg Umbrella liability policy. Disability insurance and with teen drivers, car insurance. 3). Cellphone service seems ridiculously expensive by historic "utilities" cost.....

Looking again at the article, $2.5M or equivalent in annuitized income is reasonable to retire with low risk of running out of money over a long ( 35+ year retirement). With that sort of duration and need for inflation protection, @ $2.5m, I would be scared to spend more than 2.5% or about $62k SWR annually.

Some thoughts from our experience. If health insurance costs more than 8% of your income then you can buy catastrophic health insurance even thought you are over 30. We do this and in our state the catastrophic coverage is 40% less than bronze level coverage and the coverage is not that different. YMMV and I understand that in other states there is not as much of a difference in premiums so there are not as much in savings. Also, we buy individual policies to get a better value since in our state cat policies for more than one person have aggregate deductibles rather than stacked deductibles so if we were to have a health event the insurance would kick in earlier.

If you have enough to retire early then you don't need disability insurance, which people buy to protect their income from a disability where they can no longer work.

Our cellphone service costs us only $10/month per phone through airvoicewireless but we bring our own AT&T phone and our cellphone needs are modest. They have other plans that would cover us for a bit more if we needed more service. $10 gives you 30 days of service and the $10 is reduced by 4 cents for each minute of voice, 2 cents for each incoming or outgoing text and 6 cents per mb for data.

But to be honest, if you would be scared to have a WR of more than 2.5%, you probably are not ready. Our WR is currently a bit high but it will go down when my pension and our SS start. I focus on the projected WR once those flows have started rather than our initial WR.

 

[Andre1969]

I hope the nominal rate of return by historical standards continues to hold true! I would be happy with 2.5% real rate of return over 50 years. Having 88K equivalent per year and leave nothing to heirs is doable.

Sadly. Hope is not a plan ....

I just ran those numbers through FireCalc: $2.5M starting portfolio, $88K per year withdrawal, adjusting for inflation, 50 year time span.

FireCalc looked at the 94 past 50 year periods that it has to reference, and only one cycle failed. Overall success rate, 98.9%. Average ending portfolio balance, $12,451,002. Range of $48,243,830 to -$795,997.

So, at $88K per year, there's a good chance you're going to leave money to your heirs. A lot of it.

 

[bingybear]

I just ran those numbers through FireCalc: $2.5M starting portfolio, $88K per year withdrawal, adjusting for inflation, 50 year time span.

FireCalc looked at the 94 past 50 year periods that it has to reference, and only one cycle failed. Overall success rate, 98.9%. Average ending portfolio balance, $12,451,002. Range of $48,243,830 to -$795,997.

So, at $88K per year, there's a good chance you're going to leave money to your heirs. A lot of it.

So what does this really tell you about the SWR, Firecalc, etc? It is good to live below your means... but in retirement you need some flexibility. If the market is bad...you may need to tighten up a bit, especially during early years of retirement. You do need some protection from the -798997 case by being able to reduce spending. That said... if the market is good, you need to be able to spend a tad more unless you want the extra $ to do something specific after you pass. Leaving $48Mil to no one would likely mean you should have spent more.
I try to use things like Firecal or FRIP to plan with no cases failing and plan to live on that amount. However, the mean (50% likely) case really means you have a good chance of being able to spend more.
The real take away is to plan for the 90% to 99% likelihood case, but be flexible to party a bit more.

 

[pb4uski]

I totally agree.... the inevitable dilemma is that you likely won't know whether you are on the -$796k track or the $12.5 million track or the $48.2 million track until you are probably too old to enjoy that higher level of spending. In a way, a WR with high success rate means almost spending to an investment results worst case scenario.

Taking the situation above, I suspect that once I got to some $ level that I would probably just spend anything that accumulates above that $ amount being careful not to use thse surplus funds to buy things that would increase my annual expenses so I could scale back if I needed to.

 

[Andre1969]

One other detail to take into account with FireCalc. If you're using a 50 year timeframe, that means that the most recent period in history it has to pull from would be 1964-2014, right?

I know it's been suggested in the past to run those same scenarios for shorter timeframes, just to take into account some of the more recent turmoil, such as the later 60's, the first oil embargo, etc. If you shorten that period to 40 years, whereby the most recent scenario would be 1974-2014, the success rate drops a bit to 96.2%. Shorten it to 30 years, and it's up to 100%.

In my case, I'm planning for a 95% success rate. But, like pb4uski said, if the portfolio grows too fast, too early on, I'd probably spend a bit more and have some fun with it. Also, if it grew too fast, I'd probably end up cashing in some profit and reinvesting into something a bit more conservative. So that might stifle future gains a bit, but would also soften some of the blows.

 

[ArkTinkerer]

How old are you?
What are your current expenses?
How long to you hope to be retired ?
How much is comfortable to you?
Do you have pensions ?
How old was mom when she retired? Bet she got full SS too...


I'd like to see your math. I'm in fly over states and think more than 2.5m would be necessary to sustain us from mid 40's through end of life. Now If you're 63 and "retiring early" with SS now or within the next few years, I get what you're saying.

But this is an early retirement board and that implies retiring in 40's or early 50s. I think that's where things are different.

Social security likely to be reduced or not around at a in another 25-30 years. No pensions .. It's all on our own.

Again i would like to see your math. What do you think you'll spend and how will you source that money in retirement ( thud....the sound of reality check).

51 will be 52 at retirement.
Living expenses a bit over 40K should be comfortable on 35-36K.
Already said no pensions. Rentals here don't return what others have reported but then expenses are lower--should supply about 12-20K per year depending on what breaks. 401K and IRAs about $1M. Maybe another $100K in outside funds. House will be paid for.

Mom was in her late 40's when Dad died. No life insurance no pension but the house was paid for. Several rental properties. She sold all but one within 10 years and put my brother and I thru college. Didn't take SS until she was 67 I think.

 

[Live And Learn]

My budget is 100k per year and I do not "live large". My HC budget is 25k annually (because I am conservative I've including hitting the OOP max each year), my "accruals" are 11k per year (and include new roof every 15 years, updated used car every 15 years, updated furniture every 10 years, new appliances every 10 years, new HVAC every 10 years, repainting every 15 years, and regular ongoing home repairs/maintenance at 1%). I have 5k for travel. I have no mortgage and live in a very modest 30 year old 1400 sq ft house. I have two cars- one is 16 yo and the other is 5. I do not belong to a country club, I do not eat out more than 1x a month .... I do not "live large". I know I have alot budgeted for "worst case scenarios" but once ER'd its a hard road back into the w*rkforce so I'd rather save a bit more than I need. In 10 years when I am 62 I can re-evaluate and if I need to spend more on travel to deplete my portfolio I'm sure I can find a way to do so.

 

[longranger]

My budget is 100k per year and I do not "live large". My HC budget is 25k annually (because I am conservative I've including hitting the OOP max each year), my "accruals" are 11k per year (and include new roof every 15 years, updated used car every 15 years, updated furniture every 10 years, new appliances every 10 years, new HVAC every 10 years, repainting every 15 years, and regular ongoing home repairs/maintenance at 1%). I have 5k for travel. I have no mortgage and live in a very modest 30 year old 1400 sq ft house. I have two cars- one is 16 yo and the other is 5. I do not belong to a country club, I do not eat out more than 1x a month .... I do not "live large". I know I have alot budgeted for "worst case scenarios" but once ER'd its a hard road back into the w*rkforce so I'd rather save a bit more than I need. In 10 years when I am 62 I can re-evaluate and if I need to spend more on travel to deplete my portfolio I'm sure I can find a way to do so.

How much of your budget have you been spending per year? Do you put the remainig $$ back into your portfolio?