$2.5 million to retire (Legg Mason PR story)

[Mulligan]

Unless one has a COLA'd DB pension plan? Not trying to belabor the point since this is so speculative anyway but I read a science fiction story a very long time ago that touched on that. Sorry I am clueless about title, author, etc. but the gist of it was that such a pill had been invented and pension managers all over the country were in an uproar. I read the story in the late '60's or early '70's so DB pensions were common then.

The story focused more on the societal effects (food, housing, employment, etc.) than the financial so it didn't take the financial issues very far but now I wish the author had.

I suspect that what would happen is that eventually a court would rule that if one has a COLA'd DB pension and are not going to die more-or-less on schedule then you've violated an incoherent presumption of the contract and that would make it void.

In other words, I'd have to go back to w*rk.

My pension is a COLA'd one but has a lifetime cap of 80% of initial year payment. So I guess that was enacted to keep old farts from draining the system. Doesn't look like I am getting one this next year anyways as the CPI is way under from last Julys 238 number...


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[Focus]

Unless one has a COLA'd DB pension plan? Not trying to belabor the point since this is so speculative anyway but I read a science fiction story a very long time ago that touched on that. Sorry I am clueless about title, author, etc. but the gist of it was that such a pill had been invented and pension managers all over the country were in an uproar. I read the story in the late '60's or early '70's so DB pensions were common then.

The story focused more on the societal effects (food, housing, employment, etc.) than the financial so it didn't take the financial issues very far but now I wish the author had.

I suspect that what would happen is that eventually a court would rule that if one has a COLA'd DB pension and are not going to die more-or-less on schedule then you've violated an incoherent presumption of the contract and that would make it void.

In other words, I'd have to go back to w*rk.

Speaking of science fiction, there's also the "Logan's Run" scenario. From Wikipedia:

Published in 1967, it depicts a dystopic ageist future society in which both population and the consumption of resources are maintained in equilibrium by requiring the death of everyone reaching a particular age.

 

[W2R]

Then the conversation goes toward reminding each other than we can buy just about everything except time.

Oh, money can buy time too, but it can be very expensive.

A recent poster said his wife had been on treatment for stage 4 cancer, and the cost was $200K/yr.

This song comes to mind.

Now, don't hang on, nothing lasts forever but the earth and sky
It slips away, and all your money won't another minute buy

Dust in the wind, all we are is dust in the wind

 

[NW-Bound]

Hey, that's one of my favorite songs. I had posted that here several times.

Here's how the members of Kansas band looked when they were older. And they would look even older now.

 

[NW-Bound]

And I have also shared this cover by the German rock band Scorpions, which is in a faster tempo.

So, listening to this song, does one still want to wait for $2.5M to retire?

Well, I guess it would depend on your age. If you are already in your 50s, your remaining time may be shorter than you think.

 

[W2R]

Hey, that's one of my favorite songs. I had posted that here several times.

Here's how the members of Kansas band looked when they were older. And they would look even older now.

WOW!! Much better video, thanks. They look and sound more like they understand the meaning of their own words. This version is amazing.

And I have also shared this cover by the German rock band Scorpions, which is in a faster tempo.

So, listening to this song, does one still want to wait for $2.5M to retire?

Well, I guess it would depend on your age. If you are already in your 50s, your remaining time may be shorter than you think.

I'm in my mid to late 60's, and every day I read about celebrities and others my age who dropped dead due to natural causes. Each day is a gift.

And for me, well, I wouldn't have any use for $2.5M. I have no dependents to support, no debt to pay, no yearning to travel further, and zero interest in expensive cars/boats/planes/motorcycles/RVs. I have pretty much everything I want for a fraction of $2.5M.

I really do feel that time >> $$$, for me anyway. Unfortunately, more time is beyond our reach. So, I am going to get the most out of the time I've got, that's for sure.

 

[NW-Bound]

I think we can all use more money if we have it. If I had more money, I would not get a Tesla because I do not care about fast cars, but a new small class C RV called E-Trek that costs in the low 6 figure. But the truth is that this fancy little motorhome would add little more to my travel enjoyment. While it is easy to spend more money, I do not think it is worth sticking out a few more years to get it. And as I told the story here before, only 8 months after stopping work 3 years ago, I was diagnosed with a disease that could easily end my life. I was in perfect health before that.

I found the blog of a full-time RV'er who survived leukemia by going through full-body radiation and a stem-cell transplant. Not all patients survive the complications of such treatment. When he recovered, he stopped work and lived with whatever savings or little pension he had by boondocking in a small RV, and camping out by himself most of the time in the New Mexico open space. I believed he was in his early or mid 50s when it started.

OMY makes sense too, as it allows one to accumulate a bit more to enable indulgences like travel, or to maintain the same lifestyle in higher cost-of-living areas. But one takes the risks of coming down with something that makes all that effort for naught. That risk may not be that large, come to think of it, but it is a risk that people all take, without realizing it. There are many life-threatening or terminal diseases that have no screening, no outward symptoms before it's too late. The older one gets, starting in the late 50s, the higher the risk.

If one is not so unfortunate and able to overcome his life-threatening disease, like myself or the RV'er fellow I described above, it becomes clear that additional money does not mean much once we meet the basic needs. I realize that I was fortunate to already have enough when I called it quit, but I could easily get hooked on trying to get more. Well, I was in my mid 50s already, and perhaps my 6th sense told me about the coming bad thing.

Ah, the uncertainty of life that we all face. Work OMY? Spend more now when we still have health, or scrimp to save for better nursing home care if and when we get to 90? People are optimistic, but look how many get to 90. I don't care that much any more, as I just enjoy my health and life now as it is.

Money does buy you quality of life, but as a young blogger cancer survivor pointed out, if you are dead, there's no life let alone quality. And he still suffers from after-effects of his disease for the rest of his life. If I am alive and not in pain, I too consider it a blessing.

 

[RISP]

Here's my perspective. I will soon turn 33 and have been saving and investing aggressively for the past eight years, ever since graduating. My wife and I make good money, more than almost all the people we know. Still, we live a lot more modestly than most of our friends (think small, used home; modest cars 8 and 15 years old; domestic holidays; hardly any eating out; etc.), which allows us to save and invest a high percentage of our after-tax income. ("After-tax" because here in Germany we do not have good opportunities for tax-advantaged investing.) We have no debt except for the mortgage.
All things taken together, I think we are doing great, and have a very good chance to become FI at some point in our lives.

My planning spreadsheet ends at age 67, which is currently planned to be normal retirement age for my age cohort. (If I'm not RE by then, I will have to retire anyway, so no need for further planning.) Here's the kicker: The column for inflation-adjusted total portfolio value does not ever reach 2.5 million. Never. Not even if I slave away another 34 years while saving like crazy.

So yes, I do hope that it is possible to retire early on less than 2.5 million, because I'm not likely to ever have that much money. Sure, my assumptions could be too pessimistic, but I don't think so. I'm quite adept at planning and budgeting.

For us, I think the sweet spot is much closer to something like 1 million in today's dollars, paid for home, and the kids out of the house.

 

[Big_Hitter]

^ doesn't Germany have a very good (and compulsory) national retirement program?

that's probably why you have a limited ability for tax-advantaged savings

 

[RISP]

^ doesn't Germany have a very good (and compulsory) national retirement program?

that's probably why you have a limited ability for tax-advantaged savings

Compulsory, yes. Very good - no, I don't think so. Both I and my employer are forced to pay huge amounts into the system, but my return on that "investment" will likely be negative.

I'll give you an example. The current rate is 18.7% of your gross income. At the average annual salary of 32,100 €, you and your employer together pay 6,002.70 € into the pension system. For that, you earn exactly 1 "pension point". If you make less, you get fractions of a point; more, more points. They are capped at 2.0561 points, because you do not have to contribute for salaries >66,000 €/a. (66,000 / 32,100 = 2.0561).

The rate is likely to increase in the mid-term to something north of 20%. The contribution assessment ceiling of currently 66,000 €/a increases every year, so I have to pay more and more each year, because I make a good salary.

The current "value" of a point is 28.61 €/month. In other words, the 6,003 bucks this year buy an annual pension of 28.61 €/month x 12 months = 343.32 €/a. (This amount will be increased a little in most years, but it is not likely to keep up with inflation IMO.)

But, of course I do not get that pension immediately - that will take 34 years! (Regular pension age for my age cohort is currently planned to be 67, and I'm almost 33. It is likely to be raised - there's discussions about age 70.)

I'll let you calculate for yourself whether you like these numbers. Would you take this deal if it weren't compulsory, and the alternative would be to keep the 6,003 € and invest them yourself in some tax-sheltered vehicle like an IRA? I know what I would prefer.

Americans, consider yourselves fortunate.

 

[MikeP]

In the UK they say the equivalint of living like a millionaire 10 years ago is now 9million! depends on the lifestyle of course but still astronomical the cost of living now!

 

[marko]

If the Immortality Pill is ever invented, I'll be the first in line and I'll expect to pay every cent for it.

I think there is a Native American god who invented death in order to provide welcome relief to the sick and aged.

Immortality is different from a healthy immortality. Picture being this decrepit 234 year old creature lying in a bed who just won't die!!

 

[bingybear]

Compulsory, yes. Very good - no, I don't think so. Both I and my employer are forced to pay huge amounts into the system, but my return on that "investment" will likely be negative.


I'll let you calculate for yourself whether you like these numbers. Would you take this deal if it weren't compulsory, and the alternative would be to keep the 6,003 € and invest them yourself in some tax-sheltered vehicle like an IRA? I know what I would prefer.

Americans, consider yourselves fortunate.

Your description is somewhat enlightening. I'd have to do some maths to consider which is better... and for who. Presently one pays up to $118500 in income, so I think we pay a little higher into the income. However, it sounds like you pay a higher %. Your description sounds like you get a fixed payback rate for all "contributors", where the US system is progressive. You get a better return on contributions at the lower end of the curve... and thus less on the upper end of the curve. Note I said return... you still get more overall dollars/month if you paid in more (inflation adjusted)... just the % of dollars paid in is not as favorable.
I'm not sure if it is really worth trying to compare all the benefits/costs of our social systems. Many here think they'd do better if they just invested the social security contributions over their lifetime... and likely the higher earners would. Since I just RE... changing the system would not help me.

 

[RISP]

Your description is somewhat enlightening. I'd have to do some maths to consider which is better... and for who. Presently one pays up to $118500 in income, so I think we pay a little higher into the income. However, it sounds like you pay a higher %. Your description sounds like you get a fixed payback rate for all "contributors", where the US system is progressive. You get a better return on contributions at the lower end of the curve... and thus less on the upper end of the curve. Note I said return... you still get more overall dollars/month if you paid in more (inflation adjusted)... just the % of dollars paid in is not as favorable.

I scanned through the Wikipedia article on US Social Security. You are right, it doesn't seem to be too different from the German "gesetzliche Rente". And still, US citizens can tax-shelter tens of thousands of dollars each year through IRAs or 401ks. I remain jealous.

 

[bingybear]

I scanned through the Wikipedia article on US Social Security. You are right, it doesn't seem to be too different from the German "gesetzliche Rente". And still, US citizens can tax-shelter tens of thousands of dollars each year through IRAs or 401ks. I remain jealous.

The Roth may be better in many ways that to the standard IRA/401k. While the IRA/401k lets you defer taxes and gains, it can bite you when you are required to take out money in specified percentages (RMD). One can find themselves taxed at much higher rates than when they were earning the income. Roths tax you on the way in, but not on the gains (present law). They also don't have required distributions (again present law). I have more of the former.
The surprising thing is that many Americans don't take much advantage of these programs.
And I would agree that these programs are a nice way to build a nest egg for retirement. This is somewhat necessary as traditional pensions have been vanishing from our company benefits over the last several decades.
I think the UK had personal pension... effectively annuities that provided a tax deferred method of saving for retirement. We can do annuities... but the IRA/401k are better in my mind.

 

[photoguy]

I'll give you an example. The current rate is 18.7% of your gross income. At the average annual salary of 32,100 €, you and your employer together pay 6,002.70 € into the pension system. For that, you earn exactly 1 "pension point". If you make less, you get fractions of a point; more, more points. They are capped at 2.0561 points, because you do not have to contribute for salaries >66,000 €/a. (66,000 / 32,100 = 2.0561).

If you plug some numbers into the SS calculator, they are not that different (adjusting for the contribution rate).

I'll let you calculate for yourself whether you like these numbers. Would you take this deal if it weren't compulsory, and the alternative would be to keep the 6,003 € and invest them yourself in some tax-sheltered vehicle like an IRA? I know what I would prefer.

Of course the attractiveness of the alternative depends on the future expected returns which are not all that good right now. Plus if SS were abolished I think it's unlikely that the employee would receive the employer contribution in wages.

But the real benefit of SS is that you can't mess it up. And even more importantly your relatives and neighbors can't mess it up either.

 

[Big_Hitter]

I don't do Roth. I'm pretty sure my tax bracket will be lower when I start taking money out of the K plan. One of my employers used to let us contribute after-tax once we hit the 402g limit. That's pretty rate nowadays though.

 

[RISP]

If you plug some numbers into the SS calculator, they are not that different (adjusting for the contribution rate).

I agree! So why do people seem to think, 'Germany has this fine state pension, they don't need tax-advantaged savings'? It's basically just your SS, but funded by a shrinking percentage of the population, with stagnating wages, in an aging country with rising life expectancy. The US are at least attractive to smart, hard-working, well-educated immigrants.

And why are American people complaining about company pensions being abolished? They'll get SS. I was always under the impression that the company pension used to be almost the US equivalent of our state pension, but it seems you used to have more of a three-legged-stool approach: SS + company pension + private (tax-advantaged) savings. Sounds comfy - I think I need a green card, and a time machine.

 

[sheehs1]

Legg Mason reports that investors think they'll need $2.5 million for comfortable retirement. Story doesn't say anything about pensions, ss, or the timeline to have $2.5 million. Not much context other than people feel behind. Does this amount ring true to folks here? I guess this is one of those how much is enough stories, but I'm curious as to people first-blush reactions and how it jives with their own experiences. Is there any value to stories like these or are they just PR fodder? Any thoughts?


http://finance.yahoo.com/news/u-investors-2-5-million-143000917.html;_ylt=AwrBJR6VF_5UNDIAnQzQtDMD

Getting back to the first post here. Have been thinking about that Legg Mason article. One of the many things this article does not talk about are the income streams a person may have along the way, aside from savings. It appears to assume they have nothing else but their savings. I don't know if Legg Mason really believes everyone needs 2.5 million or if they should plan on at least trying to generate that or more during the retirement years.

It seems to me as long as you can "generate" that 2.5 million to say $3 million plus along the way, in INCOME, for 30 years with all your income streams, one should be good to go. After all $100,000 X 30 years = 3 million. Doesn't matter where it comes from….just that it comes, if that is your need. Right?

Not to minimize that it also takes a lot of planning to generate those income streams along the way.

 

[papadad111]

.



It seems to me as long as you can "generate" that 2.5 million to say $3 million plus along the way, in INCOME, for 30 years with all your income streams, one should be good to go. After all $100,000 X 30 years = 3 million. Doesn't matter where it comes from….just that it comes, if that is your need. Right?
.

Yes. That's how I read the article. The ability to generate 30-40x is needed to retire early and fund life til age 95 for a couple. That means covering expenses (on average ) of 60k/year (approx USA household income) and so requires either a nut worth 2.5M in today dollars or equivalent.

what exactly those expenses are will vary across population as will the amount and sources of that equivalent income - could be SS,pensions, passive income, inheritance, a big fat portfolio, or some combination.

It makes sense on a very aggregate and average basis. Mileage will absolutely vary.

It's also based on a survey as I recall so it's what relatively savvy retirement savers think.

How could THEY be wrong ??!!! THEY - probably a lot like those on this board- intelligent. Savvy. Planners who have actually thought through the game plan.

 

[photoguy]

I agree! So why do people seem to think, 'Germany has this fine state pension, they don't need tax-advantaged savings'?

I came to US from Canada and given that "socialism" is dirty word in America, I was very surprised to see how much one could get from SS. Without looking at the calculators I would have just assumed that Canada would be much better on that front.

 

[NW-Bound]

In this thread, http://www.early-retirement.org/forums/f28/retirement-without-a-safety-net-76456.html, in my post exchange with Meadbh, I was surprised to learn that the U.S. SS benefit is generally higher than Canadian CPP. However, the maximum contribution in the US is about triple the maximum that a Canadian has to pay.

Also, an Australian poster showed that the Australian OAP (Old Age Pension) which is means tested (similar to US SSI for the indigent) is A$2,790 per month for a couple (A$1850 for a single person), a lot higher than US SSI which is only about $700. In fact, it is higher than SS that many US workers get! It is even better than SSI, in that the recipient is allowed to own his home which may be worth up to $2M.

Now, I wonder how much Australians have to pay in taxes to get that. Nothing is ever free.

Compulsory, yes. Very good - no, I don't think so. Both I and my employer are forced to pay huge amounts into the system, but my return on that "investment" will likely be negative.

I'll give you an example. The current rate is 18.7% of your gross income. At the average annual salary of 32,100 €, you and your employer together pay 6,002.70 € into the pension system. For that, you earn exactly 1 "pension point". If you make less, you get fractions of a point; more, more points. They are capped at 2.0561 points, because you do not have to contribute for salaries >66,000 €/a. (66,000 / 32,100 = 2.0561).

The rate is likely to increase in the mid-term to something north of 20%. The contribution assessment ceiling of currently 66,000 €/a increases every year, so I have to pay more and more each year, because I make a good salary.

The current "value" of a point is 28.61 €/month. In other words, the 6,003 bucks this year buy an annual pension of 28.61 €/month x 12 months = 343.32 €/a. (This amount will be increased a little in most years, but it is not likely to keep up with inflation IMO.)

But, of course I do not get that pension immediately - that will take 34 years! (Regular pension age for my age cohort is currently planned to be 67, and I'm almost 33. It is likely to be raised - there's discussions about age 70.)

I'll let you calculate for yourself whether you like these numbers. Would you take this deal if it weren't compulsory, and the alternative would be to keep the 6,003 € and invest them yourself in some tax-sheltered vehicle like an IRA? I know what I would prefer.

Americans, consider yourselves fortunate.

The US SS system subsidizes lower-wage workers with contributions from higher earners. I am not saying that is good or bad, just that is the nature of this social program. So, a high-wage earner would be much better off if he were allowed to save and invest that money himself. In contrast, a lower wage earner will do better with SS than with his own savings, particularly if he also has a non-working wife who automatically collects 1/2 of his benefits.

About the German system, you said that 6003€ in tax in one year provides 1 point, which gives a benefit of 343€/year when you retire. But if a person does that for 40 years, does he get 343€ x 40 = 13720 € per year at retirement?

 

[Major Tom]

I came to US from Canada and given that "socialism" is dirty word in America, I was very surprised to see how much one could get from SS. Without looking at the calculators I would have just assumed that Canada would be much better on that front.

Without taking the thread too far OT (yes, yes, I know - what long thread doesn't go OT at some point!) and also without wanting to risk awaking Porky by commenting on a post that used the world "socialism" , there was a definite difference for me between what I thought the US would be like when I first came here, and what it actually was like.

Before arriving, I had heard/was told that it was sink or swim in the US. People were free to succeed beyond their wildest dreams, and also to fail miserably. There were no safety nets, went the story, and I would triumph or fall flat on my face due to a combination of sheer blind luck, and my own character, drive and determination. To a 20-something year-old, it was thrilling. I was the protagonist in my own heroes journey and, naturally, I would emerge victorious!

It took a while, but it began to dawn on me that there were all kinds of social programs in place and, with the glaring exception of healthcare, the system of social safety nets wasn't that different from those in Europe and Canada. Funny thing, how countries create and keep alive their own folklore and myths...............

 

[RISP]

About the German system, you said that 6003€ in tax in one year provides 1 point, which gives a benefit of 343€/year when you retire. But if a person does that for 40 years, does he get 343€ x 40 = 13720 € per year at retirement?

Exactly. And if you want to take the pension before official retirement age, there is of course a penalty, 0.3% per month. If you postpone, the payment increases by 0.5% per month.
It's taxable income, and health insurance is also deducted, so the net amount is less.

Edit to add: It's not "6003€ in tax", but "6003€ in pension contributions", but I guess that's what you meant. Income tax comes on top of that, of course.

 

[Big_Hitter]

Germany probably needs the tax revenues for other things such as socialized medical.


How much do you (or your company) have to pay for medical insurance?